Becton, Dickinson and Company (BDX) Earnings Call Transcript & Summary

Okay. Good morning, everybody. Welcome to the final day of Jefferies 2020 Virtual Global Health Care Conference. I'm Brandon Couillard, I over the life sciences tools and diagnostics sector here at Jefferies. It is my distinct pleasure to have Becton's CEO, Tom Polen; and CFO, Chris Reidy, for 25 minutes today. I'm also joined by my colleague, Anthony Petrone, from the med device team. Gentlemen, thank you for being here.

Absolutely, Brandon. Thanks. Thanks for having us.

Thank you.

Lots to cover. So I would love to just jump right into it. Maybe kick off. Tom, it's been a little over 4 months since you assumed the CEO post at BD. Outside of the obvious COVID situation near term, what are some of the key priorities for you and the organization as you move through the second half of the year?

Sure, Brandon. So as I came into the CEO role at the end of January, first off, we've got a long road ahead and so I spent quite a bit of time reflecting on the journey that the company has been on and the capabilities we've built over the last several years. Of course, the Bard integration phase comes to an end this year, how we're naturally evolving our strategy and priorities to create that steady, strong long-term value for our shareholders, and to be a preferred partner for our customers in improving health. And so I outlined our strategy at a high level at JPMorgan. And while communicating that plan, of course, took a pause as we were focused, all of our efforts, on helping the world and the company respond to the COVID-19 pandemic, our execution of that strategy has been very much ongoing. And so looking forward, we're focused on really 3 key goals to create long-term shareholder value. That's -- number one is drive consistent, durable 5% plus revenue growth on a normalized basis as the world moves past the COVID impact. Second is to drive continued margin expansion and 10% plus EPS growth. And the third is to continue to improve our balance sheet strength and flexibility going forward. And so to achieve those 3 goals, there's really 5 key strategies that we're focused on and that we've been executing against. And let me just walk you through those at a high level. Love to talk about them in more detail if we've got time. So I think as I walk through these, these will help also give some confidence in why our underlying plans and fundamentals will get us to those goals I outlined, particularly as the world stabilizes from the pandemic. And even during that period of time, I think it will also be clear how BD's durable capabilities have been or continue to be a vital part of the solution and position well as we move into the recovery phase now, which we're clearly seeing. So first, the first of those 5 strategies to achieve those goals is we're focused on that consistent, durable growth for the long-term through innovation. And we're focused in areas where we're at our strongest, where we see disproportionate new growth opportunities and that are aligned to key health care and technology trends, right? We use organic innovation, we use collaborative R&D, we use licensing, we use tuck-in M&A to drive that innovation pipeline. And to be clear, I've said this many times but I don't think I can say it enough, this means that large-scale M&A is not a focus of ours over the next few years, right? This is an area -- I can follow-up more on our innovation plans, specifically the key markets and growth opportunities that we're most excited about. I can follow-up on that later on if we've got time here. We love to do that. Second of our key 5 strategies to drive those 3 goals we're focused on is leveraging our broad global footprint, right, to expand and deepen our presence internationally. I think everyone's quite aware of our extensive global organization, 40,000 associates in 50 countries, 45% of our revenue today is coming from outside the U.S., right, whether or not it's driving existing products into those markets, like we're doing with Bard revenue synergies, or new products. A couple of good examples are, earlier this year in Q1, we launched an internally designed new Lutonix product. It's a rapid exchange DCB. That means rapid exchange over the wire. And it's the only one of its kind. And we had recognized early on that about 70% of the traditional peripheral vascular and coronary intervention market in Japan uses this rapid exchange over the wire technology. And we developed the first and only rapid exchange DCB. As I said, we launched that in Q1, which was about a quarter ahead of schedule for us. And we've gained about 50% market share already in the Japan DCB market in the last 7 months since launch. I think that's a really good example of how we're organically focused to bring the right innovations to help drive our global expansion. Another recent example, we just launched -- announced this quarter is the partnership with Medcaptain, where we're launching a new infusion pump that's specifically suited for the European market to advance our medication management position there. The third strategy of the 5 that we're focused on to drive that consistent durable growth is how we invest in our manufacturing infrastructure and capabilities. I think everyone is aware that those are quite extensive. Our BD production system drives an unmatched level of quality and efficiency. And