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

Good day, and welcome to the Becton, Dickinson & Company Annual Meeting of Stockholders. I would now like to turn the conference over to Vincent Forlenza. Please go ahead, sir.

Good afternoon, ladies and gentlemen. It is 1:00 p.m. and the 2021 Annual Shareholders Meeting of Becton, Dickinson & Company is called to order. I am Vince Forlenza, BD's Chairman, and I am pleased to welcome you on behalf of our directors and officers. Joining me today are Tom Polen, BD's President and Chief Executive Officer; Gary DeFazio, Senior Vice President and Corporate Secretary; and Kristen Stewart, to Senior Vice President of Strategy and Investor Relations. Also joining us are the members of our Board of Directors and other members of BD management as well as representatives of our outside auditors, Ernst & Young. As we stated in our proxy statement, as a result of the pandemic, we're holding our meeting in a virtual format this year. The agenda and rules of conduct for the meeting are available on the meeting site. Shareholders will be able to submit questions online and vote during the meeting by following the instructions on the meeting website. We will have a question-and-answer session later in the meeting, during which we will respond to questions, including questions submitted prior to the meeting. We'll defer any questions about the company's current business results or full year outlook until our upcoming first quarter earnings call. On a personal note, you may have seen our announcement this morning that I will be stepping off the Board towards the end of April and that Tom Polen will be succeeding me as Chairman. It has been an honor for me to be associated with this great company for over 40 years, and I want to thank the Board of Directors and all the BD associates with whom I've had the pleasure to work with over the years to make this company what it is today. I leave BD knowing it's in good hands with Tom as its Chair and CEO. Tom is an experienced executive who is passionate about BD's purpose, and I am confident that he will lead BD to even greater success. I'll now ask our Corporate Secretary to report on matters relating to the meeting.

Mr. Chairman, I have proof of notice of this meeting in the form of an affidavit executed on behalf of Broadridge, which will be filed with the minutes of this meeting. Mr. Peter Descovich of IOE Services has been appointed as Inspector of Election for this meeting and has taken the inspector's oath. Inspector has informed that 87% of the shares entitled to vote at this meeting are present in person or represented by proxy. A quorum is therefore present, and we may proceed with the business of this meeting. The polls are open -- polls for voting are open, and all shareholders entitled to vote at this meeting can do so online. Shareholders who have already voted by proxy need not vote again unless they wish to change their votes.

Thank you, Gary. We'll now move to the proposals included in the proxy statement. The first proposal is the election of the nominees for director listed in the proxy statement to serve for a term of 1 year. The second proposal is the ratification of the selection of Ernst & Young as the independent registered public accounting firm of the company for fiscal 2021. Ms. Molly John and Mr. Tim Tracey of Ernst & Young are participating in the meeting today. The third proposal is an advisory vote to approve named executive officer compensation. The last item is a shareholder proposal from Mr. Kenneth Steiner regarding special shareholder meetings. Mr. John Chevedden will now have an opportunity to speak to this proposal. Operator, please open the line for Mr. Chevedden.

Hello. This is John Chevedden. Can you hear me okay?

We can hear you fine.

Proposal 4, special shareholder meeting improvements, sponsored by Kenneth Steiner. [ Carol ] has asked our Board to take the steps necessary to amend the company governing documents to give the owners of a combined 15% of our outstanding common stock the power to call a special shareholder meeting. It currently takes 33% of shares that normally vote at the annual meeting to call for a special shareholder meeting. 33% of shares is too high. This proposal topic won 40% support at the 2020 Annual Meeting. This 40% support probably represented a near-majority vote from the shares that have access to independent proxy voting advice. The response to management to this 40% vote from its shareholders was to think up a wonky technicality to try to keep this proposal off today's ballot, but the wonky technicality lost out to common sense. Thinking up a wonky technicality is evidence that management is not interested in shareholder engagement or shareholder outreach. Plus certain questions on company performance are out of bounds for this meeting as it was just announced. Apparently, this wonky technicality had to be approved by Mr. Christopher Jones, the Chair of the Governance Committee. According to the proxy, it appears that it's been 20 years since Mr. Jones has had a day job. Mr. Jones may not deserve to be reelected. Management has only unsupported reasons for its resistance to this proposal. Management totally failed to give one example of a less-than-good outcome at any company that has adopted this proposal topic. It is all the more important to adopt this proposal since our stock price has hit a plateau during the past year. This proposal topic was just approved at the Visa Annual Meeting 90 minutes ago. Please vote yes, special shareholder meeting improvement, Proposal 4.

