Becton Dickinson and Co (BDX) 2003 Q4 法說會逐字稿

Hello and welcome to BD's fourth fiscal quarter and year-end Earnings Release Conference Call. At the request of BD, today's call is being recorded for replay and will also be available on the BD Web site at www.bd.com/investors through November 13th of 2003. I would like to inform all parties your lines have been placed on a listen-only mode until the question and answer segment of today's call. Beginning today's meeting is Ms. Pat Spinella, Director Of Investor Relations, ma'am you may begin.

Thank you, Erik. Good morning everyone and thank you for joining us on our conference call to discuss our fourth quarter and full year results for fiscal 2003. Also joining us on the call are members of the media. Today's call is being simultaneously Web cast and as Eric pointed out it will be available for play back on our Web site and at 1-800-566-0450 for domestic calls and at 1-402-998-0620 for international calls through Thursday November the 13th. During the call we will discuss some non-GAAP financial measures with respect to our performance.

A reconciliation of these non-GAAP measures to GAAP measures can be found in our fourth quarter press release and the related financial tables. A copy of the release and tables is posted on the investor page of the BD.com Web site. We will also make some forward-looking statements. And it's possible that actual results could differ from the expectations expressed today. Factors that could cause such differences appear in the fourth quarter press release and in the management discussion and analysis section of our recent SEC filings.

Leading the call this morning is Ed Ludwig, our Chairman, President and Chief Executive Officer. Also joining us today are John Considine, our Executive Vice President and Chief Financial Officer. Gary Cohen, President of BD Medical and Bill Kozy, President of BD Diagnostics and Vincent Forlenza, President of BD Bioscience.

Before I turn the call over to Ed, I would like to inform you that we expect the Dean Krianika (ph) formerly elected as Vice President, Corporate Secretary in public policy by the board at their November meeting and he's already engaged in those duties. I know that Dean very much enjoyed working with the investment community for the past several years and I look forward to continuing that work. Now I'd like to turn the call over to Ed.

Thank you very much Pat and good morning to everyone. By now I assume you had time to read and review the earnings release attachment we issued earlier this morning and we'd therefore like to devote as much time as possible addressing your questions during this call. However, before we begin I'd like to offer some brief comments about the quarter and year just ended as well as our outlook for fiscal 2004. As we noted in our press release we changed some of the names of our segments and units effective October 1st. I will be using the revised names in my remarks today, although they are strongly related to the old names. So I think it will be he to follow along.

First let me discuss our results for 2003. Over the past three years we have been pursuing and communicating a very purposeful strategy with two interrelated goals. The first goal is to increase revenue growth by focusing on products that have a higher benefit to patients, healthcare workers and researchers, and thus earning higher sustainable profit margins. Our second goal is to drive a broad aggressive set of actions that will continue to improve our operating effectiveness and balance sheet productive. This in turn will provide the resources for our growth initiatives thereby generating higher shareholder returns. I'm pleased to report that our results in 2003 reflect the successful continuation of our strategy. As company wide revenues and earnings per share for the quarter and the year were in line with our projections that we shared with you throughout the year.

Diluted earnings per share in the fourth quarter were 61 cents. For the full year, reported earnings per share increased 15% to $2.07 per diluted share from the previous years earnings of $1.79. Earnings per share for fiscal 2003 would have been $2.15, excluding 8 cents of non-cash charges recorded in our third quarter write down of intangible assets and the inventory in the BD bio sciences segment. This represents a 14% increase from an adjusted $1.88 in the prior year, after excluding fiscal 2002 charges totaling 9 cents per share related to the medical segment manufacturing restructuring and the non-cash write down of two equity investments.

Revenue growth of 12% for the year represented an approximately 4-percentage benefit from foreign currency translation, in particular due to the strong Euro. Each segment benefited in the 4 to 5% range due to currency. Growth was driven in particular by our broad line of safety-engineered products, prefillable devices, the BD probe tech ET and the BD FACSAria. *For our safety-engineered products these products as you know are sold by both BD Medical and pre-analysts systems' unit of the BD diagnostics segment. On a combined basis I am pleased to note that U.S. sales totaled $680 million for the year. This represents a growth of about 19% and it's in line with our increased guidance for the year. For 2004, we look for U.S. sales of safety-engineered products to increase about 12 to 15% over 2003.

Turning to BD Medical. Reported revenues grew about 11% for the quarter and 14% for the year. Growth for the year and quarter was driven primarily by U.S. sales of safety-engineered products as I just mentioned, along with pharmaceutical systems prefillable products and diabetes care products. Pharmaceutical systems experienced 33% growth for the year, or 20% currency neutral. Q4 sales of diabetes care products benefited from a favorable comparison to last year's fourth quarter, which was effected by redirecting our promotional efforts of branded insulin syringes from distributors to retailers and revisions to sales in inventory estimates provided to us from distribution channel partners.