in our markets, scale and costs matter, right? We view them as a source of competitive advantage, not just for maintaining our business but for driving growth. We plan to continue to invest between $900 million and $1 billion in capital each year, both in our plants and in digitizing our supply chain systems. A couple of examples of that. Over the last 3 years, we've put in about $500 million in capital to add to our manufacturing footprint in pharmaceutical systems, both in our traditional high pack drug delivery business, but also in our new, faster-growing self-injection platform. And you can see that coming through, right, that business was the fastest-growing business in the company last year. It's continuing to grow very fast. We're very confident it's going to continue to be above the company average, and that's in part due to that manufacturing capability that's helping us drive that growth. A couple of other areas we've invested in very recently are in vascular access devices, infusion disposables and flush. The newest flush technology we're putting in, technology we developed. Our flush lines are putting out -- the newest lines we're putting in now are putting out 1.5x the volume in the exact same plant footprint as our last generation lines, right, give us a competitive advantage to further improve cost. In addition to driving growth, those first 3 areas, of course, also help us advance our focus on getting to that 10% EPS growth because they contribute to mix. Innovation drives mix. Obviously, our manufacturing strategy helps us drive cost. But the fourth area of focus is very specifically focused on helping to drive that 10% EPS growth, and that's our focus on simplifying the company. I think everyone knows BD has grown very rapidly through 2 transformational deals over the last 6 years. We have delivered about $650 million in cost synergies or we will by the end of this year. But there remain a lot of significant opportunities ahead. Those are efficiencies in our organization, in our business processes, in our manufacturing network and in our SKU offering. And so, right, if we've got any time, we could talk further about Project ReCoDe, which we announced and started earlier this year. It's our comprehensive internal simplification initiative, and we expect to deliver about $300 million in savings through that program over the next 4 years. And then our last and fifth focus or strategy is on disciplined capital allocation and increasing flexibility on our balance sheet. And we're very focused on cash discipline, driving inventory reduction, tightening accounts payable and other capital efficiency efforts. I think the last 6 years, as everyone knows, have been focused on integration and on debt paydown, and we haven't had BD's historic balance sheet flexibility over that period of time. Be that for share buybacks, continuing even just the historical level of product line tuck-ins or other purposes. And so to start, effective this year, right before I came in, I made the change to executive compensation to include ROIC to sit right alongside sales growth as now the top 2 metrics that drive executive LTI grants. And then we began organizing several programs focused on driving cash. And that includes a program on SKU rationalization and reducing our inventory levels. We've got another initiative going on accounts payable and another one on other areas of cash improvement. And because we actually started these initiatives earlier in the year, I think some of our early momentum from those efforts allowed us to respond much more quickly in preserving cash as we confront the changing dynamics brought on by COVID-19. Next and also critical to increasing balance sheet flexibility, of course, you saw us take out the $1.9 billion temporary term loan that we proactively arranged in March to help boost our liquidity at a time of extreme market volatility. And more recently, of course, our equity raise. It helped permanently raise capital within the organization and strengthen the balance sheet for future growth and delivering on our strategy. And then lastly, of course, we're focused on disciplined capital allocation. I think we all know that BD has had a 48-year history of raising our dividend annually, and we plan to keep that streak going. We look forward to celebrating 50 years not too long from now. We're going to remain focused on paying down the debt we incurred to finance the Bard acquisition. And we see getting into the mid-2x leverage over time as giving that desired level of flexibility that we want. Of course, the pandemic has, of course, altered our time line here, but that discipline hasn't changed at all, right? These efforts are going to allow us to allocate our capital most effectively to support the creation of long-term shareholder value, we think, and that includes investment in the manufacturing capital, in that tuck-in M&A and then, eventually, a restarting of share repurchases. So as we look across, right, those 3 goals I shared upfront, around growth, around our EPS performance and around that balance sheet flexibility. We think we've got the right strategies, the right business portfolio to succeed. And as we navigate the current environment and move forward in this next phase of value creation, we've got focused capital allocation and having a sufficient flexibility in our balance sheet to make those happen.

