Becton Dickinson and Co (BDX) 2004 Q4 法說會逐字稿

Welcome (technical difficulty) -- to BD's fourth fiscal quarter 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 website BD.com/investors through November 11, 2004. I would like to inform all participants that your lines have been placed in a listen-only mode until the question-and-answer segment. (OPERATOR INSTRUCTIONS).

Beginning today's meeting, I would like to turn the conference over to Pat Spinella, Director of Investor Relations. Ma'am, thank you. You may begin.

Thank you. Good morning, everyone, and thank you for joining us to review our fiscal fourth-quarter results and year end. Today's call is being simultaneously webcast and, as indicated previously, will be available for playback through next Thursday, the 11th, on the investor page of BD.com or by phone at 1-800-685-8573 for domestic calls and 1-402-220-0286 for international calls.

During today's call, we will discuss some non-GAAP financial measures with respect to our performance. A reconciliation of these non-GAAP to GAAP measures can be found in our fourth-quarter press release and the related financial tables. A copy of the release and the financial tables is posted on the investor's page of the BD.com website.

We'll also make some forward-looking statements, and it is possible that actual results could differ from our expectations. Factors that could cause such differences appear in the fourth-quarter press release and in the MD&A sections of our recent SEC filings.

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

I will now turn the call over to John.

Thanks, Pat. Good morning to everyone. I assume you have all had a chance to get our earnings release and the attachments we sent out this morning, and had an opportunity to review them. As usual, we would like to devote as much time as possible to answering your questions during the call. Therefore, I will be brief in making some comments about the quarter and the year just ended.

To that end, there are three broad topics I'd like to address. First, I want to ensure that you understand our reported and pro forma EPS from continuing operations, which importantly will establish the base from which we will build our fiscal 2005 growth; second, I want to describe the key drivers of our 2004 pro forma EPS growth; and, third, elaborate somewhat on our guidance for '05.

Beginning with the earnings per share, I suggest that you turn to the table included about halfway down in the text of the press release and immediately preceding the section on segment results. These tables were provided to reconcile the reported diluted EPS, the EPS from continuing operations for the quarter and pro forma EPS for the full year. Starting with the quarter, we begin with reported diluted EPS of 26 cents and add back the 44 cents per share loss recorded in connection with the write-down of Clontech's net assets to fair value. As you will recall, we previously announced that we're in the process of offering Clontech for sale, and have therefore classified it as a discontinued operation. We also add back the operational loss of Clontech for the fourth quarter of fiscal 2004 and 2003. This brings us to earnings per share from continuing operations in the fourth quarter of 70 cents versus 62 cents in 2003. 70 cents surpassed our recent guidance by about 3 cents, and represents a 13 percent increase over last year's fourth quarter diluted EPS from continuing operations.

By the way, it's worth mentioning that the quarterly losses attributable to Clontech were $100,000 in '04 and $900,000 in 2003, and while included in the calculation, were individually both less than a penny a share. However, as you'll note, when you do the calculation for continuing operations in '03, the loss causes the rounding of EPS from continuing operations to move up by 1 penny to 62 cents.

For the full year, reported diluted EPS was $1.77. From there, we add back the 44 cent write-down for discontinued operations, along with the related earnings or loss from each year. Next, we added back the '04 third-quarter charge of 24 cents related to the RTI litigation settlement and the first-quarter charge of 11 cents related to our blood glucose monitoring products. This calculation results in pro forma diluted earnings per share from continuing operations of $2.56. The $2.56 forms the basis for our 2005 guidance. Last year's comparable adjusted EPS, of $2.16 on the table, excludes a 3 cent loss per share from the discontinued operations and an EPS of 6 cents related to the write-down of certain intangible assets and inventory in the BD Biosciences segment.

Moving to the second topic -- that is, what drove our pro forma EPS of 19 percent -- I'll begin with our revenue growth of 8 percent for the quarter and 11 percent for the year. Revenue growth among the three segments was between 7 and 8 percent for the quarter and between 9 and 14 percent for the year. Revenue growth for the year reflected just under a 5 percent benefit from foreign currency translation -- in particular, due to the strong euro -- and all segments benefited. For the quarter, the benefit was approximately 2.5 percent, and again, all segments benefited.

Growth drivers included our safety-engineered products, prefillable devices, flu diagnostics, BGM, the BD ProbeTec ET, BD FACSAria, and the recently-launched BD FACSCanto and FACSArray. With respect to safety, US sales of our safety-engineered products totaled $765 million, an increase of about 13 percent over last year. As you know, these products are sold by both BD Medical and the preanalytical systems unit of the BD Diagnostics segment. As we had indicated in prior calls, we are going to begin reporting international safety sales, which for fiscal 2004 were just over $200 million.

Sales of our blood glucose monitoring products totaled 42 million for the full year, which is consistent with the guidance we provided during the third-quarter conference call. Our fourth-quarter sales were about 15 million, which puts us at an annualized run rate of about 60 million.

The revenue drivers and the resulting overall growth in consolidated revenues combined with, among other things, continued operational effectiveness programs, delivered a 100 basis point increase in pro forma gross profit for the year and allowed us to, among other things, invest significantly in our BGM business. Overall, our pro forma operating margin from continuing operations of 18.9 percent showed a 120 basis point improvement over last year's pro forma operating margin from continuing operations of 17.7 percent.

All of this led to strong cash flow of about $1.1 billion from operations, of which approximately $450 million was employed to repurchase about 9.6 million shares of common stock, and $266 million was spent on capital expenditures.

