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C.R. Bard, Inc. (NYSE:BCR)

Q1 2009 Earnings Call Transcript

April 22, 2009 5:00 pm ET

Executives

Timothy Ring – Chairman & CEO

John Weiland – President & COO

Todd Schermerhorn – SVP & CFO

John DeFord – SVP, Science, Technology & Clinical Affairs

Analysts

Matt [ph] – BMO Capital Markets

Miroslava Minkova – Leerink Swann

Mimi Pham – JMP Securities

Tom Gunderson – Piper Jaffray

Matthew O'Brien [ph] – William Blair

Bob Hopkins – Bank of America

Matthew Dodds – Citigroup

Kristen Stewart – Credit Suisse

Taylor Harris – JP Morgan

Christopher Warren – Caris & Company

Brooks West – Craig-Hallum Capital

David Bachman – Longbow Research

Jason Bedford – Raymond James

Operator

Welcome to the C.R. Bard Inc. First Quarter 2009 Earnings Results Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. (Operator instructions) As a reminder, this conference call is being recorded and will be available for future on-demand replay through the Bard Web site.

Today's presentation will be hosted by Timothy Ring, Chairman and Chief Executive Officer, along with John H. Weiland, President and Chief Operating Officer. Todd Schermerhorn, Senior Vice President and Chief Financial Officer, and John A. DeFord, Senior Vice President of Science and Technology and Clinical Affairs. Also in attendance today is Eric Shick, Vice President, Investor Relations.

Today, Bard's management will discuss some forward-looking statements, the accuracy of which are necessarily subject to risks and uncertainties. Please refer to the cautionary statement regarding forward-looking information and the information under the caption risk factors in the company’s 2008 10-K including disclosure of the factors that could cause actual results to differ materially from those expressed or implied.

During the call references will be made to certain non-GAAP measures which management believes provide additional and meaningful assessment of the core operating performance of the company and its individual products franchises. Reconciliations of non-GAAP measures to the most comparable GAAP measures are provided in Bard's earnings press release and on the company's Web site at www.crbard.com.

All information that is not historical is given only as of April 22, 2009. The company undertakes no responsibility to update any information unless otherwise noted all comparisons are to the prior year period. At this time I will turn the call over to Mr. Timothy Ring. Please go ahead.

Timothy Ring

Thank you. Good afternoon, I'd like to welcome everybody to Bard's First Quarter '09 Earnings Call and thank everybody again for joining us today. We expect the presentation portion of this call to last around 40 minutes.

Let me go through the agenda for today. I'll go through an overview of the results for the first quarter. John Weiland, our President and COO will then review the first quarter product line revenue. Todd Schermerhorn, our CFO, will go through the income statement and balance sheet as well as our guidance for Q2 and John DeFord, our Senior VP of Science and Technology and Clinical Affairs, will give you an update on our product development pipeline. And then we'll follow with Q&A.

First quarter 2009 net sales totaled $596.4 million. This is an increase over the first quarter of 2008 of 2% on an as-reported basis and 6% on a constant currency basis. Currency impact for the quarter versus Q1 of '08 was unfavorable by around 400 basis points.

Looking at net income, for the first quarter of 2009, was $112.5 million and diluted EPS were $1.10, excluding an item that affected the comparability of results between periods, which I'll discuss in a minute. First quarter 2009 net income and diluted EPS were $119 million and a $1.17, up 9% and 11% respectively over the prior year period.

Looking at revenue growth from a geographic perspective on a constant currency basis, first quarter net sales in the U.S. were up 6%, Europe was up 5%, Japan increased 6% and our other international businesses grew 14%.

So after a very strong fourth quarter where we grew 12% in constant currency and seem to run counter to a perceived drop in hospital volumes, it does appear that some of that headwind is caught up to us in Q1 as evidenced by a 3% miss for our revenue guys.

Now, let me break the sales issues down into three buckets as I see them. First, we have seen distributors reducing inventory, probably to lower their own risk in the face of a perceived hospital slow down.

Our view here is that based both on our sales tracings and inventory levels of track for the larger distributors in our network, our urological business alone represents about 70% of the distributor volume in the U.S. Destocking effect was $9 million greater this year than last year. So we doubt this reduction will be permanent, but obviously, it's not a decision that's in our hands.

Second, after several quarters of solid growth, our European business decelerated to a 5% increase for the quarter. Much of the recent growth was triggered by a rejuvenated stent business, more specifically the LifeStent acquisition and their sales passed their first anniversary in Q1, our overall European business reverted to mid single-digit level growth.

Europe is about 20% of our total revenue, so we need to address productivity in our sales and marketing efforts there in order to maintain our double-digit growth profile.

One component of a restructuring plan that I'll discuss in a minute is a plan to restructure our European sales and marketing organizations. I would call this more of an adjustment than an overhaul in an effort to better focus accountability there. We'll actively monitor our European sales productivity as we moved throughout the year.

Third, we are hearing all kinds of data and I'm sure you are as well about the macroeconomic environment. Hardly a day goes by when we don't see some new estimate of the trend in U.S. hospital buyings. Frankly, none of it is statistically valid; all of it is highly variable almost by region. About the only thing we know at this point is that the hospital volumes are growing more slowly than they were a year ago.

My sense is that we are not talking about a pronounced change in growth, but even a 1% or 2% change essentially doubles the variability of sales growth for a company as steady as Bard. We can't necessarily evidence it with data or attribute it to one product group or the other but our sense is that on the margin things are a little bit slower.

Looking further on our sales results, this slight reduction in our growth trend was accompanied by very difficult currency comps causing reported sales growth rates that we haven't seen in a long time. At this point it looks like the currency headwind will last couple more quarters until the comps normalize in the fourth quarter. So we need to be certain to clearly separate these issues as we look at and analyze the business.

When you look at profitability, we really experience a terrific quarter in financial profitability, given the lower sales results. We turned 2% sales growth into 11% adjusted EPS growth and achieved earnings results in the center of our guidance. Our gross margin momentum is excellent, our expense management is fully mobilized while we continue to invest in R&D. Internally, I can tell you the leverage we control are being very well matched.

That said we are concerned that a soft demand environment could continue to weigh on our results going forward to help achieve our forward financial goals we have decided to implement further efficiency programs. We have recorded a $9.8 million pretext charge this quarter to what we would call rightsizing our cost structure and improve our efficiency in a couple of our lesser performing businesses.

This is not a short-term reaction, it's more of a strategic response to the business realities that we see going forward and we expect this restructuring to save us about $14 million pre-tax this year and $25 million on a full year annualized basis. Additionally, we are implementing contingency spending plans that should yield another $10 million to $15 million this year again on a pre-tax basis. As always, we – as you know, we manage for the worst and strive for the best.

Let me now talk to our guidance for the full year. Obviously, we are in a period where predictability frankly is more challenging as it relates to forecasting revenue growth. So rather than come up with a new revenue number for 2009, we'll just say that double-digit sales growth maybe at risk at this point. Probably by something like 1 percentage point to 3 percentage points and we'll continue to communicate with you as best we can as transparency improves.

From an EPS point of view, as I stated previously, we are very active, implementing programs to insulate our 14% EPS growth targets. Since many of these steps will take us through Q2 to implement, we expect '09 earnings to be more back ended than typical but we continue to manage to our 14% EPS growth number.

Lastly, before we move to John, as it relates to financial results, we have not lost our sense of perspective or proportion. In the face of a once in a 100-year global economic crisis, we could be seeing a couple of percent reduction in demand for our products. In the big picture we remain extraordinarily healthy. We know our long-term strategy in combination with worldwide healthcare demographics works.

We expect to continue to grow nicely in both constant currency and profitability, and we see nothing in the near-term to change any of that. In fact, I would argue that we are currently proving the theoretical resilience of our industry and more specifically for Bard in our company.

Let me now turn you over to John Weiland for a review of our product line revenue.

John Weiland

Good evening, ladies and gentlemen. Please note that I'll be giving all percentage growth data in comparison to the prior year period on a constant currency basis unless specifically noted otherwise.

