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

Well, good morning, everyone, and welcome to the Morgan Stanley Healthcare Conference 2020. As we enter day 3, we progress through the morning. It's my pleasure to have with us here, as we start here in the morning on day 3, Becton, Dickinson, and 2 members of management, both Tom Polen, CEO; and Chris Reidy, CFO. And then Kristen is hanging out there somewhere with a smiley face on the strip there.

So we're going to dispense with my normal progression here. You guys have gotten used to these last 3 days talking about COVID upfront. I want to get with Tom's strategy here to start off our conversation. And Tom, I -- we've talked about this a little bit off-line, but I've covered the company almost 2 decades. It's dating myself a little bit there. I think investors have always appreciated the durability of Becton, Dickinson, the consistency of Becton, Dickinson. And I think in the last 6 to 8 quarters, they feel like they're seeing a different Becton, Dickinson. I guess the direct question to you is, is something structurally different about this business the last 6 to 8 quarters? Is this a different company post the Bard acquisition? Help us understand why that is or is not true and how this company gets back to the durable, consistent Becton, Dickinson they knew and loved from 20 years ago.

Yes. Sure, David. And thanks, obviously, for having us this morning. Great to see you, as always, and look forward to a good discussion here over the next 0.5 hour or so. But you've covered the company for a long time, obviously, and we've always appreciated your perspectives on BD. I'd say we do definitely believe it's more idiosyncratic in the past. And certainly, I'd step back. Of course, I'd been in this role now for about 7 months and took time coming into the role, looking at the exact question that you just asked as well. In the past, we have been impacted by some industry-wide headwinds like FX, drug-coated balloons and COVID. But we've also seen some company-specific matters. Alaris is a clear example of that. And so we are taking actions. I'm very focused on taking actions and making investments that strengthen our processes to both prevent and to better identify any potential matters that could arise in the future to get ahead of that. So -- and we're progressing very well on those.

Okay. And the one message you've been trying to impart, I think, recently is ever since you took over in recent months is this business can get back to a 5% top line, double-digit or 10% bottom line growth profile. And maybe it's a question for you on revenue and a question for Chris on earnings. Why are you so confident? I mean a 5% and 10% business is a pretty good business. Why are you so confident in the 5%? And Chris, why are you so confident in the 10%?

Yes. So I mean number one is -- and I do have very high confidence in both of those goals. And what gives me confidence is not only our historical track record when you take out some of those items that we mentioned, but our strategy and how we're executing against that. And our strategy is built to deliver exactly that 5% and 10% in a durable way. And so first, right, we're very focused on driving that durable revenue growth of 5% plus. We've been reshaping our portfolio over the last couple of years. Bard is certainly a positive part of that. We're now -- our end markets are growing, excluding COVID times where all markets are, of course, at growth levels that they haven't been, some much higher, some a little bit lower, but getting back to a more equilibrium, I think we're seeing positive momentum in that direction. But our underlying markets are growing 4%, and we're investing our R&D dollars in markets that are growing even faster than that. Our R&D portfolio is in markets growing an average of 6%. And we're going to continue to drive our R&D portfolio in those directions. You may have heard we've recently started an innovation fund. Similar to what Bard had after the Gore royalty, we're utilizing some of the profits from Veritor and MAX COVID-related to start that fund ourselves. And of course, we also are in a position now to resume more of a normalized tuck-in M&A level, which will also help contribute to getting us into higher-growth markets and driving that revenue growth. Second, I'd say we're very focused on continued margin expansion, that 10%-plus adjusted EPS growth. We've talked a lot about our Project Recode, which is aimed to deliver $300 million in savings over the next 4 years. Our team hasn't missed a beat with COVID on Project Recode. We've been making the same investments that we planned pre-COVID, and we've been executing right to the schedule that we had pre-COVID. So we're feeling really good about how our team, which is largely operations, I mean, is doing well there. And then lastly, of course, we will continue to improve our balance sheet strength and flexibility going forward. And the May equity raise was a step towards that as well as the very active ongoing cash management programs that we've put in place.

