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

Okay. Great. Good afternoon, everybody. I'm Bob Hopkins from Bank of America, the U.S. medical device team here for the next fireside chat session. We're thrilled to have the senior management team from Becton, Dickinson, including Tom Polen, the company's President and CEO; Chris Reidy, who's the company's CFO and CAO; and, of course, Kristen Stewart, who is Senior Vice President, runs Investor Relations and Strategy. Before we get going here, I want to hand it over to Kristen for a couple of intro remarks, and then we'll kick on. And thanks so much for being here. Really appreciate it.

Thanks, Bob. So just as a reminder, during today's discussion, we may make some forward-looking statements, and it is possible that actual results could differ from our expectations. In particular, there continues to be significant uncertainty about the duration and contemplated impact of the COVID-19 pandemic. Risks, uncertainties and other factors that could cause such differences can be found in our recent SEC filings, including our 2020 Form 10-K and subsequent Form 10-Q. The statements made in this presentation are made as of today's date. BD undertakes no responsibility to update any such statements to reflect events or circumstances occurring after such date. So with that, I'll turn it back over to you, Bob. Thanks.

Yes. Thank you, Kristen, Tom and Chris. Again, appreciate you being here.

So I'm going to start out, Tom, if okay, with a couple of higher level strategy questions for you. And then I wanted to drill down a little bit and just ask some follow-up questions relative to the guidance you guys provided on your recent Q2 fiscal call, if okay. And so Tom, on the strategy side, obviously, it's been a tough 18 months relative to medtech peers. And I don't think we need to look backwards because everyone is familiar with the history. The real question I had is I wouldn't -- I wanted to see if you wouldn't mind talking about your strategy from here to improve things. And specifically, what are the things you can communicate to shareholders that provide reason for optimism? What might change going forward with the strategy? Just, again, would ask you to look forward and provide maybe some reasons for folks to be optimistic relative to what's going on in the last 18 months. Thank you.

Yes. And we are very optimistic. I think you can see that in our performance over the last several quarters as well, too. So maybe as you step back and think about, as I stepped into the role a little over a year ago now, maybe the top things we've been focused on driving and the progress because they really will continue forward in a big way. Obviously, within the first couple of days of stepping in the role, the Alaris ship hold happened. And so as I've communicated, that's been the #1 priority is getting Alaris fully remediated. Obviously, we just had a major milestone in that progress just a few weeks ago with the submission of the 510(k). That's now progressing in the review process. And obviously, our focus remains on achieving the ultimate milestone, which is 510(k) clearance and fully remediating the Alaris situation back to shipping and then promoting and selling that fully. So the other thing, as part of that first priority, is we've gone through and taken those learnings. We established a program across the company, taking learnings to raise our quality systems and capabilities, we call that Project IQ. And we've been investing tens of millions of dollars in that to make sure our systems across all areas of the company are up to speed and looking at it if there's areas that needed remediation, taking lessons from Alaris, and we've been doing that. So that's one. The second one that we've been very focused on is that as we look at advancing our BD 2025 strategy: grow, simplify and empower. And I think I'll talk specifically the first area right off the beginning was stepping back and looking at the portfolio that we had come together from CareFusion, BD + Bard and looking at what are the areas that we're going to be doubling down in to build the company for the next 5, 10, 15 years, right? What is that going to look like? And so we step back and looked at the portfolio very early on. Actually, as I was coming into the role, we had a big initiative doing exactly that. And the focus was moving us into higher growth spaces where there's long-term durable health care trends to fuel long-term growth over, again, the next 5, 10, 15 years. First thing we did, we started reallocating our internal R&D program towards those spaces, stopping R&D and some moving R&D to others based on that priority. You then saw us start to increase our level of organic R&D. R&D had been flat for pretty much the 6 years prior during the integration phase. You saw us move that up through the deployment of our growth and innovation fund to around 6% of spend. And we allocated money to every business unit on high priority programs, new programs to drive future growth through that growth and innovation fund, the best practice that we took from Bard and John DeFord and put that in place for us. So we've been increasing that pace there. Supporting that, right, we took the time to strengthen our balance sheet in a very significant way, right? A full turn over the last year, now in a position to become active, again, which we haven't been in 6 years on the tuck-in M&A side, right back to those spaces a focus that we've prioritized. We're adding not only our organic R&D, but now we're complementing that with an accelerated activity of tuck-in M&A. You've seen us do 11 tuck-in M&A transactions, essentially since I've come into the role, including 5 in the first 6 months of this year and a strong pipeline as we look going forward. All of those getting us into higher growth spaces and all very much focused on those prioritized markets that we're investing in. So a big focus on our portfolio and moving us into higher growth spaces, so we have significant competitive advantage. That's around solidifying BD's durable, consistent mid-single-digit growth profile. And then third and last but not least, obviously, we've been focused on our simplification agenda. We got really big, really fast. In 6 years, essentially, we went from $7 billion to $17 billion. And we don't do that without adding complexity when you take 3 companies and bring them together. So first off, we saw complex opportunity to simplify that complexity, our manufacturing network, our business processes and our SKU-level portfolio to drive savings, and that's project recode that we've been ramping up, deliver $300 million of savings over a 4- year period. So that's very much on track. We've got great traction going there. And then you saw another outcome that we've been working on for a while. Obviously, it didn't happen overnight. The announcement that we made last week around our plan to spin-off the diabetes business. And we can talk about that in further detail, but that's very much aligned with our strategy, not only of focusing our portfolio in the spaces that we want to focus on in BD, setting up diabetes care to succeed and unleash their potential as a stand-alone company, but also a part of our simplification agenda as well, again, simplifying our business portfolio to focus in those areas that we see as most critical for Remainco strategically. So quite a bit. But all of those -- I think as you look at it, those are actions that we've taken over the last year that are helping us drive consistent, durable performance over the last year as we have been. Obviously, we've given guidance this year. We've raised that guidance once already on revenue and EPS. We feel good about the ongoing performance of our BD not only this year but going into next year. And those actions that we're taking aren't just for a 1-year period, they're for the next 5, 10, 15 years.