Thank you, Mr. Chevedden. I'll now turn the meeting over to Tom Polen, who will have a presentation on BD's operations. Tom?

Okay. Thank you, Vince, and good afternoon, everyone. Thank you for joining us today. I'm proud to be presenting to you today as the CEO and President... [Audio Gap] Before we begin the presentation, let me start with some housekeeping items. As you can read on Slide 8, we'll be discussing forward-looking statements. It is possible that actual results could differ from our expectations. And as noted on Slide 9, this presentation also discusses non-GAAP financial measures and reconciliations of these non-GAAP measures. The comparable GAAP measures can be found in our fourth quarter fiscal 2020 earnings release posted on the Investor page of bd.com and in the accompanying slides. So let's move on. It has been almost a year since I succeeded Vince in the CEO role, and neither of us could have predicted that the past year would be dominated by a global pandemic. But it was a year that really brought home the significance of our purpose, advancing the world of health, not just to me, but to the 70,000-plus BD associates around the world. These pictures represent just a handful of the BD associates around the globe assisting with our pandemic-related efforts. I want to start off today with a special acknowledgment of this very important group of stakeholders and shareholders of BD. On behalf of the BD management team and the Board of Directors, I want to say thank you to all of our associates around the world for your efforts day in and day out. As you can see on Slide 11, our COVID response is across the care -- the continuum of care. So my thanks is to all BD associates across all 3 segments around the world who have mobilized to rapidly address the pandemic needs to continue to do so today, from diagnosis with the development of COVID-19 rapid diagnostic tests to supporting treatments with medication management and IV drug delivery in the ICU, to prevention with the ramp-up of our manufacturing of syringes and needles to support the global COVID-19 vaccination campaigns that are underway today around the world. We are a trusted partner for many governments, health care systems and health care professionals. And we will continue to work with our counterparts to find innovative solutions and increased manufacturing of key products to help address society's needs. Taking a step back to look at the big picture, let's turn to Slide 12. BD is an innovative med tech leader in many medical, life sciences and interventional categories, with #1 positions in nearly all major served categories, as you'll see in a moment. In fiscal 2020, we generated revenues of over $17.1 billion by serving over 190 countries around the world. About 43% of our revenues are outside the United States, with 14% of our revenues in emerging markets. With our global scale and manufacturing excellence, each year, our worldwide plant network produce over 40 billion products annually. In the U.S., about 90% of patients admitted into a hospital will use a BD device during their stay. We also sell our products into surgery centers, physician offices, labs, research facilities, nursing homes and for use in the home setting. Each year, we spend over $1 billion in research and development to ensure we continue to bring new innovations to the marketplace and to help patients. Our R&D investments look to leverage our existing leadership positions. As you can see on Slide 13, we have leading category positions across several foundational areas within health care. We estimate about 90% of our revenues come from categories where we already have a leadership position. We're also expanding our innovation pipeline across 3 themes that leverage our core strengths. You can see this on Slide 14. These categories represent areas where we're very deliberately and disproportionately investing our R&D spending to move our portfolio mix into higher-growth markets. So of the 3 themes, the first is that we're applying smart devices, robotics and analytics and artificial intelligence to improve care processes. Second, we're enabling new care settings to enhance patient experience and lower costs. And third, we're investing to improve the diagnosis and treatment of chronic diseases. We believe these themes represent a significant opportunity and runway for BD to create impactful new innovations and solutions across our business. COVID-19 may accelerate some of these existing health care trends and presents new opportunities for BD to grow. We're also very carefully evaluating the external landscape. Where we see opportunities that make strategic, operational and financial sense, we look toward M&A as a potential option to supplement our internal R&D efforts. On Slide 15, you'll see highlights of our recent tuck-in M&A activity. Similar to our R&D investment philosophy, we take a disciplined approach by targeting technologies and solutions in high-growth markets to leverage our core positions and capabilities and allow us to generate value for our customers and our shareholders. We have been very deliberately increasing our capabilities and our focus on tuck-in M&A as an additional source of innovation and growth. Last year, we increased the pace of our transactions, completing 6 deals, including NATDx to expand into point-of-care molecular diagnostics; Adaptec, to leverage our leading position in acute urology and our strong connected footprint in U.S. acute care hospitals; and Straub Medical, another example, where we're leveraging our Peripheral Vascular franchise to enter the high-growth markets of atherectomy and thrombectomy. In fiscal Q1, we completed 3 deals, including the medical assets of CUBEX to expand our medication management offering into the non-acute care market. Turning to Slide 16. We believe we are approaching a turning point in our capital allocation. Over the past