The third and final topic I'd like to cover is our guidance. Diluted earnings per share from continuing operations should increase in the 10 to 12 percent range for this year's pro forma earnings per share off of a base of $2.56. This estimate excludes the anticipated impact of expensing all equity-based compensation, which I'll discuss later.

Full-year revenue growth for the Company is expected to be about 7 percent, with revenue growth for BD Medical being about 7 percent, BD Diagnostics being between 6 and 7 percent and BD Biosciences being between 7 and 8 percent. We look for US safety sales to increase about 10 percent to 11 percent over 2004. We are also anticipating growth of international safety sales to grow in the range of 15 to 20 percent, to about $230 or $240 million.

Based on our current run rate, we expect BGM revenues of about $75 million for '05. We expect improvement in gross profit margin of about 30 to 40 basis points, SSG&A as a percentage of revenue should show a 75 to 100 basis point improvement. And, very important to our innovation effort, R&D spending should increase by between 12 and 15 percent for the year.

Interest expense is expected to be somewhat higher, primarily due to the absence of the $4 million tax settlement that we discussed in the prior call.

Our effective tax rate is projected to be in the range of 26 percent, and this could vary quarter to quarter, depending on certain events.

We expect to generate in excess of $1.1 billion in net cash from operations. Our capital expenditures were expected to be in the $300 to $325 million range, and we expect to continue share repurchases in the range of $400 to $450 million. Finally, we estimate average number of fully-diluted shares outstanding to be between 262 and 264 million.

Our first-quarter 2005 EPS should increase at about 7 percent, which, while below the full-year range of 10 to 12 percent reflects the unfavorable comparison to last year's first quarter, which, as you will recall, included exceptionally strong respiratory and flu diagnostics sales.

Revenue growth for the first quarter is expected to be about 6 percent, with BD Medical in the range of 7 to 8 percent, BD Diagnostics pretty much flat, due to the flu comparison that I just noted, and about 10 percent for Biosciences.

As I noted earlier, the EPS estimate for 2005 excludes the anticipated impact of expensing all equity-based compensation, which we plan to adopt in the first quarter. As you may recall, last year the shareholders approved a new employee and director equity-based compensation plan, replacing the historical stock option program. In summary, this plan provides for performance-based stock awards and other restricted stock awards in addition to stock options.

We will begin using the new plan for a November 2005 long-term incentive grant. As a result, we expect to grant a combination of performance-based restricted stock, time-based restricted stock and stock options. Since we will be granting restricted stock, we will be required to record compensation expense for these awards under current generally accepted accounting principles, and therefore have decided to also begin expensing stock options so that all equity-based awards are expensed. We estimate that by expensing all equity-based awards, pro forma diluted earnings per share from continuing operations will be reduced by about 6 percent. This percentage is consistent with the dilution we have indicated by footnote in our 10-Q and 10-K filings, with respect to stock option grants in the past. In the end, we believe the impact of the blend of equity incentives will be positive for shareholders, as it utilizes performance-based awards and, in the aggregate, will use significantly less shares than we would have under a stock option plan only. Importantly, the adoption of this accounting treatment will have no impact on overall cash flow.

And with that, I'll turn the call over to Ed.

Thanks very much, John. And good morning, everyone. Our results for the year just ended and our outlook for '05 make us confident that the strategy we began implementing several years ago is a good one, and is being effectively implemented by our team. This is the fourth consecutive year, some 17 quarters in a row, in which we have achieved or exceeded our objectives. And before turning to your questions, I would like to briefly collaborate on our strategic direction and reiterate our outlook for 2005 and beyond.

In summary, we will continue to aggressively implement the strategy we have been pursuing over the past several years. The first element of our strategy is to drive revenue growth by designing, manufacturing and marketing innovative products that demonstrably improve the lives of health-care workers, patients and researchers. This fundamental innovation strategy is enabled and fueled by the second element of our strategy, which is our commitment to achieve outstanding operating effectiveness and productivity. Our success in the operating effectiveness component of our strategy should result in outstanding customer satisfaction, positive cash flow, and it will also, very importantly, enable us to increase our investments in innovation.

As John shared with you, we expect the following financial performance, which will be achieved as a result of successfully implementing the strategy. Over the next several years, we expect that Company revenue will grow in the range of 6 to 8 percent -- that's on an FX-neutral basis -- and we are guiding next year at the midpoint of this range, which is 7 percent. Each segment is also expected to achieve about 6 to 8 percent revenue growth, and in '05, biosciences likely to be closer to 8, diagnostics closer to 6 and medical about 7. We will continue to see improvements in our gross profit and SSG&A ratios. And, as John noted, this will contribute over 100 basis points of operating effectiveness improvement in 2005.

R&D spending will increase 12 to 15 percent a year, beginning in 2005. We expect 10 to 12 percent increase in earnings per share, which is also the guidance we're providing for '05, and we are again building it on a base of $2.56 in 2004. And this is, again, before the change in accounting for our long-term equity-based incentives.

We will continue to generate strong cash flow, as John noted, over a billion in operating cash flow again in '05. And finally, we will continue to repurchase our shares in the range of $400 to $450 million for '05.