Let's start with our vascular business. Total net sales for the first quarter in this category were $157.4 million, increasing 11% over last year, 5% on an as-reported basis. Our U.S. business was up 14% for the quarter, internationally, we grew 7%. Our electrophysiology sales declined 3% for the quarter. Overall, this business followed a very strong Q4 while it also faced a tough comp with the Q1 last year when it posted growth of 21%.

This quarter, Steerable Diagnostic Catheters were up 9% and AFib devices were up 19%. In Europe AFib was up 34%. In EP lab systems which is the largest of the few capital product lines we sell sales were down 28% in the first quarter. Though this product line typically has fluctuations from quarter to quarter, we have started to see some slow down at our deferral borders as hospitals capital budgets have been scaled back.

Graft product sales were down 2% this quarter. Our endovascular business which represented 68% of the vascular category grew 18% in the first quarter. Our biopsy product line was up 10%. This was primarily driven by continued strong performances from our Vacora vacuum-assisted device and our breast biopsy marker line, which were up 14% and 23% respectively. Sales in our peripheral PTA line increased 18%, driven again by the strength of our Dorado product and the 5-French work horse balloon line.

We continue to gain share in the market, which typically grows at about 11% rate. On the product development front, we introduced some differentiating enhancements to our PTA line this quarter, including a next generation Dorado balloon and have several new product launches scheduled to begin rolling out in the second half of this year. John DeFord will give you the details shortly.

Sales in our vena cava filter line were up 15% this quarter versus the prior year period with our new G2 express filter continuing to deliver nice growth. Late in Q1 we launched a new jugular delivery system with this product that is off to a good start. The femoral delivery version of that system should launch later this quarter. So here too we continue to enhance clinical performance with new product releases.

Our stent business grew 28% in Q1 versus the prior year quarter. Our recent three PMA approvals were the drivers of this performance. Our flair AB access stent graph, our E-Luminexx Iliac Stent and our LifeStent SFA stent all has strong growth sequentially.

Let's now turn to urology. Total net sales were $162.8 million flat versus Q1 of last year and down 3% on an as-reported basis. The U.S. business, which represented 72% of global urology revenue, was down 3%. Internationally, we grew 8%.

Our basic drainage business which represented 59% of the urology category grew 1% in Q1. Internationally, we grew 5%, while in the United States, we were down 1%. U.S. sales of Foley Catheters declined 13% in the quarter, with the IC Foleys growing just 1%.

As a point of reference IC Foleys have grown double-digits every year since their launch in 1995 and recently in the mid teens in each quarter of 2008 and we are not seeing any new competitive activity here. This entire category is sold through distributors in the United States.

As Tim indicated, our distributors substantially reduced inventory in the first quarter, which we believe drove this decline. We estimate the impact on the total urology category to be about 5% of sales growth.

Standalone sales of our StatLock catheter stabilization line increased 10%. This is about what we had expected following a quarter where the line grew 46% due to the accelerated distributor purchases we discussed last quarter. We believe the organic growth rate on this product remains at a 25% to 30% range.

While I'm on this subject, our 2008 investment in StatLock reps in Europe has paid nice dividends again this quarter. Our sales there were up 40% in Q1 as we continue to build the foundation of our franchise there. Our rest of the world StatLock business is also developing nicely, with sales increasing almost a million dollars this quarter – excuse me reaching almost a million dollars this quarter.

Our overall continence business was up 2% in the first quarter. The surgical continence line was down 7% versus Q1 last year and down 11% sequentially from Q4. We see a couple factors at play here.

Elective or otherwise, it appears that the public poor procedure market is declining as a result of recent concerns about clinical complications highlighted by the FDA's public health notice.

In our surgical sling line a delay in the 5-10(k) concurrence of our new adjust sling puts us behind in the markets since we are without a single incision device. John DeFord will cover this in more detail later.

Q1 sales in our overall continence business were also impacted by a 12% decline in sales of our Contigen injectable bulking product. Our new DigniCare line of fecal incontinence products has gained nice momentum in its second full quarter on the market. We continue to receive positive clinical feedback on the device.

Sales in urological specialties were down 10% for the quarter. Brachytherapy sales which are roughly 50% of this category decreased 13% in the quarter. In the United States, brachy was down 24% as the market continues to lose procedures to competitive therapies. The European brachy business increased 28% and is now about half of the size of our U.S. business. Closing out urology, and our Argento line, we continue to make headway with our sales efforts, put out a slower pace than we had anticipated.

Let's now turn to oncology. Total net sales in this category were $161.0 million, an increase of 11% over the first quarter of 2008 or 7% on an as-reported basis. Geographically, net sales in the United States were up 10%. Outside the United States we grew 15%.

Our core business grew 16% in Q1. The MRI, ISP PowerPort and safety wing infusion sets continue to be the growth drivers here. In a couple of weeks we look forward to the beginning of the rollout of the dual, our first Dual-Lumen PowerPort. Our pick and midline products grew 13% in Q1.

We continue to emphasize new product innovation and as a result there were several new tech product launches scheduled over the next couple of quarters that John will discuss.

The vascular access ultrasound product line was down 12% this quarter. As we noted on our fourth quarter call about 20% of the revenue in this line is capital equipment and this quarter we began seeing the impact from reduced capital spending at the hospital level.

Let's finish up then with surgical specialties. Global net sales increased 4% in the first quarter to $94.1 million, up 1% on an as-reported basis. United States sales which represented 76% of the total surgical revenue increased 7%, while international sales decreased 2%.

Our soft tissue repair business grew 2%. Geographically, in the United States, we were up 5% and outside of the U.S. we were down 6%. Our natural tissue hernia products were up 53% on another very strong performance by our AlloMax human tissue device. Also, our new CollaMend FM device received 5-10(k) concurrence earlier in the quarter and we began its rollout in February. As usual, we'll take a very methodical approach to this launch. But so far we received good clinical feedback.

Overall, synthetic hernia products were down 4% versus Q1 '08. Adjusting the prior year for a large back order release specific to our Ventulax [ph] product we were down 1%. Within this category, our new Ventrio resorbable ring ventral patch continues to receive a very positive clinical response and is building nice momentum.

As we discussed in the past, we are in a rebuilding mode with our synthetic business and while we are the market leader here we are committed to utilizing innovative technology to regain share. As we laid out at our December analyst meeting and John DeFord will review shortly, our current new product pipeline is focused on realizing this goal.

Our fixation line was up 21% this quarter, despite having about three quarters of a million dollars in Salute to sales in our Q1 '08 results. This performance reflects another good quarter of growth for our PermaSorb sort device, which set us up nicely for the launch of our new Sorbafix resorbable fixation device early this month.

Sorbafix in combination with our differentiated ventral patch technology should give us leverage in a call point for laparoscopic procedures. Closing the surgical category, our performance irrigation business was up 16% as we continue to benefit here from supply challenges affecting an irrigation line of one of our competitors. And finally in the quarter, our homeostasis business, which represented 5% in the category, in the quarter was up 4%. This concludes our product line revenue discussion. I'll now turn you over to Todd Schermerhorn.

Todd Schermerhorn

Thanks, John. On to the income statement for the quarter, gross profit was 62.4% of sales so Q1 up 100 basis points from the prior year and up 70 basis points sequentially from Q4. New amortization of intangibles relating to transactions closed in the last 12 months cost us about 30 basis points year-over-year. As we pointed out over the last couple of calls our manufacturing cost saving momentum has been pretty good and it continued very strong this quarter.

SG&A expenses were $164.3 million for the quarter or 27.5% of sales, reflecting a 140 basis point improvement over the prior year's quarter and an 80 basis point sequential improvement from Q4. Clearly our spending controls are very tight. With the programs we have outlined today, and with a limited view of the demand environment, you can expect us to remain very conservative with our spending throughout 2009.

R&D expenditures totaled $36.4 million for the first quarter, 6.1% of sales, we have not cut our R&D programs for reasons of expense, although there is probably some small indirect effect from our general belt tightening.

Interest expense was $3 million for the first quarter which is even with the prior year. Other income expense was $9.3 million of expense for the first quarter, which includes the $9.8 million charge for the restructuring that Tim discussed.

On an adjusted basis other income and expense was 500K of income for the quarter versus $4 million of income in the prior year period driven by a $4.2 million drop in interest income.