Yes. It's, I think, a good segue to my next question, Tom. I think the recent equity raise has been somewhat poorly received by the investment community, it seems to have caused confusion and sort of disorientation around the investment thesis on BD. So maybe I'll start just by asking you to articulate what you feel the market is missing in valuing BD's shares right now.

Yes. Thanks, Brandon. Great question. Let me turn that over to Chris for that one.

Okay. So I'm sorry, we're muted a little bit here. And you can hear me now?

Loud and clear.

So obviously, what Tom mentioned is we're very focused on executing, driving value long term and steady growth long term for ourselves and for shareholders. And so when we looked at the equity raise, it accomplished really 3 things for us. Those 3 things, first and foremost, it provides the flexibility to maintain our liquidity position and do that through a period of economic uncertainty. Second, it immediately enables us to delever and takes us to be below 3x on a net leverage basis immediately, and that puts us in a good position. And then lastly, it gives us the capital to invest in our business, both organically and inorganically. As you know, we did $3 billion raise. Just a reminder, $1 billion of that is to pay down debt immediately. The other $2 billion really is to replace the temporary capital that we had on the balance sheet with the term loan that would expire in a year. So it gives us the permanent capital as we enter this period of uncertainty. So we've taken that step to address all of those priorities. And we feel good about having done that. And at this point, it enables us to be in a great position going forward to continue and invest in the business and to drive value and growth for the long term.

Yes. The reason I ask about what I think the market's missing in terms of value in BD right now, Tom, is the fact that BD's performed worse than those med tech companies' stocks who are actually most deeply impacted by the elective procedure slowdown. Many of those companies were down on par of around 50% in April. BD actually fits into the most defensive bucket, having been down 10% in April. There just seems to, I think, be some disorientation around the significant offsets BD actually has from COVID, from diagnostic testing, vaccine delivery ecosystem, perhaps because of some uncertainty around the antigen test program and the fact that U.S. government seems to have gone in a different direction in terms of sourcing syringe supplies for some reason. So with that said, can you give us an update on perhaps current business trends in May relative to what you reported in April, which were down, I think, low double digits on a core basis versus your initial plan? And I'd like to touch on some of those other COVID-19…

Yes. Well, why don't we do this, Brandon, we're -- technically, we're trying to -- Chris and I are in the same room and we're socially distanced. And so that's why there's a pause between our transitions sometimes. So let me answer the -- one of the questions around what additional opportunities we see over the next couple of months that we're very focused on and then have Chris comment on May, if that works. So I think you're right. Of course, we would say that we think we're undervalued. We've been very durable through this period of time. As you -- of course, everyone knows, our products have been essential in helping society move through this pandemic, right? We've been a very vital part of managing public health, this huge public health crisis, and we're going to be continuing to be vital in helping the world recover from this crisis. We've been vital in helping people understand how the body's immune system responds, to developing diagnostics, to helping expand ICUs in field hospitals and preparing for mass vaccination campaigns. And of course, we're really -- I couldn't be more pleased with how our organization has responded to that. So let me just touch base, though, on not so much what we've done, but what we're focused on very specifically in the near term. And when I say near term, I mean over the next few months. And let's start with vaccination. Certainly -- actually, the U.S. government issued some smaller orders to other companies at the beginning, but those are nowhere as near what is actually required for a vaccination campaign or could be delivered from those. So -- and I can give you an update on that. It's actually been really good progress. So since we last spoke, we've accelerated and intensified our engagement with public health authorities, not just in the U.S. but around the world, to provide drug delivery devices for mass COVID-19 vaccination campaigns. Last month, I shared that we had received several orders -- large orders from multiple countries around the world. And since my last update, we have now received the first large stocking order from the U.S. government as they prepare for large-scale vaccination campaigns. And we expect to receive more orders from the U.S. government, but also other governments around the world. Those discussions are proceeding, and they very much have intensified in recent weeks. So positive. Very positive momentum there. Next on BD MAX, we have an installed base of over -- a little over 1,400 BD MAX instruments. And that's been going up steadily. We've tripled our BD MAX production output during this pandemic. And I think one of the positives there is that while COVID-19 demand may come down for tests, timing of which to be determined, I think, depending on the vaccine, I think those incremental placements of BD MAX are going to have a long-term value for us as they're going to use those instruments for other tests, of course, in our portfolio now that they're placed. But specifically at COVID testing, as we've shared, we're producing right now a little under 1 million tests a month, and we've recently made some investments to increase capacity. And I can confirm that we're investing to add about 900,000 additional tests a month. So we're just under-doubling our MAX assay capacity. Last month, I shared that this was on track for the very end of calendar 2020 or early in calendar '21. And I'm really pleased to share that our team has been executing really well here and we're tracking to have that additional capacity now go live by the end of Q1 FY '21. So that will add -- essentially double our MAX assay capacity going into 2021. Next, with respect to the Veritor assay, obviously, lots of interest there. We continue to get tremendous interest from our customers, from governments around the world, from employers. And I think most of you are aware that we've got over 27,000 Veritor instruments placed in the U.S. today. And not only do customers really value the simplicity and the time to result on that platform, but it's also very unique in that it's connected, it has a built-in cell chip in the newest module. It allows data integration and surveillance to happen real time across the network of those. All that data is fed into the cloud. And we have a platform called Synapsys that allows you to mine that data and do surveillance real time, which is something, particularly governments and employers, are very interested in. So of course, a big question is time line. We get that question multiple times a day. Of course, we've got our best team engaged, along with some of the best experts that we've actually brought in from the industry, working together 24/7 on this program. What I can say is that, right, we're pretty deep in evaluating multiple antibody combinations. We're actively collecting samples from a network of over 30 collection sites that we've set up across the U.S. So that when our final optimized assay is ready for trials, we can move through that very quickly. In parallel, we've taken steps to actively prepare our manufacturing network, so that we'll be in a position to scale production when that final assay and the EUA is granted. So this remains a very active development program. You can expect that we're not going to provide specific launch timing until that final assay is locked down. Our clinical data is in hand, and we've got our EUA submitted. So what I can promise you though, Brandon, as everyone watching this cast is, is that you're going to be among the first to know when that happens. So just maybe one last comment on something that is also probably worth an update here. Outside of the pandemic response, of course, we discussed at great length on our May earnings call, our dedicated team and incremental resources we've put on around hitting the Alaris 510(k) submission milestones. So let me just give you a brief update on that. As we previously stated, of course, the baseline Alaris 510(k) that we're submitting right now, it takes into account all the historical changes to the Alaris system over time, of the last 15 years. And we feel very confident that we've got the right resources, the right plan. We've got the right team. That team is executing well against our internal plan and our milestones. And I think most importantly, we've got our arms around what we need to execute against and that things are -- particularly the things that are within our control. We've had a really good collaboration with the FDA. It's been constructive. It's allowed us to help make sure that their feedback is looping into our internal processes. An example, we've had 3 really productive pre-submission meetings with the FDA over the last couple of months to review our approach for different aspects of the final submission. And those pre-meetings, they help ensure that our -- what we're doing is highly aligned with FDA expectations, and it reduces the risk of additional information request from the agency once we make our submission and the FDA starts this review process. So again, we understand the desire to know the timing for submission. We're being really disciplined about executing our plan, incorporating that feedback from the FDA and making sure we get the best submission and not signaling anything prematurely. Because, as you all know, in the regulatory process, there are variables that aren't in our control. So we're going to give a lot more detail on that, on the submission timing as we promised, on our August earnings call. And -- but we feel, overall, very positive about how that's progressing, right? We've got, again, a dedicated team focused very heavily -- over 120 folks full-time on that. In the meanwhile, we've continued to serve customers under medical necessity, and the majority of which have been used to fight COVID-19, but that we're really proud of how this is progressing now. Let me turn that over to Chris though to answer some comments in May. Let's take a second as we move from mute.