Now, I would like to address our growth drivers. In the near term, our revenue growth will be driven by the same products that have driven our growth in recent years. We expect continued good growth from our safety initiative in both medical and diagnostic segments, and both domestically and internationally. Also contributing to the medical growth will be refillable syringes, blood glucose monitoring and diabetes care products, immunization and auto-disabled syringes and our flush initiative. And I'm very pleased to advise the listeners that today, we will be issuing a press release which announced that the FDA -- the Food and Drug Administration -- has granted clearance for the BD Logic and Paradigm Link blood glucose meters to be used in alternate site testing, also known as off the finger, when checking their blood glucose levels. And this is something we had said was going to happen shortly, and now it has happened, and this further strengthens the offerings of this product area.

In diagnostics, drivers will be our ProbeTec and Phoenix instrument platforms for infectious disease diagnostics, and in Biosciences, our new line of immunocytometry instrument platforms -- namely, FACSAria, FACSCanto and FACSArray.

Our 2005 guidance anticipates an increase of 12 to 15 percent in R&D spending. We are hopeful that these additional important investments in innovation can provide us with new, advanced drug delivery, high-impact diagnostic systems and advanced bioscience research programs in the years beyond 2006 and 2007.

Moving onto operations, the successful completion of our SAP systems throughout the company now provides us with an outstanding information support capability that will further enhance our drive for operating effectiveness and productivity. Additionally, we are resolutely improving our operating effectiveness with lean manufacturing, Six Sigma throughout the whole company and outstanding program management. And I'm again happy and pleased to advise you that a major national distribution partner recently honored BD with awards for operational and marketing effectiveness among our peers, best among our peers. And we have always said that when we talk about outstanding performance, we will look to our customers to affirm that we are getting it, and this is a good indication that we are on the right track in achieving outstanding performance for our customers.

We are confident that this dynamic, integrated approach to driving productivity throughout the Company will delight our customers and provide good earnings growth, while at the same time enable us to make the important new investments in innovation that I referenced earlier. In summary, we are pleased with the progress we have made and we are making. We will continue to implement our core strategy of driving revenue growth through innovation and achieving outstanding operating performance. And we are confident that this strategy will yield outstanding results for our customers and our shareholders. And rest assured that the BD management team and the 25,000 people that we lead are committed to continued performance excellence, as we pursue our purpose of helping all people live healthy lives.

With that, we are happy to take your questions. In order to allow for a broader participation, we would appreciate it if you would limit your questions to one plus a follow-up. And thank you very much. So, operator, please open the call for questions.

(OPERATOR INSTRUCTIONS). Glenn Reicin.

I guess, only one question. Can you give us idea about how the new computation reporting works? In other words, if you have a 6 percent impact for 2005, how does that then move into '06 and '07? I'm assuming that that comes down, number one. And then, just as a follow-up, how does it actually get reported? Is it going to be in the SG&A line, and are you going to back it out every quarter? How should we be looking at that?

We will John address the financial reporting for the expensing of equity.

Basically, Glenn, what it will do is account for all prior untested stock options and all current awards. And the expense is basically attributed by virtue of when they vest. So, in the past, if we get issued a stock option that vested over four years, and we had that under the provisions providing for equity to be expensed, it would hit equally the four years with stock option expense. The same thing would go with restricted stock. It's vested over three years; you would hit each one of the three years.

So, to your point, what we'll do is we'll give you each quarter where the expense resides. And whatever the compensation committee of our Board approves this year, basically somewhere between a third and a quarter, depending upon which instruments they are, that expense will reside in 2005, and in 2005 will be a quarter of the stock option grants that were made the prior year and the year before.

It's pretty much a steady state. I would think we're looking at that 6 percent dilution. That's what we've had in the past, had we been on this, and it's always been in the footnote. The absolute number could go slightly up, because of our restricted stock vest over performance-based -- it vests over three years, whereas stock options used to be over four. But that's just a target thing.

And to where it's going to be? It's going to be mostly on SSG&A, some piece in cost of sales, as it relates to plant managers and that type of individual, and some piece on R&D as it relates to the R&D leaders. That said, the majority should be there, and we will clearly point out to you where it is.

I'm sorry, though. You're saying it would be 6 -- there's obviously some vesting for previous stock options to take place in '05, but it doesn't sound like that 6 percent would then go away or go down to 2 percent in '06. So you're saying it's 6 percent to the next couple of years?

Well, virtually. If you kept the value at the same, it would be that -- well, not 6 percent, but anyway, that amount of value. Whatever the amount is, in terms of value, and that gets very hypothetical; you get into models and all this. But that value -- take a look in our footnote; you will see it. That value is recorded in the financial statements in every year. If the comp committee determines to grant less value in a particular year, you don't see it all at once, because you see that over time. But basically, you are going to see this in the financial statements, indefinitely.

And that is because the restricted stock has always been expensed, but the restricted stock will be of similar value to what the options have been?

Restricted stock was always accounted for as an expense, period. We didn't use it -- or we did a long time ago, but not significantly. We have now replaced stock options, a portion of them, somewhat over 60 percent of them, with restricted stock. It uses less shares, and it's pure performance-based.

Glenn, let me see if I can -- as I understand it, one way I'm thinking about it is like a lapsing schedule. It's almost like a depreciation schedule where, in any given year, the last element of a prior year drops off, but the first element of the current year goes on. So it kind of continually replenishes itself, and the only thing that would change the year-on-year expense or things that could change it, obviously, is if the Board increases or decreases substantially the amount of value that it's distributing or if the vesting period changes. But I think you should think of it, absent anything else right now, as sort of a 6 percent starting in '05. And it's probably not a bad assumption going forward, although I don't think we really know what the forward is going to look like. But I would not be surprised -- I would be surprised if it changed dramatically. It's been about 6 percent in the footnotes for the less several years.

