Becton, Dickinson and Company (BDX) Q4 2010 Earnings Report, Transcript and Summary

Hello, and welcome to BD's Fourth Fiscal Quarter 2010 Earnings Call. At the request of BD, today's call is being recorded. It will be available for replay through Thursday, November 11, 2010, on the Investors page of the bd.com website or by phone at (800) 642-1687 for domestic calls and area code (706) 645-9291 for international calls, using conference ID 15660232. [Operator Instructions] Beginning today's call is Mr. Zachary Nagle, Vice President of Investor Relations. Mr. Nagle, you may begin.

Thank you, Jackie. Good morning, everyone, and thank you for joining us for Q4 2010 Earnings Conference Call. As referenced in our press release, we are presenting a set of slides to accompany our remarks on this call. The slide presentation is posted on the Investor Relations page of our website at bd.com. During today's call, we will make forward-looking statements, and it is possible that actual results could differ from our expectations. Factors that could cause such differences appear in our press release and in the MD&A sections of our SEC filings. We will discuss some non-GAAP financial information relative to our performance. A reconciliation to GAAP can be found in our press release and accompanying financial tables and in our slide presentation. A copy of the release, the financial schedules and our presentation are posted on our website at bd.com. Leading the call this morning is Ed Ludwig, Chairman and Chief Executive Officer; and joining us are Vince Forlenza, President and Chief Operating Officer; David Elkins, Executive Vice President and Chief Financial Officer; BD Executive Vice Presidents Gary Cohen and Bill Kozy; as well as Bill Rhodes, President of BD Biosciences. At this time, I would also like to introduce Tom Polen, the new President of BD Diagnostics Systems, effective October 1. Tom's responsibilities will include Molecular Diagnostics, TriPath, points of care, Microbiology Systems and GeneOhm. Tom began his BD career in 1997 and held a number of sales and marketing leadership roles with increasing responsibilities in both BD Biosciences and BD Diagnostics. In 2005, Tom left BD to join Baxter Healthcare, where he held a number of senior leadership positions, most recently as General Manager for Baxter Global Injectables. Last year, Tom rejoined BD as the President of Preanalytical Systems. We are delighted to have Tom joining our team and believe that his diverse experience across the diagnostic and medical device and pharmaceutical industries make him ideal to lead BD Diagnostics Systems through its next phase of growth. Philippe Jacon, who formerly led BD Diagnostics Systems, has a new role reporting directly to Vince. It is now my pleasure to turn the call over to Ed.

Thank you, Zach, and good morning, everyone. Today, I'll begin with a brief overview of BD's performance for Q4 and the full year 2010 and provide some context around BD's consistency in delivering against our commitments to shareholders over time. Then I'll spend some time highlighting the company's strategy and key focus areas for 2011 and beyond. Next, David will provide a drill down financial view of our company overall and segment performance, as well as key components of our 2011 guidance, including our capital structure and some of the key risks and opportunities over the near term. Lastly, Vince will spend the balance of our time discussing in greater detail how we will execute our strategies and the key things to think about relative to BD's strategy going forward. After that, we'll open the floor for questions. Starting with Slide 4. BD's performance in both the Q4 and full year 2010 was solid. We delivered against our own internal targets and against our commitments to our shareholders. This is the 10th consecutive year BD has achieved its annual objectives. It is also the 38th consecutive year of increasing our dividends. In addition, in 2010, we maintained consistent operational excellence across the P&L. We invested in capital expenditures, invested in emerging market infrastructure, increased our investment in R&D and delivered steady predictable cash flow and return to shareholders through both dividends and share repurchases. Moving on to Slide 5. Going forward, our strategy remains sound. BD's strategy is to apply technology to address unmet and sometimes underappreciated, but important needs within healthcare and life sciences. Our four areas of focus are as follows: number one, enabling safer, simpler and more effective parenteral drug delivery, and this translates to safer drug delivery for patients and for healthcare workers; number two, improving clinical outcomes through new, accurate faster diagnostics; number three, providing tools and technologies to the research community that facilitate basic science, drug discovery and cell therapy; and number four, enhancing disease management in Diabetes, Women's Health and Cancer and Infection Control. If you sum these four areas up, essentially BD is all about helping life science research and healthcare work better. We do this by helping them to lower their costs and improve the quality of their outcomes. And it's very consistent with our purpose of helping all people live healthy lives. We are confident that these four areas of focus are rich with opportunities for BD to add value and to continue to grow. Turning to Slide 6. Despite these challenging economic times, the company remains committed to driving both top line and bottom line growth through an intense focus on strengthening the core, which remains a significant lever for BD's success. In addition, as Vince will discuss in detail later, we will leverage our core by making focused investments in R&D for platform extensions and innovative new products. We're also making significant investments in growing our businesses in emerging markets. And also very importantly, we continue to focus on operational excellence and the programs that we're building across the P&L to maintain and build upon a strong cost position, as well as to return free cash flow to shareholders. On Slide 7, you will see our guidance for the full year fiscal 2011, which takes into account all of the key points I've discussed in my opening remarks. David will discuss the guidance in more detail, but the net is guidance for 2011 of 4% revenue growth and 10% to 11% adjusted EPS growth or a range of EPS between $5.45 and $5.55. As you will hear from David in a minute, the 4% revenue growth is FX neutral and really represents about 6% growth over 2010 if you normalize for flu, stimulus and supplemental spending events in 2010. Our guidance for operating income growth of about 5% includes about five points of headwind due to investments we are making in infrastructure and R&D in 2011. So that allowing for these investments, we're showing good operating margin improvement in 2011. Looking further out, our outlook for 2011, 2012 is for an average revenue growth of 6% and an average EPS growth of 10% to 12% over this three-year period, and this was previously communicated on our Q3 2010 earnings call. Now I'm delighted to turn the call over to David.