year, we've taken steps to improve our cash flows and strengthen our balance sheet. During the year, we executed a $3 billion equity raise, and we ended fiscal 2020 with a net leverage ratio of 3x. We're pleased to see Moody's last week upgraded our credit rating to investment grade, and we remain committed to maintaining investment-grade credit ratings profile across all the major credit rating agencies. As you can see in the past 3 years, a significant amount of our cash was dedicated to repaying the debt related to the Bard transaction. Looking ahead, we expect to have greater flexibility to refocus our cash deployment on growth opportunities, including tuck-in M&A, and we'll also look at other capital deployment options. Turning to Slide 17. Our growth strategy also includes investing in our workforce, and we very deeply believe our employees are our greatest assets. This year, we introduced the BD Way, which is our cultural foundation. It really embodies who we are, what we stand for and why we exist. And at the center of it is our purpose, which is advancing the world of health. And there's 3 principles that underpin the BD Way: servant leadership, a growth mindset and inspire quality. We believe in a culture that fosters diversity and inclusion, quality and compliance and the spirit of continuous improvement, development and learning and dedication and hard work. In the last year, we've made investments to enhance all aspects of our culture. Our diversity metrics are improving. We're enhancing our quality and our compliance through our Inspire Quality program, and we're strengthening our BD University, which is an institute that provides BD associates with learning and development opportunities aligned with our strategic goals. And beyond investing in our associates and the organization, we're also investing in the communities around us. In fiscal 2020, we supported global and local communities by donating $23.2 million in product and cash through the BD Foundation and BD itself. We also strengthened the BD Foundation with $25 million in funding this past year. As you see on Slide 18, the BD Global Health initiatives have a long history of driving positive societal outcome across several important health care areas, including our well-known health care worker and patient safety initiatives and our safety engineered injection devices. We're also investing in sustainability because we view sustainability as a portfolio of complementary initiatives and actions that help us achieve our long-term goals. As you can see in Slide 19, the 4 pillars in our sustainability focus include innovation, access, efficiency and empowerment. Over the past year, we've made great strides across all of these areas, and you can read about our efforts in our latest sustainability and climate change reports. Moving on to the next slide. We are very proud of our diversity, global health and sustainability efforts being recognized, as you can see here. But make no mistake, at BD, we believe in the spirit of continuous improvement, as I mentioned before, and we will never rest on these laurels. And in fact, if we go to the next slide, Slide 21, it illustrates our 2030 sustainability strategy, and we are pursuing new levels of performance. Our 2030 sustainability plan brings into focus the areas where we can make the most impact over the long term. We recently announced our climate change targets. We're committed to reducing Scope 1 and Scope 2 greenhouse gas emissions 46% by 2030, and to be carbon neutral across direct operations by 2040. We look forward to sharing more detail behind our 2030 sustainability plan with you in future engagements. Turning to Slide 22. Our BD 2025 strategy, which was launched around this time last year, has 3 pillars: grow, simplify and empower in many areas of this strategy I just discussed. This strategy is just as relevant today as it was before and during the pandemic and will continue to be our focus in the years ahead. Before closing, I want to recap our fiscal 2020 results, which are on Slide 23. Fiscal 2020 was a challenging year, but I'm very proud of the team for how we negotiated through it. The results reflected headwinds from our Alaris remediation efforts and, more notably, the ongoing COVID-19 pandemic and its significant impact on health care utilization. The results also reflected the notable success of our integrated diagnostics solutions team in developing innovative COVID-19 diagnostic testing. It helped us return to revenue growth in the fourth fiscal quarter and finished the year with flat revenues on an FX-neutral year-on-year basis. Our adjusted EPS declined nearly 13% year-over-year to $10.20. However, we were able to grow our operating cash flows over the prior year because of our cash management efforts. As I previously mentioned, we executed on a $3 billion equity raise in May and reduced our net leverage position to 3x at the end of fiscal 2020. The stronger balance sheet position and our cash management actions gave us confidence to increase our dividend by 5% last November, marking the 49th consecutive year of increases. So just to close with some key takeaways on Slide 24. Our teams have risen to the challenges of COVID-19 by advancing our solutions to the front line to help fight against this pandemic. We have made important advancements in our strategy that should create value for our shareholders over the near, medium and longer term. So while there continues to be uncertainty in the world with COVID-19, there is one thing I am very certain of, which is that with our outstanding team and our advancing strategy, BD is positioned to emerge stronger than ever. Thank you for allowing me to present an update on BD. I'm both honored and humbled to be leading this great company and our 70,000-plus remarkably dedicated associates at such an important and consequential time. I'll now turn the meeting back over to Vince.