When you eliminate the offset of the favorable comparison the underlying growth rate is in the mid single digits. Within the diabetes care unit, sales of BD blood glucose monitoring products totaled $5.4 million in the fourth quarter of fiscal 2003 and $15 million for the full year, which was consistent with the guidance we provided during the Q3 conference call. While total year BGM sale revenues were below the guidance we had initially provided earlier in the year when the products were first launched, we believe the difference was primarily as a result of timing. We're now seeing signs of strength that give us confidence in the success of our launch.

Customer pull-through in the retail channel for our strips has been consistently increasing over the past five months. The launch of Medtronics Paradigm 512 insulin pump, which works as an integral system with the Paradigm Link Meter supplied by BD has now complemented, has now been complemented by the launch this month of the Paradigm 712, which has a larger insulin reservoir. Our customer research indicates that a high percent of Medtronics Paradigm customers are adopting and using the Paradigm Link Meter and BD strips. Perhaps most importantly, our BGM products are performing exceptionally well in the marketplace. We have made important progress in securing managed care and durable medical equipment contracts, DME contracts and customer feedback has been highly positive.

Moving on to diagnostics. Reported revenue growth was about 6% for the quarter, and 11% for the year. Once again, U.S. sales of our safety engineered blood collection products contributed to the growth in the pre-analytical systems unit of this segment. Revenues related to BD probe tech ET contributed to the growth in the diagnostics systems unit of this segment. BD Bioscience reported revenues grew by 10% for the quarter and 8% for the year led by strong instrument sales, particularly the BD FACSAria. Reagent sales growth slowed in comparison to prior quarters, primarily as a result of general slow down in research spending.

Revenue of the CloneTech unit declined in the quarter and the year due to a general slow down in pharma Biotech R&D spending as I previously noted and continued erosion and sales of their gene discovery related products. We have taken aggressive actions to adjust the size and focus of that business to align it with the current opportunities in the molecular biology market. We reduced CloneTech's work force by one-third over the past 15 months.

Their research spending was also refocused toward developing products targeted at understanding gene function and increasing efficiency in the drug discovery process. We anticipate this new focus will result in products that will begin to stabilize the performance of the CloneTech unit during fiscal 2004. We continue to remain confident in the future growth potential of the BD biosciences segment. New opportunities are being created due to the need for greater efficiency and productivity in the areas of drug discovery, stem cell research, vaccine development and immune function monitoring.

I'd like to conclude my remarks by commenting on our strong company wide financial trends and provide you with our outlook for 2004. Consistent with our guidance throughout 2003, our gross profit margin of 49.2%, which on a pro forma basis excludes the $34 million of non-cash charges related to the write down of certain intangible assets in inventory in the BD bio sciences segment reflects a 90 basis point improvement over the preceding year.

We generated strong cash flow as a result of our ongoing efforts to focus on both operating effectiveness and balance sheet productivity. For the year we generated cash from operations in excess of $1 billion before contributing approximately 100 million to the pension plan in the first fiscal quarter of 2003. $261 million was invested in capital expenditures. We also repurchased about 10 million shares of common stock for approximately $350 million.

Turning to working capital. Inventory turns improved from 2.96 to 3.13, despite an increase in inventories to support new product introductions and unfavorable impact from foreign currency rates. Accounts receivables days outstanding declined to 53 days from 55 days. Our debt to capitalization ratio stands solidly at 30.4%.

Looking at 2004, we expect fully diluted -- we expect diluted earnings per share will increase in the range of approximately 10 to 12% from this year's pro forma earnings per share of $2.15, which excludes the 8 cents of non-cash charges. We again expect to generate in excess of one billion of net cash from operations fueled by our continued focus on productivity and revenue growth in the range of 6 to 8% company wide. Revenue growth for each of our three segments is expected to be in the same 6 to 8% range.

In BD Medical, we expect growth will be driven primarily by U.S. sales of safety engineered devices prefillable products and blood glucose monitoring products. We are projecting revenues of approximately $50 million for blood glucose monitoring in fiscal 2004. Based on our missing our revenue target last year we're choosing to be a bit more conservative about this year's outlook.

Having said that, we are investing at a higher level to help build a strong and sustainable position for the future and this is particularly evident in the first quarter, because investments made early in the year offer the best potential for return. As a result of incremental spending for blood glucose monitoring, we expect the diluted earnings per share growth for the first fiscal quarter to be in the range of 8 to 10%. Again, that's versus the 10 to 12% for the full year.

These blood glucose-monitoring investments are built into our overall company guidance for the year. The interim goal we discussed with you last January when we launched these products of achieving approximately 10% U.S. market share within the five years remains unchanged.

For BD diagnostics we expect revenue growth will be driven by U.S. sales of safety engineered device and continued expansion of reagent sales associated with the BD probe tech ET. In BD Biosciences growth is expected from instrument, reagent and discovery lab ware products. We do expect that the first half biosciences revenue growth will be higher than the full year due to a favorable comparison to the first half of fiscal 2003, which included less than one month of BD FACSAria shipments.

Overall for the company we look to improve gross profit margin again by continuing to focus on products with more direct benefit to the patient's healthcare workers and researchers. We will also continue our lean enterprise efforts. We will continue our work to increase our inventory turns, and to eliminate certain low volume SKUs. In 2004, we expect the company gross profit to increase again in the range of 75 to 100 basis points from the 2003 level of 49.2%. As we've been saying before, our capital expenditures are expected to be in the 275 to $300 million range, and this is a good estimate for next year.