Thank you, Ed, and good morning, everyone. Before I discuss the company's results, I'd like to remind everyone that in the fourth quarter of this fiscal year, we completed the sale of the Ophthalmic business, as well as surgical blades product platform and our critical care platform and the extended dwell catheter product platforms. The results of operations associated with Ophthalmic Systems, surgical blade platform and the critical care platforms have been classified as discontinued operations for all quarters and years referred to in this presentation. A portion of the assets related to the extended dwell catheter product platform are still reported within continuing operations as the criteria for discontinued operations were not met for this asset group. On Slide 9, I would like to walk through the impact of the divestiture in the second quarter pro forma item on our EPS. At the end of fiscal year 2010, our EPS was $5.11, excluding the $0.38 gain from the sale of our businesses as discussed earlier. The result of operations associated with these business have been classified as discontinued operations. This had a $0.21 impact, which brings you to our reported EPS of $4.90. In the second quarter of our fiscal year, we had a noncash charge related to healthcare reform impacting Medicare Part D reimbursements. That charge is worth $0.04. If you add that to our reported EPS, you would arrive at a pro forma EPS of $4.94. Looking forward to fiscal year 2011, we will be growing about 10% to 12% of our pro forma EPS of $4.94. Moving to Slide 10. I'd like to briefly highlight some of our fourth quarter results, which were in line with the company's expectations. Revenue came in at almost 3%, currency neutral, which was partially impacted by tough comparisons to the fourth fiscal quarter in 2009, due to pandemic flu sales in both Medical and Diagnostics segments. We are pleased with the results we saw in our emerging markets as well, experiencing double-digit top line growth across most regions. We also delivered on our EPS guidance coming in at $1.24 for the quarter. On Slide 11, you will see that revenues came in at almost $1.9 billion in the fourth quarter. Adjusted EPS increased to $1.24 or almost 2% currency neutral. Our total year revenues of $7.4 billion reflects solid growth of about 5.5% on a currency-neutral basis and an adjusted EPS growth of about 9% currency neutral. Now let's move on to Slide 12 where we review our growth by segment. BD Medical fourth quarter revenues increased about 2% currency neutral. The growth in this segment was mainly driven by our Diabetes Care business with continued strong sales of pen needles. The Medical segment was negatively impacted by about four percentage point due to sales related to the flu pandemic in the fourth quarter of fiscal year 2009. For the total year, the Medical segment grew 6% on a currency-neutral basis. Revenues in BD Diagnostics segment grew about 3% currency neutral, which was negatively impacted by the pandemic flu-related orders in 2009 by about two percentage points. The Diagnostics segment also experienced softness due to lower lab testing and physician office visits. However, we have seen this trend stabilize in the fourth quarter, particularly in our Preanalytical Systems business. For the total year, the Diagnostics segment grew 4% currency neutral. BD Biosciences revenue growth was about 5% currency neutral, driven by strong instrument and reagent sales in our Cell Analysis business. For the total year, the Biosciences segment grew 6.8% currency neutral, benefited by the supplemental and stimulus spending in Japan and the U.S. Now turning to Slide 13. We'll look at our geographic results. In the fourth quarter, BD's U.S. revenues increased about 1% or about 3% when adjusting for the impact of flu-related sales in 2009. U.S. Medical revenues increased about 2% year-over-year. U.S. sales of Diagnostics products increased about 1%, partially due to reduced OB/GYN visits negatively impacting our TriPath business unit. Biosciences revenue in the U.S. increased about 0.6% due to growth in Cell Analysis business unit being offset by the timing of several large customer orders in our Advanced Bioprocessing business unit. International revenues grew about 4% on a currency-neutral basis in the fourth quarter. After taking out the impact of flu, about four percentage points, underlying growth was 8.2% in the fourth quarter, which represents an upward trend in sequential quarterly growth rates and is driven by emerging markets in high-growth regions. For the total year, U.S. revenues were about 5%, with Medical increasing about 6% and Diagnostics increasing about 3%, with Biosciences also growing about 6%. International revenues grew 6% on a currency-neutral basis. Overall, international growth was adversely affected by lingering macroeconomic conditions in Western Europe and a tough comparison from flu-related sales. This was more than offset by the double-digit growth in our emerging markets, which are Asia Pacific, EMA and Latin America. In these areas, we continue to see expansion of healthcare funding and patient access. BD is investing heavily in certain high-growth markets, such as China and India, where we see unmet need that align well with BD's capabilities. Moving now to global safety on Slide 14. Reported sales grew almost 4% in the quarter to $443 million. On a currency-neutral basis, safety growth was about 5%. This was comprised of about 2.5% growth in the U.S. and an international growth rate of about 9%. For the total year, safety growth was 6% on a currency-neutral basis, which is a combination of about 5% growth in the U.S. and an international growth rate of about 8% on a currency-neutral basis. In the Medical segment, the U.S. growth rate is being driven by Nexiva and safety diet products, while international safety is being driven by infusion therapy products. In the Diagnostics segment, the U.S. growth rate is being driven by Push Button conversion, and the international growth rate is being driven by Push Button conversion, as well as Eclipse. Now I'd like to move on to Slide 15, where I'll walk you through the impact of pandemic flu had on our quarterly revenue growth rate on our business in fiscal year 2010. In the first half of the year, pandemic flu provided a benefit to our revenue growth of 2.5%, which is mainly in the U.S. For the second half of the fiscal year, the pandemic flu resulted in an almost 2% negative impact to our revenue growth, due to the international pandemic revenues that we recorded in the second half of fiscal year 2009 that did not repeat in fiscal year 2010. For the full year, the net impact to revenues is about 20 basis point benefit. As we discussed last quarter, we also received additional Biosciences stimulus and supplemental orders in the U.S. and Japan. This benefited fiscal year 2010 by about 50 basis points. As we look at fiscal year 2011, the pandemic flu revenues that were recorded in the first half of fiscal year 2010 will represent a difficult comparison, particularly in the first quarter. In the full fiscal year 2011, we are not anticipating either of these events to recur, which is about a 200 basis point impact on our growth, as Ed discussed earlier. Now moving on to Slide 16. We'll review our revenue growth in the fourth quarter, where our reported growth rate was 1%. Currency-neutral revenue growth was about 3%, which was negatively impacted by about 2% points of currency translation. There was no hedge impact in the quarter. Moving to Slide 17. And looking at our gross margin, we experienced about 100 basis points of positive currency impact. Within the performance category of 110 basis points, we had positive operating performance of about 70 basis points, which was more than offset by higher raw material costs, higher pension costs and start-up costs. As a result, net margin was down about 10 basis points. Slide 18 recaps the fourth quarter income statement and highlights our foreign currency neutral results. As discussed earlier, fourth quarter revenue was about 3% currency neutral, and gross profit grew about 1% currency neutral. Moving down the income statement line, SSG&A increased about 4% currency neutral, due to pension and EVEREST and our SAP implementation costs. R&D increased 10% or about 50 basis points as a percent of revenue over the prior period. This acceleration in R&D is in line with our expectations as we're continuing to invest in new products and platforms. Our operating margin decreased 4.5% due to the higher resin, start-up and ReLoCo costs. In addition, increased SSG&A and accelerated R&D costs were contributing factors. I would also like to point out that our earnings also reflect two items that essentially offset each other. The gain on the sale of our extended dwell catheter product platform that remains in continuing operations of about $18 million was mostly offset by $14 million write-off of equity investments. Now turning to Slide 19. I'd like to look at the total year revenue, which growth increased about 5.5%. Performance and currency contributed about 5.6% and 2%, respectfully [respectively], which was partially offset by the hedge with about 2% unfavorable impact. On Slide 20, we can see that our gross margin change year-over-year was a positive 20 basis point improvement. It was comprised of a 100 basis point improvement of underlying performance, which was more than offset by ReLoCo and pension costs. This positive performance was offset by 90 basis points of negative hedge impact. Slide 21 now recaps the total year income statement and highlights our foreign currency neutral results. Revenue growth was 5.6% currency neutral, and gross profit was 6% currency neutral. Moving down the income statement, SSG&A increased about 3% currency neutral, primarily impacted by higher EVEREST and pension costs. Excluding those items, our costs would have been essentially flat. For the total year, R&D increased 6% currency neutral, which is in line with our expectations. Operating income increased almost 9% as a result of strong gross margin and controlled SSG&A expenses. I would also like to point out that the tax rate for the year is higher than prior year, primarily due to the expiration of the R&D tax credit. Now before I discuss our guidance for fiscal year 2011, I want to briefly address BD's capital structure. Given our solid investment grade ratings and the historically low interest rates in the market, we believe it's prudent for BD to seek use of this opportunity to improve the efficiency of our capital structure. Our guiding principles as we look at this are: one, to maintain a solid investment grade rating; second, to ensure ongoing access to debt markets for strategic opportunities; and third, to optimize the cost of capital based upon market conditions. As a result, we plan to access the credit markets in the coming weeks. While a definitive amount of debt has yet to be determined, we don't expect it to exceed $1 billion. The proceeds will be used for general corporate purposes, as well as share repurchases. We plan to repurchase $1.5 billion of common stock in 2011 and an additional $600 million in 2012. The company plans to fund the repurchases through ongoing cash flow and the issuance of debt. Now I'd like to move on to fiscal year '11 guidance. Moving to Slide 23. I'd like to walk you through that guidance. For the year, we are guiding top line growth of about 4% to $7.7 billion. If you exclude the impact of pandemic sales and stimulus dollars in 2010, the underlying growth is about 6%. We expect our gross profit margins to improve by 30 to 50 basis points as we start to see the benefits of ReLoCo and improved product mix. SSG&A is expected to increase about 4% due to increased pension costs, EVEREST, SAP implementation costs and investment in our shared services centers. This is an incremental cost of about $50 million, which will be partially offset by G&A efficiency programs. We plan to increase R&D about 10%, mainly driven by the investments in Diabetes Care and Women's Health and Cancer platforms, which Vince will elaborate on later. Operating income is expected to increase about 10 to 30 points. Excluding the effects of pandemic, stimulus and the previously mentioned incremental investments, underlying growth will be about 13%. We expect our tax rate to moderately decrease as a result of the geographic mix of our business and the anticipation of the R&D tax credit being extended in fiscal year '11. We expect our cash flow to remain strong and our operating cash is expected to grow to $1.9 billion in fiscal year '11, as I mentioned earlier. We plan to repurchase $1.5 billion in shares. Capital expenditures will remain in line with our 2010 spending at approximately $550 million to $575 million. For our bottom line, we expect EPS to grow about 10% to 12%, resulting in our EPS guidance of $5.45 to $5.55. At this point, we are not anticipating any year-over-year impact from currency. The $0.08 hedge loss that occurred in fiscal year '10 will be offset by holding losses on our cost of goods sold in fiscal year '11. For fiscal year '11, we expect foreign currency exchange rates to be broadly in line with fiscal year '10. While we don't provide quarterly guidance, I want to remind you that our first quarter will be significantly impacted by the tough comparison to fiscal year 2010 as related to the pandemic flu. Therefore, our revenues and earnings in the first quarter will essentially be flat. Before I turn the call over to Vince, I would just like to highlight our solid finish to the year in a difficult environment. Our performance this year has given us continued confidence that our strategy is sound and our efficiency programs are delivering. We are continuing to drive top and bottom line growth by investing in key R&D projects and by investing in new programs to drive operational efficiencies. We're also seeking to maximize our capital structure, and in doing so, release more cash to our shareholders. Thank you, and I'd now like to turn the call over to Vince.