I don't want to belabor the point, but I guess what you're saying -- I just want to clarify -- is it's going to be 17 cents going forward, regardless, and the composition is a little bit different. The options portion comes down in value over time, as these options in fact vest, but you're going to replace that with other forms like restricted stock, which is normally expensed, and that would still remain in that 17 cent range per share, annually?

That's reasonable.

And I think, once you get out about four years -- well, over time -- it's hard to say. Over time, as our earnings go up -- and we have forecast that they are going to go up -- and since the outlook of the compensation committee is to not continue to grant more value, albeit that it's hypothetical, they are going to leave the value pretty much where it is, unless compensation practices change, and then it could go down or up. But if you assume it's going to stay steady state, over the longer term, as a dilution percentage, it should decline, because our earnings will be going up.

Think of it as -- it's compensation, and typically, compensation grows more slowly than the earnings grow. So, if we are growing earnings 10 to 12 percent, our long-term incentives are granted to each of our individuals. It's defined as a dollar value that is then broken back down into options and restricted shares. So that would nominally go up at something like the cost of living or something like that, which is a slower increase than the earnings growth. And so, over a longer interval of time, the dilution should become slightly less.

And do we restate '04 for that purpose?

Not permitted.

Yes, it's not permitted, Glenn, but it was about 6 percent in '04 on a same apples-to-apples basis.

Bruce Cranna, Leerink Swann.

I guess, a couple different things, if I could. Initially, if you can help me, John, on the diagnostic systems side, I'm looking at, I think, 168 million in the quarter. I am trying to make my numbers work. Can you comment on the size of ProbeTec in the quarter? I think you said the Logic was 15 million, and I'm just trying to figure out -- if I assume ProbeTec is kind of where it was on a run rate, has there been a slowdown on kind of the conventional microbiology side, or are folks waiting for Phoenix? Or can you help us there?

I think what you're talking about is a -- why don't I let Bill describe what happened in the diagnostic segment in the quarter? And by the way, it will not include any references to BGM, because that's in the medical segment. But let Bill talk about the growth pattern of diagnostics segment in this quarter.

Bruce, just a quick comment. You might recall last year, we had a very strong flu season in both Japan and the US, and a lot of that flu stocking last year, particularly in Japan, took place in the fourth quarter of '03. We have not seen that flu stocking take place in the fourth quarter of '04, because there still is some inventory left in Japan, in particular, of flu test. By far, the biggest factor impacting 4Q diagnostic systems was this year-on-year flu revenue.

So, on the Phoenix end of things, any update there in terms of the launch? And I guess what you're saying is there has been no slowdown in your conventional business in terms of median supplies in front of that?

No. I think John referenced that ProbeTec did real well in the fourth quarter. We are real happy with that. Continued growth in that kind of 15 to 20 percent range for ProbeTec, so pretty much where we had it. I guess the big news on Phoenix is that we launched in the US on September 10th of 2004, right at the end of our fourth quarter. On the good news side, you would expect this to have been well-prepared for that launch. Six clients finalized contracts, and we have two consumable orders, so we are off to the kind of start you would expect us to get. And we've got some early customers, we've got a totally dedicated US sales force zeroed in on potential Phoenix customers. And of course, the next 12 months, which is a little longer selling cycle with instruments, we'll see how we do.

Can you just give us a quick update on BGM in the quarter, in terms of, I guess, how many -- what was the loss in the quarter related to BGM, and when are we thinking about crossing over to breakeven? Are we still kind of mid calendar next year, or what are your thoughts there, John?

I think Gary probably should give you a little bit of look on BGM. We are still not going to guide as to when we are going to cross that line, Bruce, and the reason is because we continue to invest in this thing. And it's hard to predict exactly when that quarter will be. But, Gary, why don't you talk a little bit about BGM, since it was our biggest quarter to date?

BGM in the fourth quarter was pretty much where we had anticipated it would be, and as we had guided it in the third quarter, coming out of the implementation of the recall in the second quarter, which was an unanticipated event last year. We finished the year at just over 42 million, which was -- I think we had indicated around 40 for the year. So we were pleased with the finish. And good growth, certainly, over prior years shown in the fourth quarter. And we guided next year at around 75 million. And what Ed announced, in terms of the clearance of the off-the-finger claim (ph) certainly was something anticipated, but positive news.

I would add to that, Bruce, with those sales we had gross profit contribution. But, as I had said in my remarks and as Ed and Gary underscored, we continue to invest in the spend, meaning put more money in SSG&A as we place more meters out there. And plus I believe we have started to add our sales force on BGM, which was an additional 30-ish salespeople directed at this. But, anyway, just short of $4 million on the bottom line, more investment or net charge versus last year overall for BGM, in the fourth quarter.

One last question, on the 230 million for OUS safety -- where do you guys think you are, in terms of penetration in the EU, broadly, today?

The question was on the X-US penetration.

We had said it was $230 to $240, 15 to 20 percent on a (multiple speakers). Gary's going to answer.

Yes, and then Bill may want to comment, as well. The penetration outside of the US safety is certainly at a lot lower level than it is in the US. There are certain product categories in countries where penetration is at a higher rate relative to other European countries, still low relative to the US. So, for example, IV catheters in general have achieved a higher degree of transition outside the US than syringes and needles. Syringes and needles are at a very low level. And blood collection devices also, in some countries -- France would be an example. The country has gotten a fairly high degree of transition to safety-engineered devices for blood collection. On the whole, the penetration rates are certainly well under half the penetration rates in the US, in most cases under a third and at very low levels for injection devices.