For stock repurchase, we're forecasting about $300 million in fiscal2004. SSG&A and R&D are expected to remain at about the same percent of revenues as in fiscal 2003. Interest expense is expected to be slightly higher due to increased long-term debt. Our effective tax rate is projected to be about 25%. And we estimate the average number of fully diluted shares to be between 260 and 263 million. With all that said now let's begin the Q&A and as we do, in order to allow the broadest participation in light of time constraints, we'd appreciate it if you would limit your questions to one plus a follow-up. And I thank you for your cooperation. So, operator, I'll turn the Q and A back over to you and I'll look forward to your questions.

Thank you. At this time we are ready to begin the question and answer portion of the call. If you would like to ask a question, please press * 1. You will be announced prior to asking your question. To withdraw your question you may press * 2. Once again, to ask a question, please press * 1. One moment, please. Bruce Jacobs of Deutsche Banc you may ask your question.

Thanks so much for taking my question. Given the higher spending levels on the blood glucose product, I'm wondering if you would be willing to quantify what the impact was to the bottom line in the fourth quarter and what you expect it might be for the product line in 2004 as well?

OK. I will, as a matter of routine on these questions, I'll take them in general and if there's a need for elaboration I'll call upon Bill, Gary, John and Vince to add. This is a basic one, though. In the fourth quarter, the P&L impact, which is all in, was about 8 to $9 million. For 2004, we're expecting that the total, first of all, we're going to be less specific.

We don't want to get into specifics around the spending. We haven't and we don't want to do that. For fiscal 2004, the total P&L impact, the total loss, if you will, or investment spend, all in, is going to be about the same as it was in 2003. But this, again, is going to be a little bit uneven. It's going to be relatively, because remember we didn't have any spending in last year's first quarter to speak of or P&L impact. So the impact on Q1 is going to be a little bit higher than the rest of the year.

Now, having said that, you have to bear in mind that next year we're looking at, you know, 50 million in revenue. This year we had 15. So it's obvious by looking at what I just said that we're basically reinvesting the incremental gross profit back into the business and again we're very committed to prudently but effectively and aggressively spending to build this business to a very big success.

And I guess just as a follow-up to that. You said you've been conservative with the 2004 guidance for blood glucose but you're holding onto your 10% share expectations I think obviously means some pretty substantial growth in the 2005, 2006,2007 time period. If you could help us get comfortable why you think those expectations five years out are still realistic even though given a slower start than you had anticipated? That's all I had.

Good question. I'll give you a sentence or two then I'll ask Gary to elaborate. You know, when you compress analysis into a 6 to 9- month interval you get an amplification of the negative. It's like the months that we lost this year were the most important months. But in the scheme of a five-year outlook, the fact that we're, you know whatever you want to call it, three to four months a little out of faith, it really doesn't mean that much. That's number one.

There's a little bit of arithmetic effect here. Fundamentally I'm optimistic and I do want to emphasize that 10% is our increment goal. Basically the way we think about this business we want to be a leader. We want to be a quality leader, a value leader and innovation leader. And thus far, as I said before, the customer feedback on this product is very positive and that's why we continue to be optimistic about the future. And maybe Gary can talk about some of the groundwork we've done, even in our distribution strategy or anything else you want to talk about.

Sure, I'd be happy to comment further. I would look -- I would suggest you look at that 10% five years as a target. It's a number that we think is attainable. We don't think that the experience in 2003 really modifies our view because in retrospect we were a little bit too ambitious in our first year forecast and that six, seven month time frame from when we actually had the products in the market to the close of the fiscal year really didn't give us sufficient time to fully assess and understand the success of our launch.

We believe 10% in five years is attainable. Some people think it is too aggressive, others think it's too conservative. We think it's a prudent number to set as an initial target as described. We've been making a lot of progress. We've been making progress in securing managed care agreements at a tier two level. That work will continue. We've been making progress in securing DME agreements, as Ed has mentioned we've seen trends on retail pull through and customer pull through from the retailers that have shared that information with us, which is really coming from the ones that first joined the program with us.

We're seeing good results with the Medtronic Paradigm customers with the actual utilization of the Paradigm Link Meter so the indicators are positive and our view is that the first six months, which were by necessity back ended in the terms of their forecast at the end of the year given it was a launch year don't change our view that we can attain our initial goal over that five-year period.

Thanks guys for taking my question. I appreciate it.

Rick Wise of Bear Stearns, you may ask your question.

Good morning, everybody. Let me start off with Ed, I'm trying to think how to approach it here. What seems like more conservative guidance overall for fiscal 2004 relative to the year just ended. And maybe tying that into a U.S. business that in the fourth quarter, with the exception of diabetes and immuno cytometry looked pretty weak overall. What's pulling your guidance down toward a more conservative range and was anything going on in the U.S. that we should be concerned about or that's making you all more conservative?