Thank you, David, and good morning, everyone. As Ed and David have discussed and as all of you following the industry know, we are clearly in uncharted waters for the global economy, and what this may mean for many industries, including healthcare in the short run. However, we are very confident in -- what we are very confident in is the universal human drive to improve our standard of living and to live longer, healthier lives. That desire is pervasive globally and will ultimately drive greater demand for healthcare products and services over the long run. And that's how BD thinks about the business, successfully meeting these needs in existing and innovative ways over the long run. In the short run, there are opportunities to help customers improve the quality and cost of healthcare in the developed world, while we also help developing countries improve their healthcare systems. BD has strong growth drivers in place to capitalize on these needs, and as you've heard, we are increasing our investments in R&D despite these challenging times. BD is also investing heavily in emerging markets to ensure we are serving the fastest-growing opportunities with the right products for those markets profitably. And lastly, BD is consistently investing in ongoing operational excellence programs across the P&L to continually improve our competitiveness. Turning to Slide 26. I would like to briefly review the fiscal year 2011 guidance by segment. Again, it's important to note, as David highlighted, this guidance is relative to tough comparisons, particularly in Q1 due to the factors he enumerated earlier. For the year, we're looking at an average of about 4% for the business overall. By segment, this equates to about 4% for Medical and Biosciences, with Diagnostics slightly faster at 5% FX neutral. Excluding the effects of 2010 flu pandemic, stimulus and supplemental spending, that equates to approximately 6% for total BD as David mentioned earlier. Now I'd like to turn to the growth drivers we expect to drive success for BD over both the short and long terms. Turning to Slide 27. There are a number of things we are excited about with respect to BD's Medical business going forward. For example, many of you have heard us to discuss our reliable low cost, or ReLoCo, program in the past. In short, ReLoCo is a global, cross-functional business initiative established to sustain a low-cost capability and advantage for Medical Surgical Systems. We began implementation in 2009 and we'll continue through 2013. ReLoCo targets a number of areas, including our manufacturing architecture, process technology, work systems, product design, materials and packaging. We expect the program to break even in 2011 and to reach steady state savings of approximately $50 million to $60 million annually in 2013. Our ReLoCo program also enables a second major benefit for BD, which is accelerating growth in cost-sensitive markets where the company is underpenetrated. Today, the current focus of the program is in Hypodermic. We refer to this initiative as our ReKindle program. The ReKindle strategy is supported by three strategic pillars. First, achieving a cost-competitive position for the Hypodermic portfolio to enable the necessary pricing flexibility to compete and drive markets to affordable, higher-value products; second, offering a complete portfolio of Hypodermic products to meet the unique needs of all key target segments globally; and third, bringing a highly effective local execution approach to each segment we're targeting, aligned with the circumstances and the needs of those segments. At this time, we're not going to disclose the precise products or segments targeted for ReLoCo and ReKindle for obvious competitive reasons, but there will be more to follow on future calls as we continue to make progress. Looking at Slide 28. There are also other examples of growth drivers in the Medical segment. In our IV Catheter offering, we recently launched the first Healthcare Worker Safety product in China called Intima II safety and earlier, the Intima II. Intima II and Intima II safety were both specifically designed to meet the local clinical practices for the Chinese market. This is a good example of combining BD's capabilities with strong knowledge of local product needs to grow in emerging markets like China. In fiscal year 2010, the Pharmaceutical Systems business expanded our offering of self-administration products with Physioject, our new AutoInjector. We have obtained several customers and are building a nice pipeline. In Diabetes Care, we are extending our leadership with pen needles, as well as innovating with new safety pen needles in 2011. We are also partnering with the Juvenile Diabetes Research Foundation and will be leveraging our expertise as a leader in insulin delivery and acute care infusion to launch new products that will improve the patient experience and therapy outcomes for insulin pump users. Turning to Slide 29. I'd like to walk through some of the future growth drivers in the Diagnostics segment. In this space, we are strengthening our leadership in microbiology, while investing in innovation to expand our position in molecular and cancer diagnostics. Many of you have expressed interest in BD MAX, our new and upcoming automated HAI Molecular Diagnostics system. We're pleased with the progress of the new six-color BD MAX. It's performing very well in our labs, and we're on track to launch that as an open system in Q3 of calendar '11. The more significant BD MAX MRSA assay launch is on track for the beginning of calendar 2012 in the EU and mid-2012 in the U.S. Beyond BD MAX, we are continuing to invest in the BD Viper XTR with fully automated specimen processing and a smaller Viper LT system, which was exhibited for the first time this year at ASM, and this is to replace ProbeTec. In addition to investing in those two platforms, we are also continuing to develop our HPV test. In our Women's Health and Cancer business, we expect to launch our BD SurePath Plus Molecular Pap test in calendar 2013, which is in clinical trial right now. Turning to Slide 30. In our Biosciences segment, we have strong reagent and instrument opportunities. In this space, we continue to be the leader in providing researchers and clinicians with the tools they need to better and more fully understand the cell and to be seen as the partner of choice in providing the answer to cells-based scientific challenges. As examples, we are developing two next-generation analyzers. One for the research Cell Analysis segment and one for CD4 testing for the developing world. This year, we will also be launching a next-generation lower-cost desk top sorter to make this product line more accessible to researchers globally. Additionally, we recently announced the opening of our animal-free, antibiotic-free facility in Miami for cell culture media and peptones, which opens up significant opportunity in this sizable market. We will launch a new animal-free media supplement for bioproduction and a new serum-free media for certain stem cells this year. Turning to Slide 31. BD maintains a tremendous focus on emerging markets and geographic expansion. This is where a significant amount of our investment dollars have been going and will continue to go in the future. We've seen some of the benefits in 2010 as BD's International business grew approximately 6% FX neutral, and the emerging markets within that grew at approximately 13%, FX neutral. In these markets, we have some areas of specific product focus such as HIV monitoring, TB Diagnostics and Diabetes Care and some areas of operational excellence focus, such as ReLoCo, to name a few. But more broadly, the opportunity for BD is to align BD's traditional capabilities around the key health needs in these markets. To do this, we're investing heavily in sales people, sales training and importantly, the customer education needed to manage the growth in these developing nations. We're taking a tiered approach to intra-region geographic expansion and account management, so we're maximizing feet on the street. We're engaging with public officials, opinion leaders and healthcare associations to assist with building better healthcare policy, guidelines and best practices and becoming a preferred partner in the regions. Over time, we will complement our growing sales and marketing presence with increased local manufacturing and R&D. As we continue to analyze these markets and develop penetration plans one by one in order to tailor strategies to best compete based on each market's unique situation. Based on these continued investments in emerging markets, we believe we can deliver double-digit emerging market growth, again, in 2011 and continued strong growth in the future. Turning to Slide 32. As I outlined in my initial comments, BD is continuously driving operational excellence into everything we do. At any given time, we have a number of cost improvement programs we are engaged in. Today, I'd like to just highlight a few of the key programs we're working on and the progress we're making. One key program is ReLoCo, which I discussed earlier in my remarks. Another key operational excellence program is EVEREST, which is our SAP program, a global enterprise resource planning initiative designed to optimize processes and refresh technology to drive operating effectiveness and improve service to our customers. We're pleased with the progress of this program and have completed the design phase. We are now in the implementation phase. Although we are still three years out from completing worldwide implementation of the full program, this full program will allow us to shut off several legacy systems and should enable us to reap significant savings over the long term. We will also remain focused on SSG&A. For example, we are creating four shared service centers to consolidate things, such as back-office HR, finance and customer service. This will enable us to reduce the number of non-customer facing roles, so that we may invest more heavily in sales people in areas like China, Latin America and other emerging markets. We recently announced a shared service center in San Antonio, consolidating work for North America, and we will consolidate Asia-Pacific transactions in a shared service center in Singapore. On Slide 33. Before we open the call to questions, I would just like to reiterate the key messages I'd like for you to take away from our discussion today. First, going forward, our strategy remains sound, to apply technology to address unmet and underappreciated, but important needs within the healthcare and life sciences. Second, despite the challenging economic times we're facing, the company remains focused on driving both top line and bottom line growth through an intense focus on strengthening our core franchise and leveraging that core through a number of important initiatives. These initiatives include making focused R&D investments, to deliver key platform extensions and innovative new products and in emerging markets, to take the strength of the global BD business model to these rapidly growing segments where the local needs are tremendous and unique. And third, consistent with another core strength of BD, we continue to focus on operational excellence programs across the P&L to maintain our strong cost position. As a result, we remain very optimistic about BD's prospects for the future and our ability to continue to deliver strong returns to shareholders over time. Thank you. We will now open the call to questions.