Thank you, Tom. At this time, I declare the polls closed, and I will ask our Corporate Secretary to report the preliminary voting results. The final results will be available after the votes have been certified by the inspector.

On the election of directors, each director nominee received the affirmative vote of a majority of the votes cast and has been elected to serve for a term of 1 year. Proposal 2, the selection of Ernst & Young as the independent registered public accounting firm of the company for fiscal year 2021, has been ratified, receiving affirmative vote of 95% of the votes cast. Proposal 3, the advisory vote regarding named executive officer compensation, has been approved, receiving the affirmative vote of 67% of the votes cast. And on Proposal 4 regarding special shareholder meetings, 46% of the shares cast were voted for, 54% were voted against, and the proposal has not passed.

Thank you, Gary. We will now transition to the question-and-answer portion of our meeting. I will now turn it over to Kristen Stewart, who will moderate the question-and-answer session. Kristen?

Thanks, Vince. We have received several questions already into the portal, so we will begin with those first. To the extent we don't have time to answer all your questions, we will post answers on the Investor Relations page on bd.com following this meeting. There were a few questions that came in on diversity. So I'll summarize the questions into 2, and I'll ask them both upfront. What is the Board doing to improve Board diversity, including minority representation? And what is being done to increase diversity in the senior management levels at BD?