Timothy Lee, Merrill Lynch.

Just a couple of follow-ups on the -- well, actually, one follow-up on the BGM side here. At the time of the launch, you had initially targeted a five-year marketshare goal of roughly 10 percent. I just want to kind of get an update on that front, in terms of your longer-term goals.

And just have you changed your strategy or thought of changing strategy, again, of going towards a broader population, talking to other BGM players? Many of them now view this as a consumer product, and direct-to-consumer marketing is a requirement. Just any thoughts on that type of a marketing strategy?

I'll give you a little summary, and then I'll let Gary elaborate. If you go back over the last 18 months or so since we started selling this, as a function of some product delays at the very beginning and a couple of struggles we had with the quality issue about a year ago, as we look at this, we are about a good, solid year into the mission. And we have thus far sold the product exclusively in the United States, and that market is just over $2 billion.

So if you look at about $40 million at the end of the first year or year plus that we have been at and if we can add somewhere between $30 and $40 million each year, we will be gaining share in the United States at a rate of about 2 percent a year. And so that would get us to sort of our 10 percent overlook in five years.

We continue to believe that the best way to focus our resources would be to focus on the high users, through partners and our own benefits and our own selling and distribution organization. Maybe Gary can talk a little bit more about the marketing mix?

In terms of the marketing and the question regarding consumer marketing and direct-to-consumer marketing, as we have indicated in past calls, in the first years of launch -- and I would say in the first two to three years of launch, at least -- we're focusing our efforts on frequent insulin injectors and pump users. And that's a very defined component of the US market. It represents on the order of 2 million people, and we are engaging in direct-to-consumer marketing, but the means of engaging in that -- there are more efficient means than doing mass television advertising. We can reach our target segment, we believe, in a more effective way and at lower cost through other elements of the marketing mix for direct-to-consumer marketing.

By the way, an interesting analogy to that was the recent presidential election, where television advertising was predominant, but sending cars out to pick up people and take them to the polls proved to be a very effective tactic -- just by analogy.

In any event, we plan to continue doing so, because the value of gaining that customer is much higher. Over time, we believe we will try to also broaden our efforts to people with Type II diabetes. And at that point in time, we might be considering more of the mass media as needed to reach those individuals. We are significantly stepping up our direct-to-consumer direct marketing this year, and that is already in the works including, as John mentioned, expansion of our selling organization.

And as we have communicated in the past, the 25 percent or so of the population of people with diabetes that we're targeting, which would be frequent injectors and pump users, represents closer to half of the total market for people with diabetes. So it's a fairly substantial portion of the market that we're targeting, and we have seen steady increases in market share, albeit still at a low level, over each quarter going back since our launch. So it's continuing to trend upwards.

Larry Keusch, Goldman Sachs.

A couple of quick questions, and then perhaps a question for Ed. The two quick ones are on BGM. Given the alternate site approval now, do you anticipate that those sales will actually be up sequentially in your first quarter?

The other question just is -- as I was thinking about Japan and some of the inventory that's still sitting there -- what is the shelf life on those tests?

And then, I guess the broader question for Ed is, as you think about your cash flow from operations, your consistent share repurchase, your CapEx spending now, kind of coming off of those enhanced levels for building out some of your capabilities in the last couple of years, what do you do with the excess cash? And maybe weave in that how you're thinking about your acquisition strategy?

Okay. Lets go back to Gary on BGM, and then I think your second question was on the flu in Japan?

Right.

And the simple answer there, it's not a problem, but I'll let Bill elaborate, and then I'll talk about cash.

So, on the first part, we haven't built in an expectation of significant ramp-up associated with the recent claim that was cleared by the FDA, in part because we were anticipating that, anyway, and in part because we believe most people with diabetes will still test on the finger, although the clearance of that claim puts us in a market-leading position. Also, when you read the press release, you'll see that we received clearance for the claim that palm testing is equivalent to finger testing, and only the TheraSense (ph) meter has that capability. So it's a good, solid, strong claim that should just help bolster our overall position in having market-leading features.

We're not expecting a sequential quarter-to-quarter increase in the first quarter. Despite the fact that we don't do any quarterly promotions of any sort, for some reason the fourth quarter tends to be a little bit stronger for us. So the first quarter should be consistent with the fourth, but then we would be seeing quarter-to-quarter increases afterwards, and certainly a lot of growth versus prior year in the first quarter is what we're anticipating.

Bill, talk about the flu (multiple speakers).

I think the specific question was about shelf life I heard, and I think most of the products have a range of somewhere between 12 and 24 months. Quite simply, things that have the shorter shelf lives are gone. It's the things with the longer shelf lives, a couple of the manufacturers still have some stuff on the shelf. We're fortunate at this point; we do not. We are poised and have inventory ready to go with our products, once this demand scales back up.

And with respect to our financial condition, we are, as we have all said, we're pursuing a strategy of innovation that -- innovation is primarily driven organically, but it is also supplemented on occasion, where it makes sense, with acquisitions such as Atto. It's supplemented with making modest investments in new companies and new technologies. And again, we would expect that in the future, the combination of our capital needs, our share buybacks. I think it would be also prudent to anticipate that, in light of our positive earnings trend and positive cash flow, that it wouldn't be unreasonable to expect the board to increase our dividend at their November meeting, although we're going to wait for them to do that before we talk about it.