Please note that the $9.8 million charge is not the total cost associated with the restructuring plant. We expect the total cost to be in the $14 million to $16 million range. The remainder of the charge relates to nonpolicy benefits under FAS 146 and that will be booked in Q2.

The tax rate recorded for the quarter was 28.8% on an adjusted basis, excluding restructuring the rate was 29.1, just slightly better than our full year 2009 guidance.

We repurchased the 425,000 shares of our stock this past quarter. Last week we announced that our board had authorized the repurchase of another $500 million of our stock. We'll continue to be buyers of our shares as cash balances and market conditions permit.

Balance sheet as of March 31st reflects cash and short-term investments of $667 million versus $592 million at December 31st '08. For the quarter, accounts receivable days were up 0.8 days and inventory days were up 5.5 days.

Capital expenditures totaled $11.1 million for the quarter. On the liability side total debt was unchanged at $149.8 million. Debt to total cap at the end of the first quarter is about 7% and total shareholder investment was $2.082 billion at March 31.

Moving on to financial guidance for Q2, we are expecting constant currency sales growth between 7% and 10% for Q2. We've not included any kind of material rebound to the distributed inventory days in that calculation.

From an EPS standpoint we estimate earnings in the range between $1.18 and $1.22 in Q2 excluding any items affecting comparability if any. We expect that Q2 will suffer from a more difficult currency comp than Q1. We don't expect any meaningful positive impact from the restructuring until Q3. I'll now turn you over to John DeFord.

John DeFord

Okay. At our December analyst meeting, we detailed 40 products from our pipeline with 26 scheduled to launch in 2009. In the first quarter we launched eight new products. So with the exception of our adjust sling we are right on track with our plans and building momentum for the year.

Moving to the products, I'll start with the HD Mesh Ablation System and our atrial fibrillation activities. Early in the first quarter this product was featured in a live AFibrillation case from Europe during the Boston AFib Symposium. Our case was conducted simultaneously with procedure from the U.S. using a conventional irrigated dip catheter and serves to highlight the differences between the two technologies.

Dr. David Keane and his team from Saint Vincent's University in Dublin, Ireland, isolated all four veins in 90 minutes, skin to skin. A fairly dramatic improvement in procedure time when compared to the irrigated tip catheter.

In Europe we continued to grow our AFib franchise as John mentioned and continued to focus our commercialization efforts on growth in both procedures and clinical data dissemination through peer review, paper and presentations.

Toward that end, the HD Mesh was the subject of a new publication in this month's edition of the Journal of Cardiovascular Electrophysiology. We are also aware of four abstracts involving our HD Mesh products that were recently accepted for presentation at the Heart Rhythm Society Conference next month in Boston.

In U.S., our efforts continue to be focused on our pivotal study named Magellan. Based on the recent PMA approval of J&J's ThermoCool Irrigated Tip device for atrial fibrillation we are evaluating opportunities to enhance our study design to potentially reduce the projected duration before getting too deeply into enrollment. I don't anticipate large changes to our study though we plan to include a few clinical sites outside the U.S. and expect to begin bringing them online later this year.

Our site initiation process here in the U.S. continues with patient screening and enrollment activities building momentum. As we discussed in December, our time line indicates a late 2011 PMA submission and estimated U.S. launch in mid to late 2012.

Also in January, we announced our collaboration with Philips Medical. We are jointly developing and we'll co-market a new unified recording, mapping and 3-D navigation system. We expect this collaboration to yield its first product in the fourth quarter of this year.

Now, moving to stents, with the PMA approval of our LifeStent in February and pending publication of the resilient study results in a major journal, we are now actively working to expand our line with the digital product enhancements, including longer links, additional diameters and advances to our delivery systems.

These new products are anticipated to begin launching in Europe in the first half of next year concurrent with the start of the small U.S. clinical study that should result in a U.S. launch late in 2010 or early 2011.

On the Stent Graft front we are encouraged by the progress of our Flair AV access device and look for solid growth in the product as a result of ongoing physician training and publication of the study results later this year.

We also continue to work towards starting a U.S. clinical study of our Fluency self-expanding stent graft product to support some expanded indications. And at the same time, we are working to complete the development of our next generation stent graft technology. This platform will combine a new flexible and fracture resistant self-expanding stent system and an enhanced EPGFE [ph] covering technology. This new, lower profile product will be well suited for both AV Access treatment and use in the arterial system, including the SFA.

We are tracking toward a first half 2010 launch in Europe and an initiation of both AV Access clinical study in the first half of 2010 and an SFA focus clinical study later next year. In PTA, we previously stated that in the first half of 2009 we'd launch important enhancements to our Dorado line of high performance angioplasty catheters.

As John noted, this occurred in January and these enhancements include lengths of up to 20 centimeters and a proprietary balloon surface modification we call checkering that reduces profile while enhancing trackability.

In addition, we recently launched our market leading high pressure conquest balloon with a new indication for post deployment dilation of endovascular stent grafts.

In December, we alluded to a number of other developments in PTA. For competitive reasons I'm not going to give you the details now, other than to say we anticipate launching two new PTA product families in the second half of this year and at least two more in 2010.

Turning to vena cava filters, during the quarter, we introduced our new delivery system as John described for the G2 Express Filter. This system enhances both accuracy and ease of placement of our implant.

Now, in urology and continence products we are back on track for a second half 2009 launch of our new mesh vaginal support product for sacocopapaxi [ph]. We are also making steady progress toward our late 2009 launch of enhancements to our volta [ph] family of pelvic floor prolapse repair kits for apable [ph] support. We continue to anticipate a 2010 launch of new procedure kits for both anterior and posterior pelvic floor repair.

Now, our primarily continence efforts are focused on less invasive techniques that reduce procedural risk and decrease procedure times. We launched our new adjust single Encision sling in last December and have received very positive feedback both in sales growth and physician comments.

In the U.S. we had anticipated 5-10(k) concurrence for our first half 2009 launch but FDA is requesting some additional information so we are still in that regulatory cycle.

Moving to our oncology business, in December, we walked you through our new Sherlock 3CG development efforts. In the coming months we will be moving from the technology development phase to broadening our clinical work.

At the end of Q1, we completed a small human clinical feasibility study with very positive outcomes. We are now working toward the commencement of a pivotal clinical study scheduled to start later this year to support clinical claims and potentially demonstrate equivalence to x-ray tip confirmation.

As we stated in December, we believe that reducing the need for a confirmatory x-ray would decrease radiation exposure, nursing and radiology time and most importantly, allow patients to begin needed care immediately following pick placement.

In picks for competitive reasons we were a bit vague in December about our pipeline. And while I won't reveal everything, I'll tell you we anticipate launching two new multi lumen power pick and power pick solo versions in the coming months of this quarter and into Q3. These products will expand our power platform into the ICU and to those patients that require more infusion and sampling lumens.

In ports we just received 5-10(k) concurrence of our MRI PowerPort duo, large first duo lumen MRI PowerPort and are in the early phase of launch. We also anticipate a late Q2 launch of our new low profile PowerPort designed to support placement in the pediatric patients, smaller adults and patients who require a lower profile device for placement in the upper arm.

And in imaging we continue to work toward the launch of sight right vision, our new high performance ultrasound platform. The sight right vision will incorporate a number of new features such as color flow doppler, on-screen vessel measurement and DICOM compatibility to name just a few.

I'll close out our oncology pipeline discussion with dialysis. In December, we presented several new products for this important space and just a few weeks ago with the Society of Interventional Radiology Meeting we launched our new Power Trialysis Triple Lumen Acute Dialysis Catheter. This is nicely ahead of the second half 2009 timing we discussed when we presented it at the analyst meeting.

The Power Trialysis is the first of its kind a Q dialysis catheter that supports power injection through a third dedicated lumen. In the chronic dialysis catheters space we also featured our Ecostream over the wire split tip design that can support switching the arterial and venous lumens during a dialysis treatment due to its reduced recirculation design, a significant enhancement for a split tip catheter.

In addition, we anticipate launching our Duett long-term hemodialysis catheter later in Q2. Also ahead of the timing we predicted at the analyst meeting. Duett provides two single lumen high flow catheters to support physicians and their patients who benefit from completely independent inflow and outflow lumens or who prefer to use a retrograde placement technique.