The simple answer is no. I think the fundamentals of the business remain sound. I mean I'll call upon Gary. There were a couple of very positive successes in our prefill business this year that, because as we said on an exchange neutral basis it grew 20%. I think it would be unrealistic to think about that as continuing. But I think if you think about, nobody knows where foreign currency is going. But if you look at this past year, we reported 7.5, 8% exchange neutral.

We're guiding next year at 6 to 8. Obviously perhaps 6 is a bit conservative. But if you take the range and compare it to where we were last year, again I think what we're trying to signal here is an effort to, frankly, broaden the range bands and let you guys do some of the analysis as well. So if you look at our range for next year versus our actual results for last year, they basically overlap. And if we're guilty of being just a tad conservative, then so be it, but maybe Gary would like to talk about some of the comps. But the fourth quarter came -- it was absolutely as we expected.

We knew there was some comparison issues with the prior year. You have to bear in mind that this year all of our sort of U.S. core businesses did have a little bit of strength in the first half because some of the distributors were being a little more aggressive about buying in advance of our go live for our SAP system and so they were a little more aggressive in first half buying last year, many of those businesses were cleaning up back orders in the back end of the year.

And so that made our second half this year, particularly fourth quarter, more of a difficult comparison. But we communicated that clearly in the third quarter call and it came as no surprise to us. And we think our outlook is basically prudent. Gary, do you want to elaborate a little bit? We should talk a little bit about the prefill successes and outlook.

Sure. First I would say that the fourth quarter came in pretty much exactly as we had anticipated in the medical segment. We knew that certain units would have slower growth in the fourth quarter. And Ed had touched upon some of the reasons for that in medical surgical in the U.S., which was flat year for year.

It was comparable to last year we cleared some significant back towards last year in the safety product arena, which therefore depressed a little bit year to year overall growth for that unit in the U.S. as well as safety product growth for that unit in the U.S. And also as Ed mentioned, there was some call it safety factor, but supply safety among our distributors knowing we were going through an SAP go live during the year that affected certainly the first two quarters to some extent the third quarter and some of that came out of the fourth.

If you look at the overall growth of that unit over the course of 2003, which was around 7%, a little higher than that U.S., a little lower than that FX neutral internationally that was really reflective of the underlying rate of growth last year for that business. More so than the fourth quarter. In pharmaceutical systems, and we had indicated this throughout the year, we had a number of things that gave us favorability in the first three-quarters.

There were a number of customers coming on in the U.S., primarily, around some of the growth came around customers who were using hands, which is one of our injections prefill injection type products. Shearing had brought on interferon ready (inaudible) for growth hormone fertility and as they're scaling up for launch of those products. By the way those U.S. sales are products launched for Europe during the scale up phase you get that growth boost. That growth will continue for on going sales but you don't get the scale-up factor.

Likewise in Japan we brought on a major customer, which actually came on in the, came on in the first quarter last year. So, excuse me, came on in the fourth quarter last year. So this is the first quarter relative to that new customer in Japan where we lose the year-to-year benefit of the new customer coming on. The overall growth rate for pharmaceutical systems both U.S. and internationally was fantastic in 2003. 31% in the U.S. and currency neutral 21%, excuse me, 17% internationally.

And certainly the ongoing growth rate will be better than what we've exhibited in the fourth quarter but we don't expect it to be as high as it was last year because last year was a surprisingly strong year. So my view would be relative to the units in the medical segment, would not -- would be not to get too caught up in the fourth quarter on a stand alone basis but look at the annual trend recognizing there was some anomalies making individual quarters looking a little better or a little worse.

That's helpful. My follow-up would be actually a similar question for biosciences and maybe you can all give us some detailed input on the number of units or FACSAria and Phoenix probe than end update as well.

I'll ask Vince to talk about, and Bill to talk about it. But again we think it's appropriate to not be dealing in the granularity of individual instrument placements in a given quarter. These things tend to be lumpy and difficult on a near term basis to predict. I think what we'll be looking at is the overall customer acceptance. We'll be talking about market shares. We may periodically talk about installed base. I can tell you that the FACSAria is the most successful flow cytometer launch in our history and the probe tech is fast becoming the most successful diagnostic platform in our history. And so maybe Vince would talk a little bit about what customers are saying about Aria and Bill can talk a little bit about his success with probe tech.

Just as a transition comment. We had given a target of 55 for the quarter and we exceeded that number. So with that said, the placements of Arias is going extremely well. And we expected we would have a strong fourth quarter. The only issue was how much U.S. government spending would be there and we were pleased with the way it all came out, that as usual, you know, because the government's budget, we get a bit of a pop in the fourth quarter. So the Aria did do well and was accounted for the majority of the growth for biosciences in the fourth quarter, not all of them, but the majority of them.

Bill, any color around probe tech?

Sure on the probe tech if you look back at 2003 we had set goals and targets to achieve at least a 35% share of that amplified sexually transmitted disease market. And we're pleased that we've achieved that goal and looking forward to continuing the growth in 2004.

OK. Next question.

Glenn Reicin of Morgan Stanley, you may ask your question.