Thanks, Kristen. So the Board and the senior management team take the issue of diversity and inclusion very seriously. And it's not only something we're looking at to improve at the Board level, but also something we are striving to improve at every level of the organization, including the senior management team. We certainly believe that gender and minority representation is important for the effectiveness of the organization, and we work very hard to promote a culture of inclusion and diversity at BD. Looking at the Board, we currently have 4 women and 1 racially diverse director. And to increase Board diversity, the Board recently adopted the Rooney Rule, where we commit to include diverse candidates in any candidate pool from which new directors are selected. The Board and management are taking very active measures to improve diversity and inclusion among senior management. When you look at the top 30 roles in the company, 1/3 are diverse in terms of gender or ethnicity. And although we've made a lot of progress, we're very continuously seeking to improve in this area. Each year, we establish corporate inclusion and diversity goals to continuously improve our hiring, development, advancement and retention of diverse talent and our overall diversity representation. For me personally, it's built into my objectives each year, and we look at diversity and inclusion as a key enabler in the next phase of value creation.

Okay. Thanks, Tom. The next 2 questions were submitted regarding Board structure. I'll start with the first one. Why do you need 13 directors?

Kristen, thanks for the question. The size of the Board is something that the Board monitors periodically to ensure continuing Board effectiveness. The current skill set of its current members and any additional skills the Board may feel it needs is another factor the Board considers. The Board is comfortable with the current size of the Board, but that may change that in the future, depending on what it feels the Board needs to support the company's strategy. So this is an ongoing process is what we're saying, aligned with the company strategy, that is a continual area of focus for the Board.

Thanks, Vince. The next question came and is, why are there so many extended directors, which I think may be related to how long each director has served on the Board.

Yes. The Board feels that it has a good mix of directors that have been on the Board for shorter, medium and longer time periods. The Board has had a significant amount of turnover over the last 4 to 5 years due to mandatory retirements and had 2 directors from the Bard transaction and Jeff Henderson within the last 3 years. So there has seen significant Board refreshment over the last few years. So we feel quite good about where we're at on that issue.

Okay. The next question relates to executive compensation. How is executive compensation linked to company performance on an annual basis?

The Compensation Committee oversees the compensation program for the executive officers. The Compensation Committee is assisted by an independent consultant pay governance. The Compensation Committee uses performance metrics for BD's annual incentive plan that supports BD's business strategy. The objectives of our executive compensation is to align it with the interest of our executives with -- to align the interest of our executives with our shareholders to drive superior business and financial results, maintain pay-for-performance philosophy and offer competitive compensation to attract and retain high-performing executives who are essential to executing our strategy and to create long-term value for our shareholders. Executive compensation includes a mix of base salary and annual performance incentive plan and then long-term equity compensation awards. The annual performance incentive plan is tied to performance during the year and tied to metrics including our revenue, our adjusted earnings per share and our free cash flow as a percentage of sales. The Compensation Committee considers BD business plan -- BD's business plan and the environment in which BD is operating when setting performance targets and then sets what it believes are reasonably achievable performance targets for BD. The level of funding available for annual awards is then tied directly to how the company performs against those targets.

Thanks, Vince. We have another question in the portal that is directed on our financials. The question relates to our capital structure after the CareFusion and Bard acquisitions and whether we have plans to delever and improve our balance sheet without additional dilution for shareholders and whether free cash flows will improve to make the current total debt more manageable.

This is Tom. Thanks, Kristen. I'm going to turn that question over to Chris Reidy, our Chief Financial Officer, to answer this one.

Thanks, Tom, and thank you for the question. As we have previously communicated, we are taking actions, some as part of our BD 2025 simplification initiatives, to improve our operating and free cash flows. As we've also previously discussed, we achieved net leverage of 3x at the end of fiscal 2020, and we are targeting a lower level longer term. As Tom mentioned in his presentation, we are pleased that Moody's upgraded our credit rating to investment grade last week. So now we are investment grade across all of the major credit rating agencies, and we are committed to maintain that investment-grade rating.

Perfect. Thanks, Chris. Another question came in regarding what BD is doing to aid disadvantaged individuals, countries and populations that are being left behind by the pandemic and its related impact?