Now, moving to our surgical business, we have a number of key launches planned for this year. Just a few days ago we began the launch of our new Sorbafix resorbable fixation device. This new product is available in either a 15 or 30 tack configuration with a highly visible PLA fastener that's designed to provide strong, consistent and reliable fixation. Sorbafix is in the early phase of launch and is featured at our exhibit at the St. Jose meeting that started today in Phoenix.

Following Sorbafix we anticipate the launch of the permanent tack version called Thermafix [ph] in the second half of this year. Next out of our pipeline an on-track related this quarter will be additional size is our new ventral self-expanding ventral repair mesh with its resorbable ring technology. These new sizes will incorporate our unique technology for both open and laparoscopic repair of the largest types of ventral defects.

And then as we move into the second half of this year we anticipate the launch of next generations of our market leading PERFIX Plug and 3DMax products that support both open and laparoscopic surgical repair of angloma [ph] hernias.

And now finally moving to our VCD therapy project, we reported in December the completion of enrollment of our trim feasibility study. This study enrolled 18 patients in the primary treatment of obesity using our RS2 next-generation endoscopic suturing device.

We have three months follow-up at this point and are very encouraged with our early results. We'll be following these patients through six months and are actively preparing for the start of our pivotal study later this year, once we have completed follow-up of the trim patients.

We remain optimistic about the prospects for the RS2 devices used in natural orifice procedures for the treatment of obesity. Though a couple of years out we continue to work toward the launch with the primarily weight loss indication in early 2012, following completion and follow-up of our trim pivotal trial. That's it for me and thanks for our attention. Let me turn it back to Tim.

Timothy Ring

Thanks, John. Let me – that concludes the formal part of the presentation. Let me turn the call back to the moderator for Q&A session.

Question-and-Answer Session

Operator

(Operator instructions) Our first question is from the line of Joanne Wuensch with BMO Capital Markets. Please go ahead, Joanne.

Matt – BMO Capital Markets

This is Matt [ph] for Joanne. Can you hear me?

John Weiland

Yes. Hi, Matt.

Matt – BMO Capital Markets

First question is on gross margins. Wondering if you could flush out the gross margin increase, possibly break it down between the different factors quantitatively?

Todd Schermerhorn

Let's see. Starting with foreign exchange, about 20 basis points to 30 basis points of favorable foreign exchange, we had a peso related item as a result of our Mexican operations for a couple million dollars that essentially won't repeat going forward. So we ended up favorable foreign exchange for the period. We are 30 basis points down as a result of new amortization. I think we said that in our comments. Price and mix are relatively flat. They are both slightly favorable. I would say ten basis points a piece. And then cost is the remainder of the 100 BPs, 80 basis points to 90 basis points.

Matt – BMO Capital Markets

Okay. Thanks. And then in urology, can you talk about that weakness? How much of it was procedure weakness versus price versus, can you point out any specific products that were weak?

Todd Schermerhorn

Well, we did say that the dealer aspect is quantified at $9 million. So that would take that sort of on a restated basis it would take urology at about 5%. And that's that data is pretty hard.

John Weiland

We haven't seen any issues as it relates to price in the marketplace.

Matt – BMO Capital Markets

Okay. Very good. Thank you.

Operator

Our next question is from the line of Rick Weiss with Leerink Swann. Please go ahead.

Miroslava Minkova – Leerink Swann

Hi, guys. It's Miroslava here for Rick. A coupe of questions. First of all, how much visibility actually do you have in the ultimate demand for your product? Do you think there is any sort of a sustainable change that you see out there for demand? And is there any sort of a pricing pressure that you are seeing in the environment?

Todd Schermerhorn

I'll take that one. Long-term we are very optimistic about the growth prospects of this industry and for Bard, obviously, and you just look at the demographics despite the short-term economic issues, it's a very good place to be, very good industry to be in. So we are optimistic there. Pricing pressures, I can't remember a year in my career, almost 30 years now, where there haven't been pricing pressures. I wouldn't see that as much of a change other than people are asking more about it. We think we've got a pretty broad portfolio approach to do with that to help them frankly on a volume related basis so that's kind of the answer to that.

Miroslava Minkova – Leerink Swann

Right. Is it possible to breakdown how much of the sort of revenue shortage below your double-digit – or 9% to 10% projected growth rate came from inventory adjustments versus weakness in demand versus currency – or you name it.

Todd Schermerhorn

Well, there is I guess about 2% from this dealer issue, right?

Miroslava Minkova – Leerink Swann

Right.

Todd Schermerhorn

If you take – we talked about Europe, kind of going from low teens or mid-teens growth to mid single digit, that's about another full percent. And so you'd be back to say nine or so. And if – we think the demand environment is generally a little soft across the board. Bard is one place where it would show up because the standard deviation of our sales is so small. We typically have the same sales growth every quarter. Maybe this 1% there, 1% or 2% there what we're seeing.

Miroslava Minkova – Leerink Swann

I see. And what's the priced in Europe? And I'll get back into queue.

John Weiland

What was the question?

Todd Schermerhorn

Can you repeat the question? Sorry. Go ahead.

Miroslava Minkova – Leerink Swann

I'm just wondering, why was Europe, surprising. What happened there? What changed over there? I understand in the U.S. there is economic pressure. The inventory changes but I'm a little bit surprised that Europe and I understand the year-over-year comparison with LifeStent, but I'm just little bit surprised it is sort of coming up sort of unexpectedly as a dramatic slow down.

John Weiland

Well we really did an excellent job once we got hold of the LifeStent product line, building demand and taking share in Europe last year. And we came out of the blocks very strong with the share that we took. It finally annualized for us and it say and we are competing against tougher comps at this point in time. I think overall, as we look at Europe, we are really focused on sales productivity in Europe, and ensuring that we are improving our relative sales productivity, and that is a little portion of the realignment that we're working on.

Miroslava Minkova – Leerink Swann

Okay. Great. I'll get back in queue. Thank you.

Operator

We have a question from the line of Mimi Pham with JMP Securities. Please go ahead.

Mimi Pham – JMP Securities

Hi, good evening. Can you just clarify are you withdrawing your full year guidance for 10% top line growth or are you just keeping it and just saying there is risk for that?

John Weiland

I think we basically said there is risk to it. So 1% to 3%.

Todd Schermerhorn

1% to 3% is what I said.

Mimi Pham – JMP Securities

Okay. So you are keeping it just like.

Todd Schermerhorn

It is a little unclear at this point, Mimi. I would say our transparency is not at an all time high here.

Mimi Pham – JMP Securities

But I guess you gave 7% to 10% top line guidance for second quarter. Do you expect in the second half of the year for sales growth whatever you end up doing for second quarter for sales growth in the second half of the year to accelerate from those levels given your new product launches and your new recent product launches?

John Weiland

We certainly think that the new product launches will add momentum to us. I think the wild card becomes what happened to demand in the marketplace. I think that's where we don't have the visibility that we normally do because of the unpredictable nature of the markets today.

Mimi Pham – JMP Securities

Okay. I guess that's clear. And you mentioned just Argento launch being a little I guess slower than I forgot exact wording. Can you just give us some more color? Are you getting more push back on the pricing? Or the lead time I think you talked about it being nine months, is that taking longer?

John Weiland

No, we still like the timeframe associated. In fact, we have had some large university systems that converted based on seeing some excellent clinical data in their own hospitals once they implemented Argento and saw a reduction in pneumonia rates. But if I tell you we are honest with ourselves, our timing is kind of tough right now and if you look at what's going on in the markets I mean hospitals are struggling at this point in time and it is probably a little more difficult today than it was six months ago to get someone's attention as it relates to converting products because of clinical efficacy, especially on the significant up charge than it was six months ago. However, that being said, we still like our long-term prospects, we are focused on it everyday and as we said in the fourth quarter call, we think it will be a slow build, much like the infectious control Foley catheter was.

Mimi Pham – JMP Securities

I guess we assume that there would be some acceleration in the second half year just given you talked about this nine month sales cycle and then the publication the data last August. Is that still reasonable or are you saying that's still unclear given what's going on in the economy?