Okay. That's a helpful framework. I appreciate that. And I do have some follow-ups on the spin, but I want to save it maybe for the end because I - it's a short -- maybe a short presentation here. I wish we had 2 hours, but we have 21 minutes according to this big red clock I'm staring at right here, and 21 minutes. After your second fiscal call, definitely had a lot of discussions with a lot of shareholders. And there are a couple of things that I'd love to try to clear up for people just as it relates to the guidance that you guys provided. So I'll just kind of go rapid fire here with a couple of quick questions because you have so many moving pieces right now with the business that maybe we'll try to bring some -- a little bit of incremental clarity here. So I'll start with revenues and then go to margins. On the revenue side, I think you guys disclosed in terms of COVID testing in the first half. And I define COVID testing Veritor plus BD MAX plus the swabs, that's about $1.35 billion. Just because I'm trying to think in terms of things that are here now, but that will change over time. So not just Veritor. That was at $1.35 billion in the first half. From some of the comments you guys have made and from some of our own assumptions, I think in your guidance, maybe that's in the second half, assuming around $600 million in that same bucket. I just wanted to see if that's kind of a little less.

Let me -- Chris will take that one.

Yes. So what we did say, Bob, is that we're at the high end of that $1 billion to $1.5 billion on Veritor. And then I think it was to your question, we said that we had about $370 million in MAX and swaps in the first half of the year. It's actually $369 million to be precise. And that it would be less than half of that in the second half. The best way to think about that is around $500 million from MAX and swabs for the year. If you take that, you take the Veritor guidance that we gave and you're in that $1.8 billion to $1.9 billion kind of range as we see it.

Total COVID diagnostics for the full year, the $1.8 billion, $1.9 billion.

Perfect. That's great, because that leads me to my second question because you made a very helpful comment on the call where you said that you're -- when you -- this is thinking a little longer term. But you said your base business, excluding testing, you thought could grow solidly in the mid-single digits next year. And one thing I just want to confirm is, what's the base that you're talking about there from which you will grow that mid-single digits. I mean based on the COVID numbers here, I got to a calculation of around $17.5 billion that when you talked about growing mid-single digits off of a non-COVID base, it seems to me it's around that $17.5 billion. Is that fair?

Bob, I think -- I mean it's pretty clear to just take up. We've given very clear revenue guidance for the year. You can take $1.8 billion to $1.9 billion off of that. That becomes our base, and we feel very confident in growing solid mid-single digits off that base with obviously a very good operating leverage off of that as we've committed, perhaps even a bit more than usual next year.