[Operator Instructions] Our first question is coming from Mike Weinstein of JPMorgan. Kimberly Gailun - JP Morgan Chase & Co: It's Kim here for Mike. The first question, I guess, is just on currency. Wondering if you can help us out a little bit with the impact there on fiscal '11, both on the top and bottom line. I guess on the bottom line, you made the comment that the $0.08 hedge loss in fiscal '10 would be offset by holding losses on cost of goods in '11. And I wanted to better understand that, number one. Number two would be the top line impact, you commented that the rates look to be broadly in line for fiscal '11 versus '10. So could you just remind us at what rates you are hedged for fiscal '10? And how you're thinking about that impact?

Yes, I'll let David take that, but you're in the right direction on the revenue. Go ahead, David.

All right, Kim. If you remember back to 2009, when interest rates, particularly for the euro, was in the $1.50s and then we went into the beginning of fiscal year '10, rates had dropped and we had a holding gain in our cost of goods sold. This year, we're just going to be seeing a similar thing going into fiscal year '11, and that is that the inventory was put in. If you look at the average rate for Q3 and Q4 of fiscal year '10, the rate was in the mid-$1.20s, and now we know where the spot rate is. When that comes out, we're going to wind up experiencing a loss associated with it. So we're saying is that loss is roughly offsetting the hedge that we had this year, which was worth about $0.08 that wouldn't repeat going into next year. On the top line, really the average rate for this year was around $1.36, and what we're saying, what makes up that $1.36, if you remember in the first half of this year, the dollar euro was in the mid-$1.40s. In the second half of this year, it was down into the $1.20s, and now we're back, here we are in the beginning of fiscal year '11, we're back into the $1.40s. So what we're saying is from a currency perspective right now, where we're sitting today, we're assuming similar exchange rates for that average out next year as what we have this year. Kimberly Gailun - JP Morgan Chase & Co: So even though the rates today would imply that the exchange would be more favorable on the top line over the course of the full year?

That's right. If they stayed at the spot rate where they are right now throughout all of next year, then there would be upside. That's correct. But sitting here today, if you look at just what happened in fiscal year '10, we have similar scenario where we started in the $1.40s, and it went down to the $1.20. So we're saying the best thing for us to guide from it at this point is just think about next year similar to this year. Kimberly Gailun - JP Morgan Chase & Co: So just to ask that another way is you're basically assuming the dollar strengthens at some point during the fiscal year in your guidance.

Yes. Kimberly Gailun - JP Morgan Chase & Co: On the pension expense, I think you mentioned that, that would increase in fiscal '11 and wondering does that imply a change in the discount rate? And wondering if you could let us know what that discount rate is that you're assuming.

Kim, that's exactly right. The new discount rate, it's about 5.2%, and last year, we were around 6%. So as corporate bond rates, investment grade, corporate bond rates decline, there's an average that's used in what the future obligations are. So just as interest rates continue to lower, unfortunately it just raises our future obligations, which increases our pension expense.

Your next question comes from the line of Rick Wise of Leerink Swann.