Yes. Thanks.

Good. So yes, I think you had a question in there, Brandon, about what we're seeing in May and talking a little bit about April. So as it relates to April, you know we gave out a lot of information and detail to give some signs of where things were going. And in April, we had a net negative impact of about $170 million. But that was the result of a lot of pluses and minuses across the portfolio. We said on our earnings call, we expected those positives and negatives to continue moving forward. And we're watching those trends. We're continuing, for example, to monitor the return of procedures to pre-COVID levels. And we're also monitoring the pace of hospitals returning to non-COVID patient care, COVID and non-COVID testing volumes, and things like timing of when research institutions will resume. And then more broadly, capital spending trends across our businesses. Anecdotally, we're hearing that, as Tom mentioned earlier, close to 90% of our customers were expecting to restart elective procedures early in June and are planning to continue to increase elective procedures in the coming months. And that's consistent with what we're seeing. In addition, we're seeing customers reengaging with our sales associates. And in other areas like the rate of patients returning to the office visits, the volumes of routine screening and testing, they're all recovering a bit slower than the elective surgeries coming back. It's still a very fluid situation. We recognize that investors are wanting to hear more, and we'll continue to provide color as time goes on and the situation develops going forward.

In the 1 minute or 30 seconds we have left, I want to ask you, do you think BD's earnings power will be higher or lower than it otherwise would have been pre-pandemic once sort of new normal or deals itself in steady state?

We missed that.

I think we missed that question as we were trying to transfer over. Can you hear me, Brandon?

Yes. I'm just asking…

If you can just ask that question again, we missed it as we were transferring over.

Yes. And we've got about 30 seconds left. But just curious, do you think BD's earnings power will be higher or lower than it otherwise would have been pre-pandemic once the new normal sets in?

We're still committing, as Tom said, to double-digit bottom line growth going forward. I think as the new normal goes forward, that we'll continue to see that. We certainly have some things that are opportunities for us, but the commitment hasn't changed to double-digit growth.

Very good. Well, we're out of time. And with that, thank you both for being here. Chris, Tom. Have a great day. Thank you.

Thank you. Thanks.

Thank you. Thanks, everyone.

Bye-bye now.

Bye, guys.