And, very importantly, it provides us some very good financial flexibility as we go forward to invest in the business. I must say, when I talk about acquisitions, this is supplemental to our core strategy; it's not our core strategy. And when we think about acquisitions, we would have a very low, low appetite for dilution. Any dilution that could occur we would expect to turn around rapidly, because of the value of the business. And we would expect that, strategically it would be readily apparent to our investor base why we did a particular deal. And I think Atto is a great example of a transaction like that.

And then, just -- I'd hate to leave John out of this. Just any thoughts, John, on repatriation of cash, how much you could bring back and, again, potential uses for that?

Yes, Larry. Obviously, like everybody else, we have looked and are continuing to look at that. It would be likely that we could do something. A minimum would probably be $500 million. We could do a billion. We have about $600 million over there, now. So, if we did a billion, we would have to borrow to do it, but that would be no problem, either.

If we did $500 million, just to give you a sense of what that would mean, the tax would be between probably 6 and 8 percent. It's the 5.25 that -- in the law, plus whatever the state tax costs would be. But if you use that, you're probably talking about $30-ish million special tax provision. But if you get $500 million back for that, we would certainly consider doing that.

We have not made any decisions at this point.

Not yet.

We would be clear about that when we did, and again, it would be a net benefit to the Company, we think.

Yes.

Aaron Geist, Robert W. Baird.

If I back out the Clonetec SG&A expenses that you provided in the reconciliation, I see that SG&A expenses continue to go down. You talk about a lot of leverage there. Can you talk about where you are taking up costs? You do a great job talking about where you are bolstering and growing marketing and the like, but can you talk a little bit about where you are taking costs out?

Yes. Let me just kind of bring it back, broadly, to a couple years ago. We went through some major challenges in SG&A because we had, if you will, the perfect or imperfect storm. We changed positively our pension assumptions; we got our return rate at 8 percent. Our discount rate came down, which drives the expense up. And we had some bad years early, which were being amortized through the expense. So pension expense went up. SAP came on live for the Company, and that drove SSG&A up. And we went into the BGM, as we have all described here, and that drove SSG&A up.

At present, though, we're in a position where those numbers are in the base. We think we can keep our kind of core spending at about a 4 percent increase, which keeps it very modest. And really, when we look at it year on year, this year, we think we will probably take it down by about 75 basis points to 100 basis points, and it reflects some of that. And that's notwithstanding that we're going to drop our discount rate again on the pension to be in line with what the bond rate is. So we'll go from 6.25 to 6 percent, which will cost us a little bit of money.

So it's in those, and we are getting it all over the Company, because we just have absolutely very good control through the business presidents and the regional leaders, in that we are always there to help when needed, on SSG&A control.

Was there anything specific in the quarter that resulted in a significant drop in SG&A, other than the factors that you spoke of just now?

Anything -- there is one. And one of the benefits of settling the RTI case was that our litigation went down, and We had some benefit from that in this quarter versus last quarter. When you think about it, in the future, which is obviously one of the real questions, we think that benefit of RTI -- and I'm not going to get into exactly how much it is. But basically, anything that we're going to increase in BGM spending, for example, not -- money is fungible, so you can't say where it goes. But BGM increases in SG&A and R&D, for instance, this year will take the place of what we save now in not spending on RTI, which obviously doesn't have any future -- wouldn't have had any future benefit. So that would be one of the items, but the rest of it is just a bunch of other items.

Thank you for that color. A second question, if I could. Not to belabor the stock option discussion, but can you talk a little bit about the optics for the fiscal year, in terms of how you anticipate reporting, and whether or not you provide or you intend on providing some reconciliation, so that we can create a comparison that is easy to understand?

Yes. We're going to provide you with as clear -- I know it's hard when you talk about it -- as clear an explanation as we can, within the footnotes. And we will make sure we get that out there, because it is complicated. And so you will be able to easily, if -- it's got to be in the numbers, so it will be in the numbers. But we'll give you what has now been put into, for instance, SSG&A, cost of sales and R&D.

Is it safe to assume that you're going to focus on a number that includes that cost, and hence the guidance that you have given this morning will not be the number that we should focus on but, rather, the number that included the dilution?

No. The number I gave you today, as I said, although I said it with probably more import than I needed to in the remarks -- and also as described in the press release -- all those numbers were without this cost. This cost, which we have estimated is about 6 percent, will cause dilution of about 6 percent of our earnings this year. So, if you take$ 2.56 and pick your range, we have given you guidance that says $2.56 will grow by 10 to 12 percent. That number excludes this.

Spencer Nam, SG Cowen.

A couple of just quick questions. In terms of gross margin, you mentioned that this coming fiscal year, looking for about 150 basis points improvement. I was wondering if that is sort of the rate that I could be thinking about going forward beyond FY '05?

To clarify, for '05, the guidance that we're providing for gross profit improvement is 30 to 40 basis points, for gross profit. And for SSG&A, it's 75 to 100 basis points. So you can create your own range there.

And I don't think it would be appropriate at this point to speculate beyond '05, but we are directionally working to continuously improve our gross profit by some amount every year, the percent. And it wouldn't surprise me, also, if we showed some leverage on our SG&A day going forward, although that will be a function of how much -- one sort of begets the other, in some instances. To the extent that we have greater productivity and gross profit, it gives us the flexibility to invest more in new products and innovation while, at the same time, holding our commitments to 10 to 12 percent earnings growth.