I'm going to try to come after the same questions in a slightly different way. I was in Rich Camp I had expected a little bit better U.S. sales in the one business that did better than expected was diabetes, and I always, I don't know, I always get a little bit alerted on the diabetes number being better than expected, given the history here, stocking and de-stocking.

So maybe a good way of looking at this, if it's possible, can you maybe either Bill or Gary or both, maybe give us a little bit of history lesson as to what has happened with the inventory levels, wholesale levels and maybe how that impacts growth year over year and what had happened this year and what happened last year?

Maybe just cut to the chase here. What was going on in the fourth quarter for those two businesses had more to do with last year by far than this year. We were -- there were no promotions. Dealer inventories did not go up in this fourth quarter. And they had -- and for the most part the trends that we experienced in the fourth quarter that we experienced expected came through.

We had guided, I believe in the third quarter, that the fourth quarter would be about 5 and 9, which it came in at. So if there's a difference, it sure wasn't versus our expectation, and I can assure you that nothing was done in the fourth quarter with respect to trade behaviors that was any way unusual. And our outlook for the first quarter for those businesses is strong. So there was no timing issues in the fourth quarter of this year. It was more tough comparison to last year.

OK. And then as a follow-up to Rick's questions while on probe tech, the last conference call you did say you placed around 75 in the quarter. It was 200 year-to-date. I think you said placements stand around 800. Revenues last quarter were about 16 million. Can you give us the same numbers either for the year or what revenues were?

Let me -- the total installed base at this point is about 900. And we exceeded our plan for the year and we're just not going to be more specific about that on a go-forward basis.

What about revenues for the year and for the quarter for that product line.

We're just not going there at this point.

And then maybe John, can you give us a little help about Q1 revenue guidance?

Well, the revenue guidance is, we gave you P&L. We gave you bottom lines.

Then you hinted biosciences could be very strong in the first half. Could you give us a little more granularity by business and how this whole thing sort of adds up.

Again, on pay quarter by quarter basis, again, given the world we live in, we're trying to be a little bit more general about our guidance. So I think that the -- we're not expecting vastly unusual trends in quarter-by-quarter revenue growth. So if you looked at the, if you looked at the revenue growth again for the year, it's for the quarter, it's --

You have some currency in Q1. You have biosciences growing greater than the average in first I'm trying to understand.

Average would be 7 to 9% for the company, 6 to 8% for medical. 8 to 10% for diagnostics and 10 to 12% for biosciences and that's again where biosciences is a little -- that's not to be extrapolated for the full year. 7 to 9% total 6 to 8% medical. 8 to 10% diagnostics and 10 to 12% for bio. That's all as reported.

Thank you very much.

Robert Goldman of Buckingham Research, you may ask your question.

Thank you and good morning. Just a couple follow-up things to previous questions. On the currency issue, I know one can't predict currency, but could you assume the dollar stays where it was at the end of the fourth quarter, what would be the currency benefit in fiscal 2004? What's embedded in the 6 to 8% projection?

I think the easiest way to think about this is first of all, we kind of talk about, we always talk about currencies in terms of year over rate references. The wild card here is that you have a lot of currencies, we work all over the world. But let me just say that if the currency stayed in the 1.14 to 1.15 range, all else being equal, we would probably end up in the upper end of our range for next year. So I think that's the best way to look at it of our revenue range. So at 1.14, 1.15 Euros, now bearing in mind, other things can happen. But at the 1.14, 1.15 range, I would be more comfortable in the upper end of the revenue guidance than the lower end. So that would be one (inaudible) give us the point.

OK. And then --

Let me also say that we have, because of our good financial planning, because this question also comes up, came up in the years that we've all forgot where the currency went the other way, we do have some protection below that level as well in terms of very effective hedging that we've done in wherever we could. So we do have some protection on the downside, and I think there might be some upside if the dollar were to move beyond the 114, 115 level.

Okay. Thank you. And I have one follow-up to another question, too, if I could. And this was on the facts area or the immuno cytometry broadly. I know you're not giving out instrument numbers but you did mention you're seeing a slow down in R&D growth and that's negatively impacting the business. But I've heard this not from Butkins specifically but I've heard the slow down specifically for a year and a half two years. I'm just wondering if something unique or special or different is happening in the most recent quarter that we should be alerted to.

Let me ask Vince to elaborate.

Sure. I think that the market trends haven't changed, that the growth rate of the Pharma spending and the NIH spending has certainly flattened out and it has affected our reagent business. But I think people, our customers, I should say, given the prelaunch notification of the Aria, they had budgeted for the instrument and I think it was such a compelling platform they made sure they had dollars available. And we benefited from that. And I expect that we're going to continue to benefit from that phenomenon next year. So if you have a very compelling platform, people will allocate their budgets even if they're growing slower to a compelling platform and that's what we're seeing going on here.

OK. Thanks.

Sure.

OK. Next question.

David Zimbarlist of Blaylock & Partners You may ask your question.