Thanks, Kristen. That's an area that we're very passionate about here at the company. So first and foremost, one of the things that we're doing is that we're ensuring that all of our needed products are being manufactured and being delivered to the front lines where they're needed to treat all patients in all countries around the world. And that could be whether or not that's our COVID diagnostics, our medication delivery and management solutions or injection devices as part of the COVID vaccination campaigns that are happening around the world. Also, as you heard me talk about earlier, we have a really long history through our BD Global Health organization and through our annual giving of supporting disadvantaged individuals, countries and populations. If you look at actually last year, we announced, along with the BD Foundation, we committed $7.8 million in monetary grants and product donations over the next 3 years to support the continued expansion of a program we call the BD Helping Build Healthy Communities initiatives. And what that is, is a unique public-private partnership that we launched in 2013 and implemented jointly by the Direct Relief and National Association of Community Health Centers. And the BD Helping Build Healthy Communities initiatives, what it does is it grants -- provides grants to community health centers that are implementing innovative, successful approaches to providing quality health care to underserved populations in the U.S. Since 2013, and inclusive of the $7.8 million commitment I shared we just made last year, BD and the BD Foundation have invested a total of $22.6 million through the year 2022 into this initiative. And we've made the commitment to this program again last year, recognizing the importance of community health centers in delivering quality affordable health care to the most vulnerable patients in the United States, especially as the economic and other burdens caused by COVID-19 makes it more challenging for at-risk patients to manage chronic conditions. Also this past year marked our 25th year of philanthropic partnership with the global nonprofit, Mercy Ships. And we marked that by announcing a donation of $1 million in cash and products to support the construction and launch of the world's largest nongovernmental organization hospital ship, which plans to sail to Africa in late 2021 under the name Global Mercy. As 2019 threatens the stability of already fragile health care systems globally, the need to provide basic life-saving care is greater than ever, especially in low- to middle-income countries. In total, BD and the BD Foundation provided $23.2 million in product and cash to support global and local communities in fiscal 2020 alone. And we also provided $25 million in incremental funding to the BD Foundation to support future initiatives. And lastly, I'd add, our purpose is advancing the world of health, and we look to do that in all areas, not just developed markets. We focus on improving health care access and strengthening the capacity of health systems to care for all patients, especially the most vulnerable. So thank you to those who submitted that important question.

Great. Thanks, Tom. We have a question that relates to our sustainability efforts. The question that came in is, what are you doing to support the recycling rather than just incinerating your products in a cost-effective, environmentally friendly way?

Thanks, Kristen, and that's another great question. So we continue to focus efforts on improving the life cycle impacts of our products as part of our sustainability program. And over the years, we've learned it takes many parts of the supply chain, from suppliers through recycling infrastructure at the local level, to make a shift in product disposal for health care waste. And it's because of that, that why BD has for quite a long time and actually we were a founding member of the Healthcare Plastics Recycling Council, which is a technical consortium of industry peers, all who are seeking to improve the recyclability of plastic products and packaging within health care. And through this coalition, we're engaging in pioneering projects designed to help boost plastics recycling efforts in clinical settings of hospitals. We also, for example, established a process at our facility in San Diego to manage the end-of-life disposal of products from the BD Pyxis portfolio by recovering materials and components for refurbishment and recycling. Our teams across the globe continue to explore opportunities to improve the end-of-life disposal options for products through programs such as these, often working with local partners. As I mentioned in my presentation, stay tuned as we will be providing more details in future forums on our 2030 sustainability goals. Certainly, reducing the environmental impact of our portfolio and addressing the sustainability needs of our customers is a key focus area for us.

Perfect. And then there was one that just came in over the web, and the question was when was the last in-person Board meeting?

I believe the last in-person Board meeting was a year ago is our last January one.

So with that, it looks like we're running a little tight on time. So I'm going to turn it back over to you, Vince.

Kristen, thanks very much, and thank you for moderating those -- that Q&A. That concludes the business of the meeting, and I now declare the annual meeting adjourned. Thank you for all participating.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.