I would also add just if you're thinking about in terms of growth rates, just to give you what COVID testing was last year, we had $581 million in total COVID testing last year, $341 million of that being in Veritor. So if you do that math, it has the base revenue growth this year in that 3% to 5% kind of range.

And that includes about a -- some of the Alaris pump. There's a headwind this year versus what we saw last year as well as we didn't have any flu this year. So that just kind of comes out of our growth rate this year. It ends up being replaced by COVID, but we call that COVID, not flu, right? So that contributes to COVID, not our base number. We think that will come back in our base in part next year as there will be flu testing or flu COVID testing will become more durable base business growth as well. So even that 3% to 5% is actually it's higher this year when you account for those factors.

Yes, those 2 factors that Tom mentioned are about 120 basis points. So adding that back to the 3% to 5%, which is a very solid range.

Okay. And then 2 last little clarifications on the revenue side. It's just -- on Aleris under EUA, I think you said you did about $80 million in the first half and maybe we do a little bit more in the second half. Is that right?

A little bit not more than the $80 million. We expect that obviously, Alaris Medical necessity would be most significantly in the first half of the year, and we have very little plan in the second half of the year. We generally don't forecast medical necessity given its nature. It's expected to be very limited.

Okay. And the contribution from vaccines this year is roughly just -- I think you said $80 million in the second quarter. I just wanted to make sure I understood what the vaccine contribution was this year.

So I'd say vaccines this year, just to put those numbers into perspective, we had $37 million in the first quarter, $43 million in the second quarter and then we'll see where we kind of shake out for the rest of the year. But that might be somewhere a little north of $100 million. We'll have to see where that ends. But we do expect to grow over that. So we wouldn't call that out as -- that would be in our base. So we would grow over that. So when we say solidly mid-single digits next year, the only thing that you should back out is kind of the diagnostics.

We now see the vaccination piece. And remember, when we first came out and talked about the opportunity in vaccination, we said $100 million to $150 million over the next 12 to 18 months. Just to put it in perspective over the last, essentially, 9 months since Q4, Q1, Q2, we've sold $92 million to be exact of syringes specifically for COVID vaccination. So we're already kind of right there at the bottom end of that range in the first 9 of the 12 to 18 months. So clearly, we feel good about the upper end or beyond that over FY '21 and '22. And as we said on the earnings call, we now have orders -- commitments for 1.7 billion syringes for COVID -- a lot of COVID vaccines being delivered with BD devices, 1.7 billion around the world, but we have those commitments. And so we see this durable -- we have a very clear visibility of durability of that into '22. And that doesn't fully include where things may evolve with booster vaccines on an annual basis. And eventually, we do believe that COVID vaccines will transition as most vaccines do into prefilled devices. And we shared, of course, on the earnings call as well that we now are in active engagements with several vaccine companies around doing stability -- with started stability testing or doing that work in our syringes for future potential launches. So it's a longer-term opportunity as that takes some time, but we certainly are excited about that as a potential future opportunity.

Yes. No, thank you for mentioning that. So now I want to try to ask a few questions on margins because I think this is particularly important for folks. And so just a level set on -- in Q2, I mean the stated gross margin was 53.8%. But as I think you commented, there is FX and some inventory issue. You sort of called out that the -- excluding those things, it was more in the low 55% kind of range for Q2. My question is, in the guidance that you provided for this year, are you assuming that the back half gross margin is somewhere in that low 55% range again? Or does it come off a little bit because of things like resin costs?

It will be -- purposely, I'll let Chris speak to it a bit, but it will be lower than that run rate underlying 55%, and Chris can explain exactly why.

Yes. So one of the things that brought it down to that 53.8% is the conscious spending that we have of Veritor proceeds, and that was about 70 basis points. And that is expected to continue because that spending of $200 million is ratable in the first half and the second half of the year. So we are consciously doing that. And again, those are investments that we'll invest to support growth in the future that won't recur in '22. So we're doing that consciously. That's one of the things that will drag that down. Then, of course, there are some pressures from the material costs, talked about resins, those kind of things, some of the freight in. So we talk about shipping costs, but that affects freight in on gross margins as well. And so we would expect it to be down by where the second quarter is. But going forward, we think that 55%, 54.5% on a reported basis, excluding FX, is the right place to be.

And so if you take the second half.