Okay. And this 5% to 10% profile, I know it's going to be somewhat -- the comps are going to be challenging here as you come out of COVID here. But this is -- as you think about 1 year forward, kind of fiscal '22, I mean, do you feel good about that 5% and 10% profile? And do you need to resolve Alaris before you can get back to a 5% and 10% profile? And how soon could investors see that underlying performance?

Yes, let me turn that to Chris.

Yes. So you're absolutely right, we have to look at it on an underlying basis, and lots of things can happen in '22. We've been very clear that the lift that we get in Veritor in '21 is a variable in '22. So you have to -- we're going to give a lot of transparency to what goes up in '21 so that it would be very clear as to what happens in '22. So you have to normalize for that. You do obviously have the Alaris and how much that comes back. So we'll be very clear on what it looks like underlying. But we're very confident that on an underlying basis, we can drive that 5% plus and 10% plus. And I'd just add a few bits of color to what Tom said. On the Recode Project, we've done a good job of being able to deliver margin based on the synergies that we had coming out of CareFusion and the Bard deal. So we have improved margin. We have an infrastructure to do that. And Recode is really an acknowledgment that when you put 3 big companies together, you don't get all those synergies right out of the box. You get what you promised, but there's still a lot of complexity in the business that we can simplify. And that's what Recode is all about, and we can drive another $300 million of savings out over the next 4 years. So we're highly confident in the ability to drive those kind of margins.

So you think underlying basis, Chris, you can get 50 bps a year out of this business, at least?

Yes. And we've always been able to do that. I mean that's kind of a given. And then how do you drive more than that in a given year or over a period of time? And we've been able to do that, driven by simplifying, and that really was the synergies on getting that incremental dollar amount. And we think that there's still a lot of opportunity to do that. We've got the same people that went after the synergy savings going after the Recode savings. And so we're highly confident in the ability to do that.

Right. And then, Tom, when you -- I think the fourth quarter guide, it seemed concerning to some, and I want to make sure that your trajectory is consistent with your peers. So on your procedure-oriented businesses, I thought your fourth quarter guide didn't really model a whole bunch of recovery. What we've heard at this conference so far is people in the procedure-driven world are seeing some kind of recovery. You kind of said the percent of number you saw in the third continues into the fourth. What are you seeing from a procedure-based recovery? And then, look, with these businesses like a BD and a Baxter where census and inventories and stocking matter, how confident are you that you have a good sense of the census for hospitals and sort of the inventory that's in the channel as we kind of exit the year here?

Yes. I'll turn it to Chris to make any further comments related to that. But maybe let me just make a comment that we feel really good about our execution and the performance that we have, very much in line with the guidance that we shared. And so I'll leave it at that. I don't know, Chris, if you have any other comment.

Yes. I would just say that several months ago, in the absence of guidance, we did give some color on a monthly basis. And what we did say is that when we looked at June, we were in that kind of 75% of recovery on average. In July, we said that got up to 80% to 85%, and that's the color we gave. At this point, now that we've given guidance, we really want to kind of hold to that guidance and not go back to giving monthly updates on what we're seeing. But I think Tom's point that he just made there kind of tells you what you need to know, which is we feel very good about the progress of the business in the quarter. We're coming to the end of the quarter, and we feel good about the execution and the operations. And so that kind of tells you what you need to know.

Okay. And then either for Tom or for Chris, I mean, one of the reasons I'm asking all these questions about sort of the structural business is, look, in recent months, you certainly have been trying to sort of control expectations for next year. Some of that is because of overzealous analysts, maybe myself included, on Veritor. But the real question is heading into next year, it's fine to control expectations. And given what the company went through the last 6 quarters, I frankly want to control expectations. But I want the investors to appreciate that there's nothing structurally that's sort of gone wrong here. So maybe just help us understand, there are some dynamics of MMS and MDS that create some bad comparables. Other than these comparable dynamics, has anything changed in the last 60 days? Or this is just making sure people have idiosyncratic financial points about fiscal -- the forward fiscal year?