That clears it up (ph) a lot. One quick follow-up question on the innovation side. I was wondering if there are any particular sort of projects that, rather than incremental improvements, more of a cutting-edge sort of significant growth potential type of innovations that you guys are thinking about that maybe you could share with us?

Yes. When we talk in these healthcare conferences, we reference -- and it's in the public domain, in terms of literature -- that we're working on what I would call advanced drug delivery modalities -- once again, cautioning everyone that these are at least three years away -- But using technologies with very, very, very small needles, with intradermal delivery systems. We have a technology that enhances the functionality of nasal delivery routes, and we are in preliminary studies showing that, obviously, the first goal of this approach is to result in a parenteral device that has less pain associated with it and less inconvenience, so to speak. Some of these could be self-administered, for example. We've recently published some work that we've done on vaccines for things like anthrax, which could be easy self-administration systems that work very effectively.

And in some of the instances, our preliminary studies actually demonstrate that the pharmacokinetics of the drug is actually enhanced by these delivery routes. So I think that's a good example of an area where, yes, that is very close to BD's current core competency, which is drug delivery, but we are using different types of technology to make it functionally far superior. And there are analogs for that in diagnostics, where the Holy Grail in diagnostics is to get your diagnostic tests faster and more accurately and with less bother, so to speak, in the sample. And we're working in those areas, primarily in infectious disease. But again, we have aspirations to do that in other areas, as well.

And in biosciences, the whole trick there going forward is to have a system which is the instrument, the reagents and the accompanying software, which makes researchers more and more productive; they can analyze more and more drug targets. And, again, that is happening today, even now. And we expect more of that to happen in the future.

So our new spending in biosciences, of course, is against the Atto platform, this new live cell imaging device which we are just getting started in the market. That's a completely new platform for us.

Good answer, yes.

Mike Weinstein, JP Morgan.

First off, I just wanted to say you guys did a very good job of laying out your thoughts on the upcoming year. So I just wanted to say, well done.

I want to just follow up the question relative to your thoughts on your cash flow, as well as the potential to repatriate some of those profits. Is there any reason, John, that you see that you would not want to do that, to repatriate at least $500 million back?

I really can't see why we wouldn't. I think it's a one-time opportunity, and the long-term benefit is just obvious there. But it's something that we go through with our Board and our finance committee. But I would give it a high likelihood that we would do something of that magnitude or better.

And what would the thought process be, in terms of thinking about do we do more or less? If you can just walk us through that?

Well, we'd run the economics, obviously. And we think about the uses of the cash and what we were going to do, and certainly what you guys would ask us after we brought it all back. But, that said, we would go through that. And we also -- there are certain tax strategies we have followed in our offshore cash, not the investment of the cash but in what we did when we were in Puerto Rico and Ireland and Singapore, and also looking at where we might need that cash overseas, although we continue to generate a good deal of cash overseas. But we are -- 50 percent of our revenue is generated overseas, and investment in overseas, which certainly should probably be equal to what we end up doing here.

Educate me, if you would, on your debt, in terms of any limitations you might have on the ability to repay some of that debt.

Well, some of it is not -- we have one case which has a call for $100 million, and the call is January 15th it becomes callable. Most of the rest is not callable, so you wouldn't be able to do that. But our debt has gotten down to a relatively low position. We have about $1.2 billion in total debt. And, take the cash away from that and our net debt's about $500 million. So we are in pretty good shape there.

And then the last question. As you think about your free cash flow in '05 and as you move out, you still have -- as you walked us through it, which you did a good job of walking through your CapEx and your share repurchases -- you still have excess free cash flow there. And you addressed this a little bit in a prior question, but as we think about it, the Company isn't really saying, we're going to go out and seek out acquisitions, but we will be opportunistic. Do we still consider the possibility of returning more of that free cash flow to shareholders?

We're very open to that, yes.

Rick Wise, Bear Stearns.

A couple of questions in sort of following on some that have gone before, a little bit. When you start the year, you all are typically quite conservative. Maybe just reflect a little bit on where some of the bigger upside is going to be, in terms of growth or margins. And maybe reflect, as well, on some of the areas of risk that you are a little concerned about, as you look out the next 12 months, whether it's internal or external?

Well, I think, if you look at the Company, the strong areas tend to do well. So I would look for continuing strength. And again, I think we're very comfortable with our guidance at this stage of the game. There are a lot of uncertainties out there, but I think that the core businesses, the businesses that are well-established -- safety, the core businesses in medical, the diagnostic systems and biosciences -- I think we're very comfortable with that. I don't know that I would speculate regarding upside.

For example, could this be the year that diabetes really takes off, now with the off-finger testing or something like that?

It's possible, but I wouldn't speculate in that area. The off-finger, I think -- as Gary said, we're not the only ones with that. I think, when people actually start doing it, for some it's a benefit. For others, frankly, it's not that much of a benefit. So I don't think that's a market mover, and I wouldn't encourage any anticipation that this is going to be a breakout year for BGM, although we'll take it a quarter at a time.

Maybe on the diagnostics side, reflect a little bit, if you want to do it or not, on the competitive environment. Vectren, in their quarterly conference call, seemed to be signaling that they have a host of new platforms coming out. And maybe just talk about the competitive environment, and what we should be anticipating next in the pipeline there?

I'll ask Bill to comment on the diagnostics segment outlook.