Let me start with the repurchase announcement. Obviously, this is a significant announcement. A couple of questions. What's the likely mix of cash and debt? How long is it going to take? And maybe just some reflections on why so big right now, lack of opportunity in terms of external technology opportunities to buy? Just again, broader perspective on all that.

I'll let David comment. But we can't get into too many of the specific details at this point in time because of SEC regulations. But in terms of why we're doing it right now, we think from -- number one, from an economic standpoint, the cost of debt is very, very low. And two, in terms of where pricing is, stock prices and our stock prices, that's the other factor. And third, of course, we're also investing in R&D, at the same time, investing in growth drivers. So you put all that together, we think it's a very good time to do this. David, you want to make any other comment?

Rick, it really comes down to looking at our capital structure, and the one slide that I went through really lays it out. It's an opportune time from this perspective, given as Vince said we're at historically low rates to maximize our capital structure without jeopardizing our ability to borrow into the future for strategic opportunities. As far as the buyback is concerned, a very important component of the value to shareholders is returning cash to our shareholders. And we believe all cash is fungible. We already have $1 billion sitting on our balance sheet. We're really borrowing -- the money that we are borrowing is to make us more efficient from a capital structure perspective. And we think the $1.5 billion and the $600 million that we talked about in fiscal year '12 is a reasonable level. The other factor, as we said, this is something that we continue to evaluate with our board, and we'll continue to evaluate the capital structure and our share repurchases as we go forward.

And do you think you'd do it fairly quickly? Would that be your hope?

Well, we're already into fiscal year '11. When we said that we plan to purchase $1.5 billion, and that will be spread throughout the year.

First, oil prices seemed to be rising daily. Maybe just comment on how we should be thinking about gross margin pressure as resin input costs rise. And last, just, David, maybe a little more reflection on your first quarter guidance. Historically, when you've been able to, I think, in fact, have guided conservatively to start the year, particularly in the first quarter maybe just help us think about what goes into that essentially flat revenues and earnings side of things, some of the moving pieces.

Yes. Well, I hope you're right, Rick, as far as being able to beat that in the first quarter. But if you look at the way the pandemic orders, the way that they had come in, I think that's really the biggest factor that's driving that first quarter. So it's the timing of those orders that we had, and that's why we're saying that next year overall, it's going to be flat from a revenue and EPS perspective.

And the resin? I'm sorry, that resin question?

On resins, if you recall, from a resin pricing perspective, we said for this year, we had favorable resin in Q1 and Q2. And we had over $30 million of unfavorable resin pricing in the second half of this year. So the net impact of that was about $9 million for the year. And as you think through where oil prices are, oil prices continue to increase. In the first quarter this year, they're around $68 a barrel by the fourth quarter of this year. Where they are now is around $80 a barrel. So we also believe when you compare the first quarter of fiscal year '11 compared to where we were in the first quarter of fiscal year '10, that's a significant increase in the resin prices.

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

Vince, I wanted to just come back to some of your comments on emerging markets. At this point, it looks like based on '10, emerging markets is around 19% of the company, which is sort of the high end of industry peers. So maybe you can talk to us about where your margins gross and EBIT sit right now in your emerging market business relative to your developed market business? And post ReLoCo and ReKindle on a couple of years where you think those margins can be?

So you're right. Emerging markets are about 19% of the company. So we're talking about $1.4 billion. The good news in our emerging markets is that they are profitable, and that they are around the corporate average. So now when you pull out R&D out of the United States, so we do that and we neutralize for that. So now at the same time, we're investing -- we will be investing in infrastructure, and the way we're thinking about that is that we're not leveraging those P&Ls as we go forward, but we're not depressing the profitability either. So we've got to go through that period. Then as we've said ReLoCo starts to hit, most of those benefits are out in Asia to the tune of $50 million to $60 million. Gary, would you like to make any other comments on that?

Sure. Well, a couple of comments. One is, even though we're at around 19% we're in the high end of the peer range, there's still very, very significant upside for us in emerging markets. The nature of our product portfolio aligns very well to the health needs that these emerging countries are seeking to prioritize in the coming years, and we have a particular focus on China and India. And as you may know, China's making a very substantial investment in its health system, following a policy to extend health services access to about 90% of the population. And then in terms of gross margin and operating margin, it's very close today to the U.S. market and the company's overall global average and the places that are growing fastest are actually at least as high in terms of operating margin is the U.S.

And then maybe just a quick follow up for Gary, and then one for David. For Gary, just if you can quantify the Chinese portion of this revenue amongst the $1.4 billion that's possible. And then, David, just thinking about this year, even margins relatively flat with our model, but obviously you talked about the investment, I think, about 50 basis points. If we start moving into the '12 time frame and beyond, can you maybe just remind us again, what you think is a reasonable amount of margin expansion that we can expect from BD a more of a multi-year basis?

Sure. I'll take the first part. China is about 1/7 of the emerging market number that you mentioned and growing substantially faster than the company average also growing substantially faster than emerging markets in general. So you'll see over the coming years China becoming a larger percentage of that.

And going on to the operating margins. This year, on a currency-neutral basis, gross margins are going to be increasing about 50 to 60 basis points, and the operating income is on a currency-neutral basis is increasing 10 to 20 basis points. And as we said, we really aim to improve that about 50 basis points year-over-year. In fiscal year '11 on a currency neutral, operating margins increased by 70 basis points. So some years we get a little bit more, some years we get a little less. As you start to think about fiscal year '12, although we're not providing any guidance in relation to that. As we said on previous calls, we're still investing in our ReLoCo program, which is a key driver to improving our gross margin profitability year-over-year, and we're still investing in our SAP implementation or shared services. As those start to trend off in '12 and '13, that will provide us some nice tailwind to our operating margins.

Your next question comes from the line of Jon Groberg of Macquarie.

The first question if you can maybe just help me understand the revenue guidance a bit more. One, in terms of -- it looks like you were saying there was maybe about a 70 bps benefit from flu and stimulus in '10, you're expecting a 200 basis point headwind in 2011. And also, it looks like you're saying Diagnostics should grow a little bit faster, even it looks like maybe you pushed out some of the dates of some of the new products and maybe just kind of give a little bit more color there.

Yes, so on the revenue guidance for '11, we said if you neutralize for those impacts in 2010, which was the flu and which was the stimulus and the Japanese, you go from about a 4% to 6%. Then when you look at the individual businesses, you also have to take that into account at the individual business level. So while we had Medical, we guided you at 3% to 4%, you've got the big impact in that business and that brings you up close to around 6%, then Diagnostics is 5%, and then you got to neutralize for the Biosciences impact of the stimulus and Japan, and that brings it up to about 7%. So that gives you the big picture, and David will fill in some more details.

Jon, really good question. The way to think about this is in fiscal year '09, if you remember, we had about $76 million worth of flu-related orders. In fiscal year '10 at the beginning of this year, we had around $90 million worth of stimulus orders. The two of those kind of offset when you look at fiscal year '11, and that's why on that one slide, you see it's only a 20 basis point impact. But as you look at fiscal year '11, there's $90 million of orders we do not anticipating them repeating in fiscal year '11. Also, as we said before, we have about $40 million related to -- between stimulus and supplemental Japan orders. The combination of all that has about a 200 basis point impact on our growth rate next year. So that's why we're saying as you think about our underlying growth rate it's around 6%, but with those things not repeating into next year, it's around 4%.