John Weiland

I think as I mentioned in the fourth quarter, I think our viewpoint is exactly the same that we think you build a base of customer conversions and then you continue to make conversions one hospital at a time, based on the clinical data that you have and your ability to convince them within their institution of what it has to offer to you.

Mimi Pham – JMP Securities

Okay, and then last question on LifeStent in the U.S., do you expect continued sequential growth there? And do you expect to be taking share from other self-expanding stents or growing by growing the category?

John Weiland

Definitely and definitely.

Mimi Pham – JMP Securities

Okay. Alright. Very clear. Thank you so much.

John Weiland

Welcome.

Operator

And we have a question from the line of Tom Gunderson with Piper Jaffray. Please go ahead.

Tom Gunderson – Piper Jaffray

Hi, good evening. Couple of housekeeping questions first. Todd, on the guidance for Q2 on EPS $1.18 to $1.22, that includes the left over $4 million to $6 million that you are going to take as a charge for restructuring?

Todd Schermerhorn

No, that does not.

Tom Gunderson – Piper Jaffray

Does not. And it sounds like the $14 million savings from that restructuring will be almost all in the second half, is that right?

Todd Schermerhorn

Yes. Well, 14 plus the contingency plans which are another 10 million to 15 million. So we are talking 24 million to 29 million, all in the second half, and interestingly enough, really big chunk of that more weighted towards the third quarter than the fourth quarter.

Tom Gunderson – Piper Jaffray

Okay. And then what was your assumption for the Euro exchange rate on that $1.18 to $1.22?

Todd Schermerhorn

Well, I will tell you this, Tom. We'd expect the currency comps to get significantly worse in Q2 because we had the movement up last year at this time. So I think it was 410 basis points this year. We see something between 550 basis points and 600 basis points for Q2. And so as a consequence, year-over-year, this quarter wasn't that bad on a bottom-line from a bottom-line standpoint partially because of the peso issue. But I would say a million dollars or so, maybe even a little less. That will, in terms of year-over-year, that will get more difficult by a measure of five or so. We think the currency comp bottom-line for next quarter is 5 million bucks or 6 million bucks.

Tom Gunderson – Piper Jaffray

Got it. And then cash, of the 667 million in cash that you have, how much of that is in Europe, outside U.S.?

Todd Schermerhorn

Yes. I would tell you I can't do the math in my head but 247 million is in the U.S.

Tom Gunderson – Piper Jaffray

And then that's it on the housekeeping. On LifeStent, we all know there's lots of stents out there, but you are the only one that is labeled for SFA or at least the only bare stent labeled for SFA. Docs have been doing the off label ones for quite a while here and your competitors would say all the docs know where the competitor stent goes. What have you seen in the early stages here as far as reasons that docs are trying or reasons that docs are switching? Is it trialing? Is it that you can market and the other guys can't? Is it fear of DOJ or CMS? What are your territory guys telling you?

John Weiland

Our folks are, I would say significantly excited about our early entry with the LifeStent with the SFA indication. I think we are seeing just about all those things you mentioned, but I would highlight two as being the most significant. One is physicians want to buy on label. We have seen that time and time again and are willing to pay a premium to buy a stent that's been proven clinically to have the right efficacy. You compare that with the significant data associated with the resilient trial and that's a pretty solid combination. Now, it also helps that based on what's happened in the market and the competitive landscape becoming relatively – or staying away from off label promotion in this space, I think it's given us a very compelling competitive position and an opportunity to convert pretty rapidly and we really like what we see.

Tom Gunderson – Piper Jaffray

Thanks. And then last question, is there any update to anything on the litigation legal side? And have you even received the lawsuit from Covidien that they announced yesterday?

Todd Schermerhorn

We actually found out about the lawsuit through the press release that they had on the newspaper. We have not even been served with that. So we don't really have any comments about frankly any litigation matters at this point.

Tom Gunderson – Piper Jaffray

Okay.

John Weiland

But I think it's important to note that we were launching that product in stages today.

Tom Gunderson – Piper Jaffray

Right. Not a coincidence.

John Weiland

Probably not.

Tom Gunderson – Piper Jaffray

Okay. Thanks, guys.

John Weiland

Okay.

Operator

We have a question from the line of Matthew O'Brien [ph] with William Blair. Please go ahead.

Matthew O'Brien – William Blair

Good afternoon. Wanted to talk a little bit about the guidance that you gave out on the top line and if you were to kind of see the worst case scenario of 300 basis points of a hit to the top-line growth, could you still get to the 14% EPS number or is that stretching it?

Todd Schermerhorn

That's a great question, Matt. I think you got to stop talking about sort of reported growth for the year, right, the combination of currency and constant currency here. We think with the programs that we implemented, this, today in this quarter, we think we're good to the sort of 3% to 4% range in total growth.

Matthew O'Brien – William Blair

In overall growth you still get the 14% bottom line growth?

Todd Schermerhorn

Yes, we think so.

John Weiland

We'd be dancing right around it, I think at 3, 3.5.

Matthew O'Brien – William Blair

And is it coming off the top line anything to do with additional currency, headwinds that you hadn't been expecting? Has the Yen moved more than you thought?

Todd Schermerhorn

Well, when we guide it's constant currency. So the 7% to 10% is pure constant currency. But as we do the calculation for EPS obviously we got to bring it all in and so the currency impact is meaningful to that and that gets us down to we did two this period, so we are thinking that a three and three change somewhere around that we will get to 14% EPS growth.

John Weiland

And we really don't have any – we have no exposure to the – that's we sell fell into a joint venture there in dollars.

Matthew O'Brien – William Blair

Okay. Thank you. As far as the distributor visibility goes, I mean, can you provide a little bit more commentary as far as what they're telling you now? Do you have visibility into the, the amount of inventory they have on hand? I guess the question is how much lower can their inventory levels get to until they get to that kind of safety stock that they just can't go any lower?

John DeFord

Well, I can't talk to the data piece, maybe John can talk to the discussions and the strategic side. But we do see the data as it relates to our shipments of tracings. We pay commissions on it and all that have for years. And that data is pretty good. So we do know from those calculations of what we put in and what we got out is where the inventory went. It is often true that their communication to us on inventory doesn't necessarily always jive with that, but I think we can get to a good number. We talk about the $9 million we feel pretty confident that's a good number, relative to what they say. I don't know John -

John DeFord

Well, I think we got a very good relationship with them. But I'll be honest with you. Those distributors and rightfully so don't consult with us when they are going to move their inventories down based on what they see and their crystal ball moving forward. So I think that's the area it gets difficult for us in that we really don't know what's in their strategic plans if they move downstream because a lot of that will be based on demand in the marketplace from their perspective. So of the all the areas that we have the least amount of visibility, that's the one and it's the one that we're always cautious about.

Todd Schermerhorn

Obviously Matt, they don't manage our inventory in a discrete pool. It's lumped in with everything else (inaudible). It's not like we can get a whole lot of intelligence about our products specifically out of that.

Matthew O'Brien – William Blair

Okay. Fair enough. And then finally as far as LifeStent goes and this might be directed a little bit more towards John DeFord than anybody else. But with all those new products that you have coming, it appears that there might be some cases out there that you can't quite serve at this point with the current length of the stent. Of the 150 or so 1000 procedures that are done in the U.S. every year SFA, what percentage of those can you get at right now?

John DeFord

Well, we should be able to get at all of them. Our longest stent is 170 millimeters, which is the longest one commercially available in the U.S. for any indication. Likewise, our labeling describes the ability to use multiple stents in overlap. So – and in the resilient study if you recall there were patients in there that were treated as long as 300 millimeters. So from a length perspective we are not really limited. Does that answering your question?

Matthew O'Brien – William Blair

It is. I just – when you start to talk about the new process you have in the queue, obviously that’s part of the Bard culture, but it seems like there are some things you are looking to attract that you may not be able to address at this point, but I don’t I believe you are saying that’s not the case.

John DeFord

That's right. Now with that said, we do think that there is value in longer length and so I described in discussion that we are working on longer lengths, other sizes and new delivery systems to rollout in Europe early next year and run a clinical trial in the U.S. to get them on the market late next year or early in 11, here into the U.S. which by our calculations still probably puts us ahead of everybody else.