David, I like the fact that you said you'd be doing the same thing. And there is no -- to your point, nothing has changed in that period of time. But a couple of things. Let me just start off by saying, first off, we recognize there's a need and an opportunity to better communicate with the investment community. And you've seen us make investments and bring in talent to do exactly that. And so to that end, right, last week, we publicly made some comments in the spirit of exactly that, better communicating, engaging with the investor community. And so as I also said, we continue to be very comfortable on the progression of our strategy and also how operations are performing in Q4. For '21, right, we haven't provided any guidance. Obviously, November will be here before we know it, and we're not going to comment specifically on '21 before then. But we also thought it's going to be helpful because it is a very complex time in the industry with what's going on with COVID. Obviously, with some of our new innovations that are COVID-related, they add another level of complexity. They're great opportunities, but how do you model them? And of course, you've got their pump business as well. And so all these complexities, we recognize the need to give some clarity to help people in their modeling, and we made a couple of observations. And maybe let me just reiterate some of those right now just to be helpful. Again, we said, first off, there's a wide range of Veritor estimates, some in the $1.5 billion to $2 billion range. Some of them seem to -- those seemed aggressive to us given variables around vaccine timing, supply and demand and ASPs, and then it would be more prudent to take a more conservative view on that. And if it ends up being in that range, that's something that can be increased through the year rather than assume that, that were to evolve that way. We don't think that would be prudent. The second thing that I made the comment is, is that related to those new innovations on Veritor and MAX, I commented on this earlier, that we're going to be reinvesting a portion, an appropriate portion of those profits back into the business to drive our strategy of durable, long-term growth. And we talked about the innovation fund. We haven't quantified how much we'll be reinvesting at this point in time. Part of that will wait to evolve depending on how those products evolve, but we'll be prudent. We're not going to invest ahead of the curve on those. And then we reminded also for those that aren't as familiar with the stock that we're one of the very few companies who have a September year-end. We still face a tough COVID comparison in the first half. We actually don't annualize until Q3 the COVID impact. And so again, we thought it was more prudent to assume that we don't get back to pre-COVID levels through '21, that there can be some underlying pressure on health care. We just made those comments, specifically called out MDS as the area that some of the Street models seemed a little aggressive. We expect a more modest growth in MDS specifically that was impacted as -- based on what we are seeing. And then we also pointed out that in infusion pumps, we had difficult comps because Q1 was a full -- a partial quarter before the ship hold. And then, of course, we had an abnormally large bolus of sales in Q3 due to the huge demand from COVID in both the U.S. and in Europe. And so Chris, I don't know if I've missed anything you'd like to add.

No, I would just add 2 things. One is just more housekeeping that when people update their models, they should adjust the base in '21 going through to '22. So that's one housekeeping. But more substantively, I think the comment that we're making around the first half of the year being a tough compare for us to pre-COVID levels and the fact that we don't think it's prudent to assume that you get back to 100% of pre-COVID levels immediately, the combination of those things really also have an impact on gross margins. So what we would think is that the first half year is going to have a decremental margin impact. And we gave a lot of clarity on that in the third quarter and the fourth quarter. And what we said was that the decrement in the third quarter, which was the peak period where the revenues were impacted, we said it would be about 80% flow-through, and that was about 390 basis point drag. As you move forward to the fourth quarter, we said it would be about half that. Now you would expect it to improve in the first quarter and the second quarter, but it's still a drag on margins. So we just want to make sure people understand that and have that in their models as well.

And Chris, just getting to this notion, making sure there's nothing fundamentally wrong, I want to push you a little bit on some of these fund numbers. I mean Street consensus numbers were kind of $12 to $14. So maybe the $14 number was a little goofy. But the Street consensus really was more like $12.75, and yet you still seem a little uncomfortable with that number heading into next year. And I appreciate you're trying to control expectations. But if I just say, look, the core business does low-single digits, like 3-ish kind of percent next year and gross margins get back to kind of 56%, that kind of gets me to kind of like $11.70 kind of number. When I throw in $1 billion of Veritor, I can still get back into the low 13s. So to be pushing people closer to a $12.50 number, either, a, I've got to be wrong about the core; or b, you're really going to invest a lot of that Veritor savings. And remember, $200 million is 1 point of R&D. That would be 40% of the Veritor money, which is that's a lot of money. But just help me understand, I mean, $11.70 in the core, plus $1.25, $1.50 in Veritor...