Two questions then one more significant one. First, could you give us the foreign exchange benefit for the quarter and the year for your EPS? Second, if you could talk a little bit about Phoenix and where you're at in the progress towards that launch, and some level of expectation that could contribute next year, and then finally if you could talk a little bit about your board meetings, priorities there, particularly in light of your strong cash flows, what are the sort of issues you're bringing to the board in a couple of weeks.

As we said for the year it's about 4 to 5% tail end benefit on the revenue side. We don't elaborate on the EPS side. There's just too much variables we leave that up to you guys to sort out.

I'm talking about what did it contribute in the fourth quarter, what did it contribute --

We just talk about the revenue side of it. It was about 4 to 5%. I'll let Will talk about the Phoenix and you know it wouldn't be appropriate to talk about what our board agenda is. But overall the board is very supportive of the company. They're very happy with the results over the last couple of years with the stability we've got.

We do have a sound cash flow. I remind you it's at the November board meeting where we typically vote on dividends. It's increased every year. Probably since we went public. I would expect that would happen again and it would be premature for me to anticipate beyond that. But we're looking to, again, I think the strategy is purposeful growth.

We have many opportunities within places that we really understand markets and customer needs, investing in new technologies, investing in once we have a good product like BGM to invest behind the selling of that product, and that's kind of what the board is looking at. But it would be inappropriate to comment beyond that and I'll ask Will to talk about Phoenix, which is doing very well in Europe, although it's still a very small base. And we're looking forward to new launches in the next year.

Thanks Eddie. As already commented at, the sales for Europe and Canada which are primary launch markets for this product were essentially laid on plan for 2003 as we mentioned last quarter all of our attention right now is really focused on the Q2 2004 launch of Phoenix in the U.S. and the Q4, 2005 launch of Phoenix in Japan. I think I commented at our last meeting about the fact that U.S. and Japan are the key automated IDAST markets. We recognize the selling cycles are such with capital equipment like this that the implications for 2004 are not significant. I think the question for us will be what we can bring in 2005 and we'll certainly understand that by this time next year.

Can you just explain, given that the Phoenix instrument was actually approved, and you know tests are being approved sort of bit by bit, if you could talk a little bit about why you haven't sort of been testing the appetite for your instrument with your buyers, with your customers? What's sort of the strategy as rolling it out once you have a full menu?

We very much have tested the appetite with our customers, with our trials in the U.S. and we continue to be encouraged to date by those responses. The other good part of your question there is around where we're at with our final drug approvals with FDA. We do continue to stay on the schedule that we had committed to about nine months ago. And if everything continues to go well with our submissions and approvals, that's what's driving the Q2 2004 launch date that I mentioned.

Thanks.

Bruce Cranna from Leerink Swann, you may ask your question.

You didn't want to comment too much about the FX impacts. But is it possible if I look at year over year 100 bits I think of improvement could you quantify maybe what portion of that improvement on the gross margin line was FX related?

Well, again, if-- I don't think first of all, direction, I don't think it has a huge impact. The improvement in gross profit of the year of about 100 basis points, the vast majority of that is because of things we did to improve it. And if it's maybe one or two-tenths of a point related to FX, that would be a gut estimate. But the 70, 80% of the improvement of the 100 basis point improvement is related to products that have higher margins.

It's related to manufacturing restructuring. It's related to the absence of some investments we made in prior years around restructuring. And in spite of the fact that we're investing in blood glucose, in other things. So I think the FX kind of gets lost in the rounding on the gross profit improvement. I wouldn't want you to think of the gross profit improvement as highly dependent on FX. It's stuff we're doing. It's products that have higher margins it's driving productivity plant by plant and program by program.

That's helpful. Thank you O the safety side, I think the number, my math is right, was 182 total sales in the quarter; is that right? 182?

We can do that.

I think it's somewhere around there. I got 182 roughly. My curiosity.

182 is correct. We have verified your arithmetic.

I got that going for me. So if I look at what I think is the trend the first three-quarters, we were sort of coming in around 165, 167. Looks like a up tick from a somewhat previously flattened perspective. And I'm curious, was there something going on in safety sales in this quarter, plus I learned of that around September and I assume that was a slower quarter in general in the markets you're selling into. So looking at this quarter's safety numbers did that surprise you or did you feel that was what you were looking for.

That's basically what we were looking for. We had guided in the third quarter that the fourth quarter would be as advertised. And again as Gary -- as Bill said, in both of these businesses, last year Bill was recovering from a back boarded situation so his fourth quarter last year was particularly strong. I think Gary was also recovering from a back forward situation. Inter-linking Gary's safety and safety blood lock collection set in Bill's case. It was a tough comparison.

On a serial basis we're glad the way it's progressing quarter forward, quarter forward. So again we're looking at next year 12 to 15% growth and we continue to drive that. It's very illustrative that we continue to come up with new products here. We have the push button blood collection set coming out next year, and so this is going to continue to be a steady growth for us. Although now that you've got $680 million base, any increment in sales has a relatively lower percentage impact. But it's still a good business for us. We said it would be a billion dollars couple years out and we still think it will be.

You answered my next question 12 to 15% next year we should be thinking of?

Yes.