And the push out on the Diagnostics business didn't really have any impact in '11.

Interest income jumped significantly sequentially. Can you maybe just explain why that was?

The biggest thing that impacted our interest income if you take a look at it for last year, we had a loss of about $3.3 million. This year, it's about $1.3 million. And as you remember as I said, sorry, I was talking to other income. Jon, was your question around interest income?

Yes, it was on the interest income. It looks like it was around, I think it was like $4 million last quarter moving to like $14 million, I think.

No, sorry. I had $33 million. Let me come back to you on that one.

And while -- just one more point on the Diagnostics business and maybe Tom can comment on this. But we're seeing some stabilization of testing that was -- and doctors office visits, which was severely negatively impacting the business in 2010. Tom, you want to comment on that?

I think you covered it. I'd say, as Vince has mentioned earlier, we particularly saw that some of that stabilization in the Analytical business, which we see as a good barometer for volumes in the overall test markets.

So particularly in the U.S., Tom.

Particularly in the U.S.

Yes. So that's where you really see that difference. Okay. David, do you have any more information...

Jon, are you talking about the sequential. Sorry, I was talking about year-over-year. So are you talking about sequential Q3?

Yes, it was just sequentially. You probably about assume I don't know what your cash and interest rates didn't change a lot. So...

No, it's an anomaly with our deferred compensation. So based upon how the asset values of our deferred compensation plan, there's an offset in SSG&A. So you can see big swings as you're noticing there between interest income, but there's an offset sitting at our SSG&A and we have those swings as equity values fluctuate from quarter-to-quarter.

Your next question comes from the line of Larry Keusch with Morgan Keegan. Lawrence Keusch - Morgan Keegan & Company, Inc.: Perhaps for Vince or Ed, if I'm thinking about this correctly when you laid out the FX neutral growth for your top line from 2011 to 2013 of 6% and you look at the growth for '11 of 4%, obviously, that would imply that you're expecting some acceleration in the back half of that sort of three-year period, perhaps plus 7%. So just broadly thinking what drives that acceleration in the top line, if we're thinking about this correctly?

You are correct. As we've been discussing for a little while now that there's a couple of factors that are impacting this. One is continued expansion in the geographic markets, and that becomes a bigger factor as we go out. That's number one. Number two, that the new product platforms start to become more material in the later years of this as well. And then three, BDB, of course, in the short run, in this fiscal year, we have this jump over phenomena where you've got this anomaly of 4% going to 6%. And so you've got all of those factors and then that just lastly, I'd point out when I was mentioning the product platforms that includes some of the new instruments we're talking about in Biosciences, the two analyzers and the new sorter and, Bill, maybe you want to comment on what the new sorter is going to be like.

Absolutely. So the two analyzers obviously are in the markets that we're already participating in terms of sorting technology, we've advanced a product that we'll be introducing in the first half of this year, which is a small desk top sorter priced at a point where we feel it will be more affordable around the world, as well as in academic centers in the U.S. and Europe. It's performance characteristics are quite excellent, and we're thinking that this will expand the opportunity.

So it's basically a product that will expand the market not just upgrade. Lawrence Keusch - Morgan Keegan & Company, Inc.: And then, just two other points here. Again, I just want to make sure I'm understanding this correctly, the guidance for the $5.45 to $5.55 for this year, I wanted to just make sure I understand how you guys are thinking about share repurchase as it relates to that specific guidance, how much of that is potentially in there? And then the other question that's related is just as we think about CapEx, directionally, how should we be thinking about that over the next couple of years?

The guidance that we gave you includes our projection on share repurchase for the year. Lawrence Keusch - Morgan Keegan & Company, Inc.: So the $1.5 billion is basically assumed to be in there?

Yes, and the biggest thing to remember on the share repurchases is we're sitting here and the impact that can have on an averaging perspective. So the $1.5 billion will have a much larger impact on fiscal year '12 than what it actually has this year just on the way you average the share repurchases. And as I said before, we haven't even started our share repurchase program yet. So most of that will be towards later in the year. Lawrence Keusch - Morgan Keegan & Company, Inc.: And the CapEx?

CapEx, as we said before, we're at the $5.50 to $5.75, which is similar to last year as previously guided. We anticipate that, that would continue to come down. We have some opportunities that we're investing in, in fiscal year '11. So talked about with China go after these operational efficiencies and with those shared services and those types of items, as well as our SAP implementation. But we're very much focused on cash flows and getting more efficient in how we do our capital spend is something that we're looking, that we are doing and we're looking to bring that down in the coming years.

Yes, maybe to think about capital this way. We've really pretty much finished our facility buildout program on the operations side. It's going to be more capital spending as we implement new manufacturing process, less on the facility piece, so that's why we're going to see it trend down somewhat.

Your next question comes from the line of Jon Wood with Jefferies. Jon Wood - Jefferies & Company, Inc.: Ed, you discussed -- so we've got the new three-year organic revenue growth target average of 6%. My question is on the ROIC targets, have you changed that assumption in this new three-year plan, so the FY '11 through '13 plan versus there what, there was 32%, I think, in the last year's plan.

You're talking about the long-term incentive plan? Jon Wood - Jefferies & Company, Inc.: Right.

I think we would be looking to keep it in that range, whether it's 30%, 31%, 32%, it's all the same number. We're very committed to having a strong ROIC. By our reckoning, we're in the top decile of our peer group. We want to stay there, so we're not trading ROIC for revenue growth. The revenue growth just to build on what Vince said, if you think about '11 as a platform of 6%, we're not looking at ratcheting up the second and third years of this. As you get into the high 6s and low 7s in the second and third year, which we think we can do is all the reasons that Vince gave you. We feel that we can achieve that 6% average. But our commitment to very strong ROIC is going to be there. So it's going to be a number that starts with a three. Jon Wood - Jefferies & Company, Inc.: So I understand on the comp on the stimulus, but just to be clear, there's no assumption that Japan supplemental this year or any other I guess discrete type of funding events in the Biosciences market, correct?

You're right. We don't have any assumption that there's a discrete event.

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

I wanted to just get a little more detail on Diagnostics. You mentioned there were some stabilization in the Preanalytical Systems. But can you give a little bit more color on the performance of Diagnostics Systems, how do Molecular versus GeneOhm and TriPath do in the quarter?

Sure. Tom, would you like to take that?

Sure. So we saw, Amit, in terms of GeneOhm for the quarter, we saw pretty much in line with what we saw on a full year basis, with that business running about 10% in FY '10. On a Molecular, on the GC/CT, we saw high single digits in Q4, so well in line with our expectations. We saw solid growth there. On the TriPath or Cervical Screening business, we certainly saw in the U.S. we're seeing the impact of OB/GYN visits as the data that we're looking at shows about 4% to 7% decline in OB/GYN visits over the past two quarters. And we've been able to offset that over the full year basis, we have seen positive growth in the U.S. on a full year basis. We saw some weakness in Q4, but we're expecting for that to improve in FY '11. We certainly have positive growth outlook, both in the U.S. on the cervical cancer side, but even in an increasing level x U.S. for cervical cancer screening as we're investing in market development initiatives in those markets.

And just a quick follow up on Biosciences in the U.S., you had an easy comp there, but the segment was flat in the quarter. Can you just go through that also?