I guess most of our focus, Rick, is around making sure we do this US Phoenix launch, which I mentioned a little earlier. I didn't mention that we are also watching Phoenix in Japan, which is the second-largest automated ID/AST market in the world. Those are critical areas of focus for us. And, as I believe we referenced in the last call, during the course of '05, we will continue our emphasis on adding to the ProbeTec offering. We're not at a point here where we're getting into any specific dates, but if we look at '05, we promised an enhanced transport device for urine collection and transport. We're promised enhancements to Viper, which we expect to deliver. And our pneumonia panel, which we referenced last year, would roll out during the course of '05 in Europe, in particular. All that is expected to happen, and that's where the bulk of our new product emphasis will be.

We have clarification. Beckman Clinical Diagnostics really doesn't complete with BD, but their fluorocytometry business --

I'm sorry; I was thinking fluorocytometry. Apologize.

Maybe Vince can talk a little bit about competition in his space, as well, while we are at it.

So Beckman has been talking about, though I have not seen, that they will introduce a new sorter into the marketplace. We don't know exactly when that will be. We just continue to -- we're going to continue to add new features to the Aria, and drive that into the market.

In the analyzer space, they announced a low-cost analyzer for CD4 testing for the developing world. That's a relatively small market right now -- maybe a $20 million market, something like that -- but growing and growing double digits. We're already in that market and doing extremely well with the FACS count. You'll see enhancements to the FACS count and new technology coming out of that. So they have been a tough competitor. We expect them continually to update their products.

Why don't we take one more question, if there is one.

David Lewis, Thomas Weisel.

Just a couple of quick questions here on relative growth. Just for ProbeTec, looking out into next year, could you just talk generally about the growth -- whether it's going to come largely from new placements or potentially increased utilization through a conversion from nonamplified testing to amplified testing?

Well, I think that optimistically here, we think both of those things are going to be very important for us. We have continued to -- on a quarter-to-quarter basis, continued to provide a healthy new instrument placement capability, because of the market growth you just mentioned. We continue to believe that that molecular market is going to grow above the basic diagnostic growth rate. And optimistically here, maybe that market is going to grow in the 5 to 7 or 8 percent range. And if we can continue to capture a healthy piece of market share of that growth, those will be the drivers in addition to the earlier comments I made about the enhancements we're bringing, particularly with Viper and the urine tube.

So if you had to peg it, where do you think the gonorrhea and the chlamydia market stands right now, in terms of amplified versus nonamplified?

That's a really good question. I'm not sure how far along -- the US I think we understand well. I don't think we understand Europe and Japan quite as well as we would like to.

US is fine. Just US is fine, if you are willing to share it.

I think I'm more comfortable about talking about where we are at. And I think we've probably got a total market in the US roughly, slightly above the $200 million range. And we continue to hang in there nicely with that 35 to 40 percent leadership position that I've referenced over the last year or so. That's probably the most accurate comment I could give you.

And then, just one quick question here for Gary, also tied to growth dynamics in kind of the US marketplace. In terms of where you see safety growth coming next year, maybe you could talk about the dynamic between penetration of injection devices that have been generally lower penetrated as opposed to other devices, and maybe kind of that growth trend, Gary, versus second-generation safety devices?

You have hit on the two appropriate areas. I think there will be, in the US, continued growth and penetration of injection devices, which are standing now probably in the 65 to 70 percent range in hospitals, about 35 percent range in alternate-site facilities, meaning clinics and doctors offices. We would expect that would continue to grow.

And some of the products that are in our injection safety number also are not growing at that rate, because they were already well-penetrated. So, for example, needle-less ID access systems were well-penetrated even as far back as the early '90s. They were also part of the injection safety number. So the growth of the actual skin injection safety devices is faster than the overall safety injection category.

Relative to new devices, there are a continuous stream of new innovations that we're bringing out. In the fourth quarter of '04, we brought out a new safety surgical blade, which we believe represents the state of the art in surgical blade procedures, and we will be getting growth from that. We're introducing in low volume a redesigned IV catheter this year that will offer substantial benefits both for the healthcare worker and for patient safety, and we see a lot of opportunity for that device in Europe and Japan, as well as the US, because of the range of benefits it will offer. And the growth of that device will unfold over a series of years.

In Bill's area, in diagnostic systems, there is going to be continued growth in the pushbutton blood collection set, which has had a very favorable reception by customers. So there will be a combination. In the US, more of the growth will be coming from newer, higher-value devices. And internationally, we'll be continuing to get growth from the baseline transition.

Just one quick follow-up. If you had to peg the price differential between nonsafety to safety and then safety to second-generation safety, could you give us a metric about the price differential in those two shifts?

It varies by product, but let me give you some indications. For wing sets for blood collection, blood collection sets, the conventional devices in the US sold -- it's more of a catheter story -- for about 50 cents, the safety device is for about 75, and the pushbutton sets are over $1.

The catheters I was referring to -- a conventional catheter in the US sold for about 70 cents; the safety-engineered catheter, about $1.40 to $1.50; and some of the designs that we are working on now, which we believe will have broad market potential, will be over $3, in some cases $4. And there's a whole economic story around that, that I think we will save for a future call. That makes it not as big of an impact to customers, because we will be integrating various devices into one device and capturing more of the value. So the upgrade has opportunity for topline enhancement.

Operator, thank you, everyone, for joining us. If you need me, you have my number. And thank you for joining us.

Thank you. That concludes today's conference. You may disconnect at this time.