[indiscernible] I should say.

Yes.

Yes, yes. I see. I see. One thing I'm really curious about is, if you look at that run rate you just kind of anticipated, I think, where you said around 55% maybe exiting this year. If I were to exclude the contribution from COVID revenue and also think about excluding this -- the reinvestment that you're making because of the COVID profits, what is the underlying gross margin of the business?

That's 55%, Bob.

Yes.

That's the 55% that we said.

Yes. Let me just make it clear because you said exiting this year at 55%. So that's the underlying margin. That's not where we expect to exit this year. So if you look at this most recent quarter, if you think about it, we had about 70 basis points of headwinds from the reinvestments that we were making from the Veritor proceeds that actually washed out pretty like matched evenly the contributions that we had from COVID diagnostics. So those neutralized it. So the benefit that we got from product mix from COVID diagnostics, we just reinvested that back in. So those 2 wash each other out. So that's how to think about that. They kind of offset -- they happen to offset each other this quarter from a gross margin line. And then as you think about the second half of the year, this second quarter, we ended at 53.8%. We would anticipate a little additional pressure as we move through the year. We will lose the product quality discrete items, but we will still continue to have some pressure from those reinvestments. We will lose some of the mix benefits because we do expect the COVID diagnostic levels to decline sequentially because we're not modeling in, again, first half loaded COVID, we're not expecting that to continue at the same pace in the second half, as you look at our forecast, than what we achieved in the first half versus the second half. And then we will, as Chris mentioned, see a little bit of modest, again, keyword modest, pressure from just overall raw material costs. But as Chris mentioned, we do see our more normalized margins as we look beyond kind of more in that 54%, 55% kind of range.

Okay. Again, and just to be clear, excluding the benefit from COVID revenue and the reinvestment that you're making of that 54%, 55% level, okay.

And that is depressed by -- obviously, we don't have Alaris back. We're not running at preCOVID levels still. So our plants still aren't kind of all the way back. So there are things that are still, I guess, I shouldn't say full normalized for what the environment we are still today, not recognizing we're back with Alaris and other things, so kind of quasi normalize.

Those are the thing, Bob, we look at when we say 55% underlying to date, again, as we think about we're investing, set the quality charges in the quarter and we've got the impact of FX, right, to benefit us on the revenue. It revalues our inventory, which negatively impacts GP, that will end up collaborating out as we go forward over time. And then we think about -- you get, so that's kind of the 55% and then as Alaris starts coming back in the market. Remember, our service organization in Aleris is in the COGS line. And we keep our service -- or they can go, take out our service. They're very skilled teams that we keep in place, even though we're not out doing tons of installs right now at the cost base that we kept, which doesn't have the revenue flow-through benefiting it. It's weighing on the rest of MMS COGS line. That will help us boost margins back up if you think about where it was at 56% pre-COVID, pre-Aleris ship hold as Aleris comes back in, that will also help with that. That's the other main factor in 55% to 56%.

Yes. Very helpful. And is there any incremental headwinds...

Sorry, Bob. We'd expect to see that lift for the full year FY '23 since Alaris is only coming back, as we pointed out in the second half of '22.

Yes. Yes. No, that's a good point. Are there any incremental headwinds from that 54%, 55% level that are worth calling out?

At specific, obviously, we got puts and takes that we work on, on pricing. We're doing a lot of pricing work. You probably saw we were 20 bps favorable on pricing in the last quarter. We've got initiatives across the organization on pricing specifically. We know we've got some caps in us and many large-scale manufacturers. We cap and roll our material costs. So material costs that we incur now hit the P&L 4 months from now, right, is typically the way it works. So we know what's hitting the P&L in Q3 and early Q4. So for example, Texas. No storms resin plant shut down, right, processing plant. What do you do? Some people stop making cars. They stop making shipping things. That was all over the news. We can't stop shipping components to people in the ICU. So we get resins. We put tons of resins on a plane. We fly them to our manufacturing plant. It's a lot more expensive. We normally have -- we've probably been to our plant. We have railroad tracks next to most of our plants, but we bring full railcars of resins in that gets sucked up into silos at our plant. Couldn't do that and you needed it there faster, so we flew them in. Those are the types of input costs that we know are going to be a bit higher now, our transient input cost as we're managing logistics through a pandemic period. Those hit us in Q3 and a little bit in Q4, which is why we said that and the reinvestment will in a little -- bring it below that 54% normalized run rate. Those types of things that we recognize will be in our numbers.