Yes, Bill Rhodes will address that, but just keep in mind as he gets into some of the details that we've been discussing Advanced Bioprocessing as a bit of a lumpy business and Bill, and that's in the U.S.

I'll talk to that the situation in the fourth quarter in the U.S. is exactly as been stated. And if you remember in the third quarter, we talked about the opportunity that a large order had it coming in, in the third quarter from Advanced Bioprocessing that had been anticipated in the fourth quarter. There were some fourth quarter opportunities in Advanced Bioprocessing that have been pushed out. So that really contributes to the lumpiness and quite honestly, there were -- the third quarter was an easier comp for us.

Did the large order come through in the fiscal 4Q?

No, the large order came through in the fiscal third quarter, and then there are some modest orders that are moving from fourth quarter to first quarter.

Just by the way, is your tax assumption for fiscal '11 assuming the R&D tax credit. Did I hear that right?

Yes, you did. That is correct.

[Operator Instructions] Your next question comes from the line of David Roman with Goldman Sachs.

Vince, I was hoping maybe you could shed a little light just directionally on the incremental R&D spending for 2011. You gave some general directions being focus on emerging markets and the Biosciences. So maybe you can help us walk through the other end of that R&D spending. When we should start to see a return from that? And how we should be benchmarking the effectiveness of this increased R&D?

Sure. So first at the R&D, there's both more of a short-term and long-term component to it. And what's happening right now is some of the significant programs are moving into the more final phases in clinical trials. So the biggest increase in R&D in the company is in the Diagnostic segment. And the biggest increase within that is in Women's Health and Cancer, and that is for SurePath Plus, and that has -- we've talked about that a number of times that we were anticipating going into the clinical trial. We have redone that product, and we have now got an automated solution that we're very excited about. So that's moving into clinicals, and that clinical is going to take a year or so. So your first benchmark on the Diagnostics spending is going to be completion of that clinical trial. The second big benchmark on Diagnostics, of course, is going to be the six-color BD MAX and over this plan period, we are, as we said, it's working well in the labs and then we'll be moving into clinical trials on that product first for MRSA, right? And of course, that ramps up our spending as we move into these clinical trials. So those are the first two biggest ones. HPV itself isn't ramping that much this year, but it'll ramp later. So when you hear us start to talk about HPV going into clinical trial, that'll be another benchmark. So those are kind of the big benchmarks on Diagnostics. Now coming back to BD Medical, some of the things that I would point to. Number one, would be the Diabetes business. And in the Diabetes Care business, in the short run, it's the launch of the new safety pen needle. But the more significant one will be the new set of infusion products for pumps, for insulin pumps. And that work is a new program for us, so that is also driving some of the increase in R&D. Also, we're investing in self-injection in Pharmaceutical Systems. I did mention the first product there, Physioject. And so I think we'll be monitoring the ramp up of that product and then we'll talk to you as things progress, other products in that area. Come back to Biosciences, Biosciences, it is this new sorter and these other two analyzers, a small research analyzer and a small clinical analyzer, CD4 analyzer, for the emerging markets. So those are kind of the core areas. Now lastly, and I think we could all measure quite specifically on those. We are also increasing our investment in longer-term technologies. And when those come out of feasibility, then and we enter into product development, then we'll start talking about them more. So if you'll hear that, that will be the last indicator we'd look for.

And there's obviously a lot going on right now, and maybe since we have Ed here, from a strategic perspective and Rick sort of asked this question earlier. But it is a pretty big step up in R&D and you're making this increase commitment on the buyback. Can you maybe just remind us about your sort of strategic priorities on the M&A side and how we should we be thinking about it balancing internally and externally investment, especially in the context of the step up in R&D and move on the buyback that you committed to in both 2011 and 2012?

Yes, the strategic priority is really the same as they have been. We're using cash to feed the current business and to grow internationally and to build new platforms. The growth that we have indicated in our guidance is primarily, vastly primarily organic growth building out the acquisitions that we made. We do still have the flexibility to do strategic acquisitions within the context of this new capital structure. So that is still very much a possibility at such time as our strategy suggests that a move in that direction is important for us that we can buy something more effectively than we can make it ourselves. Poster children here would be HandyLab and GeneOhm, TriPath and the small acquisitions we've been making in Biosciences. So the strategy is the same. And acquisitions, should we make them, would be strategically obvious, well disciplined, dilution, if any, would be short-lived and they would be strategically obvious, so staying the course.

And just so essentially, from a managing perspective very similar to what we've seen from you over past call it three to five years?

Yes, as we ramp up R&D, we're doing so I think I've said this on numerous occasions before. Over the past several years under Vince's leadership when he was running it and now it's Scott Bruder running our technology function, we have done a substantial amount of work in improving our what I would call our project management, our programmatic skills. So that we monitor as a leading indicator here at the office of the CEO level milestone achievement of our key R&D programs to make sure they're on track and get them back on track if they ever get off-track. And so that was an important prerequisite that we installed before we started increasing the pace of spending. So we're ready to go. We've got good discipline, and now this pace of spending can uptick. And again, we're looking at increases in R&D next year of about 10%, 11%. So that's important. It's very positive, but it's not anything we can't control very effectively.

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

It's Dave Clair here for Bill. I was hoping maybe we could talk a little bit about the European safety rollout. How's the pacing of adoption here? And are there any countries that are tracking ahead of expectations, maybe a few that you see as opportunities in the near term here?

Sure. I'm sure that Gary would be happy to comment on that.

Sure. What we're seeing the early stages of awareness building around the new EU directive, which as you know is cast in the spring and some additional interest being expressed in safety engineered devices, but it's still early stage. In general, Europe in 2010 grew a little under 10% in the 8% range in safety. We're expecting that to uptick going into 2011 and overall safety growth for the company to uptick in 2011, driven by international growth. We're also seeing, and I know you didn't ask specifically about other parts of the world, but we're seeing substantial growth in safety in other regions, including Latin America and Asia Pacific in particular. As I say, in general, in Europe as we've said in previous calls, it's still early. We're expecting most countries will take most of their actions to come into the clients with the new directive near the compliant state, which was three years after enactment. So we still have about two and a half years before we think we'll see the peak of the activity.

And then maybe just a follow up to a couple of the Diagnostic questions that have been asked. I was hoping that we could get expected launch timelines for HPV and the Viper LT system. And then for the Viper LT, what type of menu should we be thinking of upon launch?

Tom will address those questions for you.

So HPV at this point in time, we have not disclosed the launch time for HPV. That is progressing well in development, and we're pleased with the performance that we're seeing there. Regarding the Viper LT, certainly, the first assay that will go on that platform is going to be GC/CT, and we're looking for that to launch at the end of FY '13, and that is on track and it's progressing very well. Certainly, as we look at where HPV will go, it is going to be directed onto that LT platform. And then we certainly have a broad number of other menu component in our pipeline. But at this point in time, we're not looking to disclose those.

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

David, I was wondering if you can just kind of help us with the gross margins and just kind of bridging the gap. If we look at kind of the full year impact on the gross margin line, there was, obviously, the 90 basis points of impact from the hedge. And so that should go away. And I guess the holding loss that you had mentioned will come into play. Can you just help us understand like where your expectations are for performance plus or minus embedded within your gross margin assumption for the full year? And should we think about that holding loss coming through and impacting margins kind of in the first quarter? How should we think about kind of progression of gross margins through the year?