Matthew O'Brien – William Blair

Okay. Thank you.

Operator

We have a question from the line of Bob Hopkins with Bank of America. Please go ahead.

Bob Hopkins – Bank of America

Thanks. Can you hear me okay?

Todd Schermerhorn

Yes, we can.

Bob Hopkins – Bank of America

Great, thanks. Want to try to break this down a couple of different ways. First I want to check on my math. Is the magnitude of the top line short fall relative to your internal expectations roughly in the neighborhood of $25 million to $30 million?

Todd Schermerhorn

For what period Bob?

Bob Hopkins – Bank of America

For the first quarter.

Todd Schermerhorn

Well, it's 3% from our guidance. I mean you can do that math.

Bob Hopkins – Bank of America

Right but there is constant currency there is – I just what I was going to ask is you have broken down the inventory part in urology to the tune of $9 million. I was just wondering if you could give us a similar dollar amount for the other buckets that were mentioned that European shortfall and the sort of the macroeconomic comments.

Todd Schermerhorn

No I don't have the dollar amounts for that and it would be putting too fine a point on our knowledge to be able to put that out in dollar term.

Bob Hopkins – Bank of America

Well then just if I mean the math should work out to about that $25 million to $30 million and $9 million is less than half of that. So I'm just curious about magnitude in terms of the other buckets.

Todd Schermerhorn

Well as I said, I think the Europe piece is about 1% which 1% let's see the prior year is 584. 1% is $5.8 million bucks.

Bob Hopkins – Bank of America

Alright. Maybe say it a different way. For Tim, when we think about what went on in the first quarter, what percentage of the shortfall do you think is related to the economy? And what percentage of the shortfall is related to competitive issues? Or any other issues?

Timothy Ring

Well, obviously the competitive issues, we don't see a change there this quarter versus previous quarters. We think the hospital issue and the procedural issues could be a percent or two. But again, it's sporadic data, it's more anecdotal than statistical at this point.

Bob Hopkins – Bank of America

So basically your message is 100% of the shortfall you are seeing in the first quarter on the top line is due to the macroeconomic environment?

Timothy Ring

No I don't think that's what we said. We said at least the distributive piece is heart data. We did say the Europe was 1% and that's not necessarily macroeconomic data. That's us.

Bob Hopkins – Bank of America

Okay. But just to be clear on the urology side, that $9 million, that inventory issue with your distributors, you think is a just distributors tightening up inventory because of the economy?

Timothy Ring

Yes, we get the tracings and we can see that the – inventory always drops in the first quarter. It dropped $9 million more this year at the distributor than it did last year.

Bob Hopkins – Bank of America

Okay. And then excluding that, you said that urology would have grown about 5% which is still below the 7% to 9% you are sort of anticipating for the full year. Is there anything else going on in that division that is worth mentioning?

Todd Schermerhorn

Yes, I think the – we have certainly seen that the surgical continence business slowing. I think a piece of that is the market, and I mentioned that in my comments that the – some of the concerns over complications associated with those procedures has impacted the growth in that marketplace. There is no question in our minds about that. And I think that was even enhanced by the FDA's correspondence with the marketplace last year on that. Also, we were expecting to have our new sling launched at this point in time we're very close to it which was going to be a primary growth driver in that space now. We are hung up at this point in time with the agency. We are working hard on trying to move that. We don't know when we'll be out of that – outside of that question in terms of answering it, but that's hurt our share position in that segment. There is no question in our minds. And then I think that, in general, if there is a slow down in procedures in general, we believe there is a slight slow down that could have affected there as well.

John Weiland

And I would say the brachytherapy decline as well.

Bob Hopkins – Bank of America

Are you seeing a slow down in hernia procedures based on the economy?

John DeFord

Anecdotally we hear that from physicians. But there is no data that we have seen out there that substantiates that at this point in time. We continue to see nice momentum on our new products that we have launched, especially in biologics, especially with our new absorbable ring and what we are seeing in fixation. So it's difficult to tell at this point in time. I can't see why it wouldn't affect that like it would every product line if there is a general slow down though.

Bob Hopkins – Bank of America

I'm just trying to put this on a perspective because I know it's tough to compare different companies with different product mixes. But other companies thus far that are sort of put in the same bucket as Bard have, just not made similar comments to the comments you are making about the macroeconomic impact on procedures and maybe just as you said it's the law of small numbers versus big numbers you would see it first because you are a smaller company. I'm just trying to understand that the –

John DeFord

I think, Bob, we are focused on is that we looked at the major hospital groups first quarter of '08. And if you go through that analysis, it will tell you there was nice growth in the marketplace in terms of admissions. If you go to Q4 data and do the same mathematics, it shows you that admissions were decreasing. Now I don't see the first quarter changing and the early data that we've seen from a couple of hospital groups that have announced, we don't see that data changing. That's where we get to the overall viewpoint that there could be a slowing in admissions in hospitals right now.

Todd Schermerhorn

Yes, but I think the difference between admissions and surgical procedures is like listen to J&J or Covidien, some of your competitors in certain areas it just is a slightly different tone to the message and again that could be just the law of numbers, I'm just trying to figure it out.

John DeFord

It could be the law of numbers and I also think frankly because of our market shares, which are pretty high, we would probably see it first.

Bob Hopkins – Bank of America

Right. Right. Alright, thanks, guys. I'll get back in line, appreciate it.

Operator

We have a question from the line of Matthew Dodds with Citigroup. Please go ahead.

Matthew Dodds – Citigroup

Thanks. Good afternoon.

John DeFord

Hi, Matt.

Matthew Dodds – Citigroup

On the SG&A side, when you look at the cost charges you are taking, can you just say, Todd, generally, is there any divisions you are targeting? Is it OUS or U.S.? Are you maybe consolidating some sales forces? Just any additional color on that would be great. And then adding to that, usually you hire 50 to 100 additional sales people a year. Is this a year where we might not see that? That's the first set of questions.

Todd Schermerhorn

Well I would say it's both the U.S. and both in and outside the United States, Matt. We rather not get into specific businesses, because there is people use that competitively. We are not going to go down that path per se. But it is shared both in the U.S. and outside. As it relates to sales people, John -

John Weiland

Matt, we still focused on growing our sales force to that level, although it will be more back ended than otherwise. And I'd also say that the other reason we are not rolling out the details and that is we are still in the process of having conversations with individuals. It wouldn't right for us to get out ahead of ourselves on that.

Matthew Dodds – Citigroup

Okay. I understand. And then on the hernia side, this is at least the second if not third quarter, where the tissue business has done exceptionally well (inaudible). Have you been able to figure out how much of that might relate to market share versus the market continuing to shift to tissue? Meaning are you losing in synthetics versus the competition but gaining against maybe the major tissue player but not losing share?

Todd Schermerhorn

I think we are definitely gaining share in biologics. That becomes obvious with the growth profile of that piece. I think we are gaining share with some of our new entries into the synthetic market but we are still building momentum on those now.

Matthew Dodds – Citigroup

Do you think synthetics is still growing as a market?

Todd Schermerhorn

I would say it's little tough with the number of hernia procedures that's being done right now. We are having a difficult time getting our arms around that in aggregate.

Matthew Dodds – Citigroup

And then one last question for John DeFord, on the Magellan trial, is your trial designed abasian like the J&J trial or is that something might be looking to changing and then how long is the follow-up length for the patients in your Magellan trial?

John DeFord

Okay, Matt. The Magellan trial we followed the FDA guidance document, which is not a abasian design. So obviously you have seen through the veil and you see one of the things we're looking at in potentially evaluating the study. We are also looking at the power of the study, see if there are opportunities for us there. Other than that, I don't think there is we talked about adding some other sites, J&J showed some ability to do that with OUS sites. We're looking at some of those things as well as I said earlier. As far as timing goes with the study, I think we are still pretty much on track. And so and – on follow-up, our standard – our follow-up before submitting to the FDA is one year. However, we will be following those patients for several years after that with annual follow ups.

Matthew Dodds – Citigroup

John, the way to look at this is if you get any changes, it could shorten the time limit but now we should expect the 2012?