You mentioned tax rate 25% in 2004 seems like a bit of an uptick, is that geographic mix or how do we look at that?

Basically the tax rate, it's a function of the growth in the income in some of our tax haven products is slower than the growth in the income in the rest of the company it's nothing more than a mix issue. While you've given me the opportunity let me point out that the uptick in the tax rate is worth about a nickel versus if you had run it at this year's tax rate. So if you look at pretax or operational growth, it's pretty strong. Again, guiding it 10 to 12, there's probably some head wind there from the tax rate. Now, we are trying to manage this as best we can, and as we come up with new products and move into new innovative areas, obviously we'd be looking to rebalance our sourcing to make sure that we get the best kind of tax advantage going forward.

OK. Thank you.

Lawrence Keusch of Goldman Sachs, you may ask your question.

Two questions, if I could. I want to start just on the BGM for next year. And I know you preface your comments by saying you're being conservative. But if you kind of think about where you were in the fourth quarter, you know, I would think that you should probably do a little bit better than that. And I guess part of the question is: Is there any changing in the investments in terms of where those dollars are going this year versus fiscal 2003? That's sort of the first question.

As I say, I think the important thing is to understand that we are investing aggressively. The biggest investment in this space is meters. And maybe I'll let Gary elaborate on it. And obviously a meter placed in October/November that has an opportunity to create a stream of strip sales is a very good product for us. So we're being particularly aggressive in our first quarter. And we really think about these things in two separate modes. One would be to a bit conservative on the revenue side. And on the other hand be very aggressive about including spending and investments that are needed to make the product successful. So I'll let Gary talk maybe a little bit about the marketing mixes I think is one of your questions.

Relative to your question about is there a change in let's say where the investments are going, as have been, as we communicated last year our focus is on the frequent tester segments of the market, which would be the insulin-using segments of the market, primarily in the type one area, and we estimate that pump users as well as frequent insulin injectors, people who inject three or more times, two to three or more times per day, represent about 62% of the strip market.

That's where we're targeting. It was interesting over the last month a report, I forgot the report we issued the report we issued indicates to be the BGM market that's growing by the way we didn't choose it for that reason we chose it because that's where we have access. I think we chose wisely. And our meter sampling activities are direct to consumer marketing activities and our work with Medtronic are all oriented around frequent insulin injectors and pump users and we generate leads from our own relationships and direct access to our customer base, insulin injectors, pen needle and syringe users as well as Medtronics and through Lily.

That's where the focus of our meter sampling effort is going which creates pull through in the retail channel as well as sales through Medtronics direct channel. And that's the focus of where our investment is going. We're seeing good adoption rates and we've chosen to do that rather than forgive the term but blind and widespread meter sampling because we'll get better return on our meter sampling this way and it represents more than substantial enough segment total amount of the strip market to make it a viable strategy.

Great. Then just two other things. If there's any sort of update on safety legislation in Europe. I know that there have been talks that Germany could be getting close and then just lastly, as you think about the cash flows for next year, is there a pension contribution needed for fiscal 2004.

Let me start with, we don't anticipate a pension contribution next year. And we'll let Gary talk about public policy in Europe.

You're correct in what you said. There's been an uptick in some activities in Europe relative to public policy. My understanding is that Germany did indeed enact a safety requirement in October. And that focused on use of safety-engineered devices in areas where there's higher risk of infectious disease transmission and our understanding of that requirement is that you know is it will have likely impact in infectious wards, emergency rooms and paramedics, but that the guideline, the requirement is not limited to just those areas.

It leaves it up to interpretation so it will take a little bit of time to really understand what the impact will be. There's been a lot of activity in the UK. A number of articles published last month, with wide media exposure (inaudible) exposure regarding healthcare workers who had contracted HIV through injury and there's been a real cross sector mobilization in the UK led by a nursing group but with many others involved as well mobilized to push towards guidelines for use of safety engineered devices.

So that continues to be the momentum in the UK. In France, although it's not as much going on in terms of regulatory side there's been a strong move towards safety devices particularly blood drawn procedures because of the blood scandals in France a number years back. And Spain has had the written law that hasn't been enacted on the books for some time.

Our understanding and it got set back due to change in political administration in Spain, and that could be put back in place or actually regenerated in any point in time but it's a little unpredictable as to when or whether that will happen, but in general good positive momentum relative to policy efforts in Europe driven a lot by nursing groups and others who have been come of with that decision.

Do you do many sales of safety for next year when you talk about your guidance?

Excuse me, could you repeat that?

I'm asking if you assume any significant European safety sales for 2004 when you talk about the growth of that product line.

Not included in the numbers Ed gave, the 12 to 15%. That's strictly U.S. S, we've remained cautious about guiding specific numbers for Europe because of some of the unpredictability's in the market and we're growing safety in Europe growing it faster than the U.S.

Small basis. Operator I believe we have two or three more questions depending on how long the answers are.

Timothy Lee of Merrill Lynch, you may ask your question.

Hello. This will be a real quick follow-up. In terms of the sales outlook for next year, that 6 to 8% range is there a cost of currency outlook or is that a reported number you're looking for?