Yes. Good question. And really as we look at fiscal year '11, we're looking to the gross margin increase from the 51.9% to in the range of 52.2% to 52.4%, which is about 30 to 50 basis point improvement year-over-year. FX overall, we're seeing all in, when you include everything. It will be a slight 10 basis point drag on our margins year-over-year. What you are seeing is on a performance basis, the performance basis, we're expecting our gross margin increase 40 to 60 basis points, which is excellent product underlying operating performance and our margins being offset, as I talked about earlier, higher resins and higher pension costs. And within that operating performance, we're also expecting to see some benefits in our ReLoCo program. So overall, I think the operations group, as well as the Medical organization is doing a fantastic job in driving margin improvements in those areas. We've got some one-offs that are outside our control, like the pensions and the resins that are pulling that down a little bit, but we're feeling really good about our operating margins and the improvement in our profitability.

And so that holding loss, is that something that we maybe should would see sprinkled kind of throughout the year? Or is that something that is also driving basically flat year-to-year?

You'll see it in the first quarter. That's where the bulk of it is. Some of it might lead over into the second quarter, but the bulk of it will be in the first quarter.

And then just the tax rate as well, your R&D tax credit, can you remind us how much of that, it is on a full year basis? And are you also assuming in your flat year-to-year EPS for 1Q that, that resides all kind of in 1Q?

Yes, I think on the tax rate there's a lot of variables into tax rate, and we really don't guide what the tax rate will be in any given quarter. I think the way for you to think about is that our tax rate in fiscal year '09 was around 27.5%. This year, it was higher as we talked about because of the mix of business, geographic mix of business, as well as not getting that R&D tax credit. And then next year, what we're saying we're assuming we get the R&D tax credit and a different mix of business, and that's why we're guiding the tax rate for the full year to be in that 27% to 27.5%, which is similar to what we saw in fiscal year '09. And also, remember with the R&D tax credit, it also -- once you do get that credit, has the potentially not just to be for this year but they have a tendency to do it for prior years as well. So it can have an unusually large impact in a given year, depending upon when Congress approves it.

Your next question comes from the line of Brian Weinstein of William Blair. Brian Weinstein - William Blair & Company L.L.C.: Question on the STD business that you guys were talking about high single digit growth there. Did you not see the impact from office visits that you saw on the TriPath business come through in the STD business? It seems as, if a 4% to 7% impact on TriPath would have impacted the CT/GC stuff as well.

You don't see it in the CT/GC business anywhere as near as much as you see it in TriPath. We're also trying to parse, pull apart a little bit, the impact of the change in the guidelines in U.S. And it's impossible for us to pull that apart. We do know that, as Tom mentioned, that office visits were down for women, but you've also got a lot of screening programs that are outside of the physician office. Tom, you want to comment any more on that?

Yes, I would just say that a lot of the GC/CT testing is driven by public health screening programs, which are discrete from general annual physical checkups, which tend to drive the cervical cancer screening. Why I mentioned that, the data that we're looking at shows overall office visits for OB/GYNs are down 4% to 7%. I just want to clarify that we're not seeing our business down at that level. So on a full year basis, we're still seeing positive growth in cervical cancer screening, a little weakness in Q4. But again, we're expecting positive growth in that business in FY '11 as well.

[Operator Instructions] Your next question comes from Sara Michelmore with Cowen.

Just hoping, Gary, could expand a little bit on this ReKindle program and, Gary, what I'm interested in is first, you talked about this is an incremental market opportunity for you in Hypodermic, and can you just comment on -- I assume that you're there with some product lines but perhaps the market is segmented and there are certain segments that you're not competing in currently and if you could comment a little bit about the competitive landscape and the types of manufacturers you'd be competing on, on a local basis.

Yes, Sara, I'm going to ask Bill to take that one. Bill Kozy.

Sara, yes, the target markets have been set up by the Worldwide Med/Surg business focused on Hypodermic, and these are geographies where historically we have not been cost competitive enough where we could compete profitably. So through this Worldwide Business over the last 12 to 18 months, they have selected geographies. They're completing this product portfolio that you heard described earlier. They've got a three-wave game plan where they are rollout by geography around the world, focused on Hypodermic with the right product, a significantly improved cost and some sizable investment around our localized marketing and selling capabilities. Those are the real three drivers around ReKindle, and we're looking to take a kind of a core Hypodermic business that has been relatively flat in growth for a number of years and ramp that growth up to something that's in the kind of the mid-single digit range. We'd be quite pleased with that.

And do these products start rolling out in 2013 when that ReLoCo program is done? Or is it a rolling launch?

It's a rolling launch with the first products that are critical to ReKindle going in 4Q of '11. Setting up launch activities at the same time in the wave one geographies and with significant focus between 4Q '11 and the end of fiscal year '13.

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

David, just wondered if you could talk through the scale of the SAP spending in 2011 and how it trends down in 2012 and 2013?

For this year, we have about incremental expenses around $10 million as we get into fiscal year '12. We'll be full swing into our implementation. So we haven't guided on fiscal year '12 on what that spending level will be. But the one thing I would say is we'll be in full pledged implementation in various regions in fiscal year '12, now probably will be the peak.

And then just on the timing of the buybacks, do you say it was mostly in the second half of fiscal. . .

No, what I had said is that it'll be spread throughout the year. The only time that we can trade is once we're out of our blackout period, so that ends today.

And what share count are you using for the full year?

When we guided the average shares, mind you, it's going to be about, around 228 million for the year. Now there's a lot of variables within that, what the actual number will be. One of those being, obviously, the share price that you can buy it and the other is that the averaging of what you can buy in quarters one and two versus quarters three and four, that impact the -- but the bulk of the impact really comes through in fiscal year '12.

Our final question comes from the line of Jaimin Patel with GreenLight Capital.

Actually, it's Vinit. Relating to the operating margin target for the next three years, in terms of the 50 basis points a year kind of normal goal, would we expect to catch up to that by the end of the third year for the 20 bps that we have this year? Or is it more of a 50 basis points from where we are at the end of this year? That's the first question. And then the second question was whether we're expecting any our R&D leverage beyond fiscal year '11 as revenues accelerate into '12 and '13?

Let me take the first question. As I talked about earlier, this year, on a currency-neutral basis, we improved our operating margin 70 basis points. And this year, as we said, it's about 10 to 20 currency neutral. And as we've always guided, we said on average it's about 50 basis points year-over-year. So that's what we're targeting internally, some years we're slightly above that, some years we're slightly below that. And as you think through the forecast, going out, what we try to achieve is that 50 basis point average year-over-year. I think your second question is the leverage. Obviously, as our top line revenue growth increases, that clearly provides more leverage to increase R&D. But we really don't think about our research and development investment level as a percent of revenue. What we do as we saw this year as we have the opportunities to invest in these new products and new platforms, we have the financial means to invest in those, and I think Vince went through that there's numerous opportunities. It's not just one program that's driving it. We just see a breadth of opportunities from an R&D perspective to invest in right now. So we're going to be doing the right thing. We're really focused on the long-term health of the company, and funding these research projects is extremely important.

All right. Well, thank you to all of you for joining us today. We look forward to talking to you about the progress on our growth programs, both the geographic expansion and the new product and the operating effectiveness programs and our program to optimize our balance sheet. So thank you very much for joining us.

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