John DeFord

Yes, we are sticking with that time line right now. But obviously we are looking at ways to try to shorten that.

Matthew Dodds – Citigroup

Is it something you would know in three months, six months? Or you just don't want to give a guess right now?

John DeFord

Well when we know something definitive, we'll let you know.

Matthew Dodds – Citigroup

Got it. Alright, thanks, John, thanks, Todd.

Operator

We have a question from the line of Kristen Stewart with Credit Suisse. Please go ahead.

Kristen Stewart – Credit Suisse

Hi, thanks for taking my question. I just wanted to go back I know kind of been harped on quite a bit. But just in terms of the numbers this quarter, ex-currency were up 6% you are saying that the full year could come in 100 basis points to 300 basis points lower than that 10% potentially. Do you see anything going on in April that makes you less competent that this maybe just one of a one-time inventory destocking effect? To what degree I guess did you see the softness? When did it occur during the quarter? And what are you seeing so far in the month of April?

John DeFord

Well, as far as last quarter, I think we sort of begin to crystallize really at the end of January and which is why we were able to adjust some spending, we had two months that we could still go after spending. And as it relates to April, we are on plan for April as it relates to our guidance. I would say there is an improvement in April, it's slight.

Kristen Stewart – Credit Suisse

Okay, and so I guess is there, I guess what is it that's driving the second quarter to be much more heavily impacted then? And why would the year be more back end loaded if April is tracking ahead? Are you just being more conservative or do you anticipate to see further destocking?

John DeFord

Well, we just came off a six. We don't know the 6% constant currency growth. We don’t know whether the distributors have done or not reducing inventory. So I would say it's just a question of transparency. I mean we gave ourselves – typically we don't give ourselves 300 basis points of spread in that guidance, but I think it's just a function of kind of what we know right now.

Kristen Stewart – Credit Suisse

And then based upon current rates, is it reasonable to assume a 400 basis point negative impact for the full year?

John DeFord

Yes. That's right. I think somewhere, we think right now somewhere between 400 and 450 if we hold at these rates.

Kristen Stewart – Credit Suisse

Okay, and so the commentary on the 14% growth would be if your reported sales were up 3% to 4% you still feel confident that you can meet that 14% growth target?

John DeFord

Yes.

Kristen Stewart – Credit Suisse

Okay. And is there anything, any – I guess where the additional expense savings specifically? Sorry, if you have already kind of addressed this. But what more are you going after absent the restructuring efforts? Holding more on head counts –

John DeFord

Yes, it's a number of things. Obviously when a company is diverse as we are, it's a lot of things – lot of little things, I think I'd bore you with a list of them at this point. It's a detailed plan and we feel good about it. We have shown that we can get the spending reductions. We don't think it affects overall health, we think these things are intelligent to do under the circumstances. So we feel good about it.

Kristen Stewart – Credit Suisse

Okay. And you had said earlier that on the pricing side you weren't seeing any incremental pricing pressure as kind of volumes are seemingly coming down, is that correct?

Todd Schermerhorn

I would say that we're seeing more conversations at the hospital level as it relates to pricing. And certainly in this environment, hospitals, and rightfully so we're trying to save every dollar that they possibly can, to help them on the net income side of it. However we have not seen any result in our results.

Kristen Stewart – Credit Suisse

Okay. So they are not pushing back more on some of the premium price? Infection control, and not – are they shipping back out of infection control into some of the more basic products as a measure of cost savings?

Todd Schermerhorn

We have not seen that at all.

Kristen Stewart – Credit Suisse

Okay, Perfect. Thanks very much. I'll jump back in.

Operator

We have a question from the line of Taylor Harris with JP Morgan. Please go ahead.

Taylor Harris – JP Morgan

Thanks a lot. I want to hit on the inventory level one more time just to make sure. In the fourth quarter, you guys had – and you disclosed it, stocking of about $6 million in urology, and you told us that, that, either all of that or some of that was going to go away in the first quarter. So is this $9 million above and beyond that?

John DeFord

No. That would include the basically $5 million or $6 million from the fourth quarter, that's right. That's how we got from 10 to 9 in terms of guidance. So what we're saying is from the six it's two points.

Todd Schermerhorn

Okay. I see. Right. Because a full nine would be a point and a half of impact.

Taylor Harris – JP Morgan

Right I see what you are saying. Was there destocking in any other business?

Todd Schermerhorn

You know the majority of our distributed business is in urology. And that's where we have the most intelligence. We did not – we don't feel like we saw it we do distribute a little bit in oncology and a little bit in hernia. We don't feel like we saw it so much in those products.

Taylor Harris – JP Morgan

Okay. And did these issues start fairly early after your last quarterly call? So were you able to adjust your spending plans from fairly early in the quarter? It was fairly dramatic spending controls you put in place. I just want to understand how you were able to do that so effectively?

Todd Schermerhorn

I think a couple things. Number one, we managed pretty tightly anyway out of the blocks with our expanding across the board, that's not new, we have done that historically. And we also put contingency plans in place when we do the plan, kind of a what if something goes wrong, what are you going to do so that they don't have to think about it after the fact. But they got a plan in place just in case. So that is kind of how we plan.

John DeFord

So we saw, Taylor, we really can't tell, because a lot of our shipments are back end loaded in a month we really can't tell until we get through a month how it is going to come out. And so we had to kind of wait until January, until the end of January, until we knew for certain. We got some signs sort of in the third week or fourth week, but we got to kind of wait until we close January before we figure out that we were soft and then we went from there.

Taylor Harris – JP Morgan

Sure. Okay. And the spending control plans that you put in place for the back half of the year looks like it adds up to maybe $0.17 to $0.20 of bottom line impact. Is – should we be thinking that if you weren't doing that, then I think I mean I think that's about a 4% EPS impact, would you be looking at 10% earnings growth this year, without these new actions?

John DeFord

Yes I think it's a function of transparency. It depends. If we got to 10 we wouldn't need any of it. Probably I will all go back in R&D. But it really depends on where the sales comes in. So it's a plan we put together to insulate ourselves to the extent that the revenue doesn't come in where we wanted.

Taylor Harris – JP Morgan

So, if revenue – if this all does sort of come back to you in the second half of the year, then you'll be able to – I mean, I guess that's the question. If revenue does come in at the high end of your range, are there programs that you think you will need to reinvest in, in the second half of the year?

John DeFord

We have a list of projects as we always do that where we have some excess level of opportunity for investment that we would turn on and we would certainly do that again this year.

Taylor Harris – JP Morgan

Okay. Great. Thank you.

Operator

And we have a question from the line of Christopher Warren with Caris & Company. Please go ahead.

Christopher Warren – Caris & Company

Hey, thanks. Two questions for you. First, is it possible to distinguish the difference between fewer procedures or a weaker hospital environment and a situation where the hospitals maybe are increasingly compliant with the GPO preference products?

John DeFord

I don't think that we have seen anything in the environment at all that would suggest that any issues around GPO compliance would be affecting the overall admissions or even demand for our types of products. We have a very rigorous GPO process and program and there is no new competitive pressure in that environment which would cause us any changes.

Christopher Warren – Caris & Company

Got you. That's helpful. And then the other question I had looking back a little bit in time I guess in 2007 on a constant currency year on year basis you guys were maybe a shade below 10%. I'm trying to evaluate the growth drivers you guys think you have this year in the next three quarters and compare the magnitude of those versus what you had sort of launched at the end of the first quarter of 2007. Could you help me with that in terms of evaluating how powerful what you have launched today is relative to that year?

John DeFord

Chris, that's a pretty deep analysis. I think we have to take some time and work through, we are happy to discuss that you and Eric take offline, but I'm not sure any of us can remember 2007 as we sit here today. So we'd be happy to work through that with you kind of off line in the next couple of days.

Todd Schermerhorn

I think maybe another way to answer it. John DeFord alluded to this in his comments, actually stated it in his comments. We are right on track in terms of our new product launches in the first quarter. As we see those launches going forward, obviously we included those in the guidance that we gave for the entire year, so, I'm not so sure it matters a lot comparing it to 2007 versus what we planned to do this year and where we are versus with that plan.

Christopher Warren – Caris & Company

Okay. Certainly appreciate that just trying to gauge the ability for you guys to accelerate going forward. Thank you.