That's a reported number.

So then on cost of currency we could expect maybe a point or two below that?

I said before the way to think about it is that if again bearing in mind there's a lot of stuff that goes on with cross rates, but again if everything kind of stays where it is and the Euro dollar rate was about 1.14, 1.15, we would be in the higher end of that range and so our baseline is about, maybe there's about a point of FX in those numbers.

OK. Thank you.

David Lewis of Thomas Weisel Partners. You may ask your question.

Maybe a quick follow-up for Bill. Bill sounds like growth for 2004 fall back, the company still remains fairly bullish. I wonder if you could comment on how you factor in the tie grist launch in Gemfro (ph) as well as the Abbott share gains getting a little harder fro next year, where do you model the Abbott share gains anniversary probably by next quarter for you guys. And maybe talk about protech in conjunction with tie grist and Abbott?

Let me take the Abbott part of that first we pretty much believe the gains that we're going to recover from the Abbott exit is pretty much completed at this point and we don't see that as an ongoing source of revenue. Of course we did pick up some of those during the latter half of the year so at least we'll have a little tail wind from some of those new accounts as we go into the coming year. I think our product competitively is positioned pretty well, particularly when you include the favorable response we're getting from Viper to compete with tie grist and we'll wait and see when they've got all their approvals done and go to market. But we think we're in an effective position to compete.

Thank you very much.

Matthew Buton of Argus Partners. You may ask you question.

Just made it under the wire following Larry's question about -- could you talk about the penetration rates about the various categories infusion, blood injection infusion, what your thoughts are for next year in terms of rates and then I guess maybe in your 12 to 15% guidance for U.S. safety, maybe can you talk about how that plays out over the course of the year? Do you expect it to be sequentially up each quarter or could there be dips?

First the transition rates in the U.S. we estimate it to be around 90% driving catheters, a range of 85% for blood collection, a little bit higher than that in (inaudible) a little bit lower on straight collection needles and 55% for injection devices a little bit higher than that in hospitals and lower than that in alternate site facilities. And at this stage, you have a few categories that are approaching high transition, and I think to some degree what -- what you should be tracking going forward not only transition rates, but also the new product introductions that will upgrade safety product to more advanced safety product.

An example of that would be push button collection set, which will go into a highly penetrated market but where there's been terrific customer response to a new product that also has a higher selling price. And we'll be pursuing similar strategies in some of the other product categories so the basis of measurement will shift a little bit going forward.

Relative to the quarterly outlook without going into too much detail I would say in med surge we could expect a little bit lighter in third quarter safety again because of the SAP conversion go live last year, first quarter last year safety sales were a little bit stronger as a result of that you might -- if you look back at the data, you'll see from the fourth quarter of 2002 to the first quarter of 2003 sales were pretty level. Which is unusual. Usually there's a little bit of dip in the first quarter. That was because of the putting away some product for the SAP go live. So it should be a little softer in the first.

I understand we have two more in the queue and we'll take those and wrap up so everyone can do their reports.

Glenn Reicin, Morgan Stanley, you may ask your question.

On the safety side do you expect greater growth in the coming year from medical or from the diagnostics business?

Diagnostics would be a little higher because of push button blood collection.

Second question one business that's almost impossible to model out is the pharmaceutical systems business. Can you give us some idea of what kind of growth you're anticipating this year what kind of trends you're seeing for the year, sort of quarterly trends?

We're not going to guide it specifically because we're not guiding units specifically in the growth rate will certainly be lower than it was in 2003. It will be higher than the company average and we ourselves are trying to assimilate some of the trends in that business. There is more competition, although there's a lot of ongoing strength in that business. So it should continue to be a good grower for BD. Above the company average but we don't expect to repeat the performance of 2003. And I know that's still a little general but that's as much.

Is that like low teens do that seem reasonable?

I think that you'll have to decide that on your own.

OK.

Rick Wise of Bear Stearns. You may ask your question.

Two last quick ones. Gary mentioned that a high percentage of Medtronic customers are adopting the - blood glucose monitor could you give us a better feeling, high over 50% or some sort of range? And you talked about products at CloneTech stabilizing fiscal 2004, could you give us some sense what those are and when we might see them and that stabilization, resulting stabilization? Thank you.

On the first part, what I was referring to is the users of the Paradigm system, where the meter and the pump are an integrated system. And as might be expected there's a high adoption rate there. Although it still requires people who are accustomed to using a strip and combination, if a competitive one, a change over. It's a positive sign that we're seeing that certainly north of 50%. I don't want to give you a specific number but certainly over 50% among the Paradigm users.

I'll let Vince talk to CloneTech.

On the CloneTech, even in the first quarter, we'll start to see some improvement versus the trend that we had last year. Certainly just because of an easier comparison but from the new product standpoint, the products are real time PCR products that we're launching. And they are out in customer hands for evaluation and we expect to start to see sales of them significantly in Q2, beginning of Q2.

Thank you very much.

Thank you all for joining us. Pat, do you have anything else to say or have we finished?

No, we're finished.

Thank you all very much.

Thank you and this concludes today's call.