Okay. And then -- so this is really helpful. So when you started, you talked about that starting point. And then we, as analysts, can assume whatever we're going to assume on COVID testing and how that will impact margins? I'd like -- it's great to keep that kind of separate. So that's great on gross margin. Can we just kind of go through the same exercise on operating margin? You guys have said that you'll be in the low 20s, I think, in the back half. What is kind of more of that underlying operating margin of the company, kind of, again, excluding that testing dynamic, some positives from the revenue and then the negative offset because you're spending. So what's kind of a normalized operating margin for the company ex testing in the back half?

Yes, Chris, you want to take that?

Yes. So most of what we talked about flows through to operating as well. So I think it's fair to say that most of that goes through. If you look at the second quarter, though, there are some costs that are offset down in other income expense, that's the deferred comp. So that really suppresses operating margins in the second quarter. So if you're using second quarter as a baseline, like we did on gross margin, you'd want to back that out, that flips both ways. And as you know, deferred comp is an offset, it doesn't impact the P&L. That's the only item that I would say flows through. Shipping is obviously the other. And shipping is under pressure. You could read about that in the paper with the ships backed up at the LA ports and that kind of thing. Whether that continues into next year, that's something we're watching. Is it a onetime phenomenon or not? It likely is to some extent. So we're watching that. So those are the kind of factors that we're impacting. And then obviously, we're also investing in R&D, as Tom said. And so that is something that we're consciously doing to spend down that would hit the operating margin.

And Bob, just the other thing to mention is, remember, we are investing about $200 million just this year. And that $200 million will stop at the end of FY '21 and be a tailwind for 2022. That's our Veritor reinvestment. And we've shared that's evenly weighted between the first and the second half. So think about that $200 million. We've invested $100 million already. That's flown through our P&L in the first half of the year. And we have another $100 million, which will flow through our P&L in the back -- in the second half of this year. And that's included, of course, in our guidance range, and including, that's the guidance range that we provided originally, and then we actually increased our outlook, of course, at the end of Q1.

And so if we were to -- again, I'm trying to get to the -- you've said the total company operating margin will be in the low 20s. But if I'm trying to think about that, excluding that spending and excluding the contribution from COVID, what does that base underlying operating margin look like in the back half relative to these.

So we'll share that. Obviously, that's -- that gives the last piece of the puzzle to '22 guidance, and we'll share more on that as we go forward, and we understand people want to get to that. But the actual range for next year, we need a little more time to solidify and then communicate.

It certainly is a higher number.

It is a high number than what you're experiencing.

But I think a better way to kind of look at it might be to kind of think about the second quarter. If you look at what we reported in the second quarter, our operating margin was closer to that 25% level, and that did kind of include somewhat of a depressed gross margin levels. There was also an 80 basis points swing within deferred compensation to depressing that. So there are some moving parts within that operating margin as well. So certainly, that kind of gives you a little bit of a sense. We were then reinvesting, again, against the BD Veritor profits in 2Q. So the earnings power of the company is certainly there, and we're reinvesting in the second half as well. So there are moving pieces. But there will be certainly margin expansion of the base business as we move into '22. The reinvestments that we're making will lift out of the P&L. And so we'll have more to come on '22 there, but there will be a healthy level of operating margin as you look at the core business. And then you can layer on top of that, what we get from COVID diagnostics and Alaris when it comes back.

Kristen, you ran out the clock. I got more questions, so now [ get it ]. So yes, I just was trying to get at -- you gave me that really nice number of kind of 54%, 55% underlying. I was just looking for an operating margin equivalent to that. It sounds like it's clearly higher than 22%, not quite 25%. And then again, we'll layer things on top of that to get to 2022. So I got 90% of the way there. I realize this is a lot of math, and I apologize for being so granularly focused. But it certainly helped me frame things. And so I appreciate your willingness to walk through all the different numbers. And Tom, I appreciate your kind of top-down thoughts at the beginning. So thanks, everybody, for the presentation, and really, again, I appreciate you guys coming to the conference.

Thanks, Bob. I appreciate it.

That was great topic.

[ We'll see ] Vegas next year.

Yes, I hope so too. Thank you.

Okay. Thanks.