Operator

We have a question from the line of Brooks West with Craig-Hallum Capital. Please go ahead.

Brooks West – Craig-Hallum Capital

Hi, guys. Thanks for taking the question. And I apologize I have been jumping back and forth between two calls here if some of this has already been asked but on the LifeStent pricing, how are you guys able to or how is it going holding pricing versus some of the stents that are being used off label and being sold at a discount? And are you maybe giving up some market potential by holding price?

John DeFord

We don't think we are. We are seeing and I mentioned this earlier a couple of times earlier in that. We see a clinical group, group of clinicians, it's very willing to pay a premium for an on label product, especially the importance of the on label product in the space. So from our vantage point the pricing that we have established in this, which we don't believe has been exorbitant relative to what the non-indicated product had been priced at historically, we were very cautious about how we priced this. But it is certainly (inaudible) getting it.

Brooks West – Craig-Hallum Capital

Great. That's great. And then on the continence market, specifically on the slings, is the sling that's delayed, is that prolapsed? Or is that continence?

John DeFord

No it's incontinence.

Brooks West – Craig-Hallum Capital

It's incontinence.

John DeFord

It's our single incision sling.

Brooks West – Craig-Hallum Capital

And so how much of the slow down there do you think is share loss? Can you quantify that?

Todd Schermerhorn

I would say put it this way. Certainly we believe that that market is decreasing in aggregate right now. You can debate exactly how much.

Brooks West – Craig-Hallum Capital

Okay.

Todd Schermerhorn

And we also believe that we are losing some share without this new product being launched.

Brooks West – Craig-Hallum Capital

So you think I mean at the analyst meeting you were talking about kind of low teens growth in continence products based on my notes here you think that’s you think it’s still double digit growth market?

Todd Schermerhorn

We don't believe it's a double digit market at this point in time.

John DeFord

Not right now. Not until the complications are eliminated there. Ultimately, yes. But right now the products won't allow it to be a double digit.

Brooks West – Craig-Hallum Capital

Okay. And then lastly, any more color you can give us just kind of macro things you might be doing in Europe to get back on track there?

Todd Schermerhorn

I would say the easiest way for me to describe it and again, we are still having discussions with individuals associated with this, so I can't get too far over my (inaudible), but the reality of it is that we are focused on improving the overall effectiveness of our selling efforts, and proving the focus on our selling efforts as opposed to marketing, et cetera, within that environment. So I'll leave it at that at this point in time. Again, in respect to the individuals that we have not had a chance to discuss this realignment with.

Brooks West – Craig-Hallum Capital

Okay. Great. Thank you, guys.

Operator

(Operator instructions) Next question from the line of David Bachman with Longbow Research. Please go ahead.

David Bachman – Longbow Research

Good evening. And thanks for the long call. Couple more questions just on the dealer and distributor network. Is the destocking that you saw there really across the board? Or is it a situation where you have seen perhaps more destocking and some are still not, others have yet to go through that same process?

John DeFord

Yes, well there is a real freedom in there, David, in that three distributors is 80%.

David Bachman – Longbow Research

Right.

John DeFord

And we are seeing it in them. I can't speak for the other 20.

David Bachman – Longbow Research

Okay. But the big three is where you are seeing it?

John DeFord

Yes. Big two even.

David Bachman – Longbow Research

Okay. Can we go for big one?

John DeFord

Well big one as well. Our largest distributor significantly dropped inventory.

David Bachman – Longbow Research

Okay. Good. Yes, we have covered a lot of ground here. But just on the, IC Foley cath, in my way of looking at things that to me that seems like it's pretty highly correlated with patients and procedure volumes at the hospital level and so some by here in the distribution and supply chain is thinking perhaps we could having a pretty pessimistic outlook on where that's going. That would kind of be my read and that this may be where we are starting to see that where might first show up.

John DeFord

Certainly not a new competitive threat.

David Bachman – Longbow Research

Right. Absolutely. So to me, it looks like it's got to be more the kind of just the leverage to patient volumes overall. So I mean, is there – if I look at that as a pretty bearish, barometer of where patient volumes are going, am I, is that totally out of line?

Todd Schermerhorn

I think we are just being conservative as we look at this. And I think, again, I can't talk for what the strategy is at the distributor level. And they have not disclosed that to us. But it would seem to be, obviously, there is some conservatism on their part as well.

David Bachman – Longbow Research

And just lastly, do you have any sense on how much, how many days of Foley cath inventory would typically be in the channel?

John DeFord

It's different by distributor. In fact remarkably different by distributor, David, to be honest with you. I would say on average it runs around a month.

David Bachman – Longbow Research

About a month? Okay. I'll leave it there. Thanks for all the detail.

Todd Schermerhorn

Okay.

Operator

We have a question from the line of Jason Bedford with Raymond James. Please go ahead.

Jason Bedford – Raymond James

Hi. Good evening. Just a couple of quickies here. On the gross margin line, are you benefiting at all from lower input costs? And then did I hear you correct in that it was a $2 million benefit from the Mexican peso? And is it safe to assume that won't recur going forward?

John Weiland

Yes that was a balance sheet item. In effect it's kind of a one-time we look at it that way. We wouldn't expect that to repeat as it relates to input costs, when we look at our manufacturing efficiency more than half of it is in materials. Now some of that is what we call method variance and some of it is purchase price variance. But the lion share of our improvement is occurring in the materials side.

Jason Bedford – Raymond James

Okay. And just lastly a product related question. On Ventrio is that creating incremental business for you guys or is it cannibalizing existing Google sales?

John DeFord

There is a piece of that which is cannibalization, but competitively we are focused squarely on those original Google compositive users who had switched away some time ago. And that's squarely where we are focused.

Jason Bedford – Raymond James

Fair enough. Thanks.

Operator

We have a question from the line of Kristen Stewart with Credit Suisse. Please go ahead.

Kristen Stewart – Credit Suisse

Thanks for taking the follow-up. I wanted to ask about some of the guidance ranges that you had provided back in December and to what extent you still think that on the margin side 50 basis points to 100 basis points of margin expansion is still possible given currency and given kind of the mix of business here and the growth rate?

John DeFord

Well, to take out that peso situation, I think we start the year at 52 which would be 70 basis points. So I think we are right in that range. And if anything, we probably improve as the year plays out. So I would expect us to – if we don't meet that guidance, we beat it.

Kristen Stewart – Credit Suisse

And then SG&A might be a little bit lower given some of the accelerated expense initiatives?

John Weiland

SG&A would be a whole lot lower. I think we talked about a 100 basis point production. I think the changes we talked about were up to $29 million. So that's another 100 basis points.

Kristen Stewart – Credit Suisse

And any thought on share repurchase programs or anything like that accelerated or M&A at this point?

John Weiland

Well I'll leave M&A to Tim. As far as share repurchases, we are buyers pretty consistently, will continue to be.

Timothy Ring

And M&A we continue to be extremely active in terms of looking at things and again like we said at the last call, we are seeing a lot more things for sale, but they are not necessarily what we would call really high quality things. It's just because we get something cheap, we are not going to lower our standards in terms of filters we would put in a normal like position. Kind of the same thing would be more aggressive but obviously we haven't announced a deal so still working on all that stuff.

Kristen Stewart – Credit Suisse

Okay. Thanks very much.

Operator

And Mr. Ring, I'll turn the call back to you for closing remarks.

Timothy Ring

Great. Well, thanks, everybody for taking the time, obviously, we have gone on longer than we normally do. And this is a point of call where I typically thank employees around the world and I frankly like to address the rest of this message to them. Today we are even more grateful to all of them for their service and dedication. We do understand and are sensitive to the fact there is no such thing as a small reduction in force. I can assure you that we take these things very seriously. We came to this decision as a result of our deep sense of responsibility to our shareholders, our Board of Directors and then frankly to our employee group at large. So with that, thank you in advance for your continuing hard work and dedication and for those on the call, we'll talk to you next quarter. Thanks.

Operator

Thank you. Ladies and gentlemen, that does conclude our conference call for today. We do thank you for your participation and for using AT&T's Executive Teleconference service. And you may now disconnect.

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