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

Welcome to the BofA Healthcare Conference. Up next, we have Becton, Dickinson. I'm Travis Steed, the medical device analyst here at BofA, and we're welcome to have Chris DelOrefice, Chief Financial Officer; and Simon Campion, President of the Interventional segment. So great. Welcome. And Chris, I think you wanted to start off with some opening comments, kind of just a few takeaway, some -- the recent quarter that you had last week.

Yes. Absolutely. So first thing, thanks for having us. Thanks, everyone, for joining. Good to see everyone in person. Yes, as I reflect on the quarter, I think a couple of things. One -- I think 2 key things maybe to highlight. One, I think what you're really seeing play out in both our second fiscal quarter and our first quarter results is really our BD 2025 strategy coming to life, really strong growth. As you saw, as a matter of fact, year-to-date, we're just about 9% growth. And I think the way to think of the BD growth profile is you have this durable core, right? We have -- anyone that's sitting in acute health care setting, 90% of those people are touching a BD product. So it lends itself nicely to what I would call a derisked and reliable growth profile. But I think what's even more exciting is we had laid out, as part of our Investor Day, this 5.5%-plus growth profile. And we were accomplishing that through building on our durable core and driving, call it, an enhanced growth profile, both organically and inorganically. And to be clear, when I say inorganically, we're not reliant on kind of the onetime impact that you get from doing tuck-in acquisitions. It's really about acquiring those assets and growing them. So in the second quarter, you actually saw a 30 basis point organic contribution from acquisitions that we've already anniversaried over a year. So again, I think a really strong growth profile, fully executing against our BD 2025 strategy, both organic and inorganic contributing to that profile. I think the second biggest point is, obviously, we're navigating, kind of unprecedented times, the inflationary cost pressures more so than just the cost pressures as the complexity in the supply environment. So I think it's a real testament to BD's ability to focus on execution. We committed to 200 basis points of margin improvement when we started the year. Obviously, those inflationary pressures have grown significantly since we originally rolled out our Investor Day and initial guidance. And we've been doing a great job navigating those. And I'm sure we can talk about that further. But we reconfirmed our guidance here in the quarter. We actually took our organic growth rate up on our base business by 100 basis points and reaffirmed kind of our margin commitment. So a really strong start to the first half of the year, but more importantly, I think, representative of the long-term strategy that we have.

Yes, let me get a little more color on some of the inflationary impacts that you saw incrementally in your guidance but still able to do 250 basis points of margin expansion this year for -- excluding the spin. But you also had some extra costs, shipping costs, inflationary costs over the last few months as well. So just love to get your sense on the incremental costs that you're seeing in the business and some of the offsets that you're able to achieve that margin expansion.

Yes. That's a great question. So one way to -- we haven't shared the exact amount of the inflationary environment. But I think most folks, as they look at inflation, you would say normal inflation is 2% to 3%. We're probably experiencing an inflation level that's more like 7% to 8%. That's not happening across every kind of variable spend component within our business. But directionally, I think it gives you an order of magnitude. We're talking about 3 to 5x kind of normal inflation environment. So what are we doing to offset that? You don't navigate that with just kind of 1 thing. So it's a multifaceted approach. And maybe first, just to talk about. We started the year with a plan to deliver 200 basis points improvement. Half of that was just from volume increases going back to our strong growth profile. That's well on track. We also had a small contribution from carryover FX from last year that hit this year, that we're executing against that as well. So in total, that was 150 of the 200 basis points. So we needed another 50 basis points improvement of cost improvement, net of inflation, and the inflation grew as we just talked about. So how are we doing that? We've done a couple of things. I would put it into 3 buckets. One, we're leveraging a strong growth profile that I talked about earlier in a few different ways. We're really able to be thoughtful about how we're driving mix in our portfolio is 1 of the biggest ones. The second one is we were able to actually accelerate some of our cost improvement initiatives, most notably Project Recode that we've called, which has an element to it related to optimizing our SKU portfolio, our portfolio through SKU rationalization. And so we've actually accelerated that. Both of those create structural benefits in the P&L. The other one is just launching increased cost containment and cost trade-off type initiatives throughout the business. There's not 1 thing that I would point to. But I think in an environment like this, it requires a high degree of discipline. You know you're going to have increases in certain areas. Obviously, you do your best to mitigate those. Some of the things that we're doing to mitigate those is dual source supply, maybe a more regionalized approach to supply, staying very connected to our supplier base and stay 1 step ahead in terms of buying patterns or maybe even building inventory in appropriate areas to ensure the continuity of supply. So those are some of the things that we're doing. But we feel really good halfway through the year here with the progress that we've made and remain on track to that cost improvement.

That's great. And then taking to the next step, this 250 basis points of margin expansion this year, still saying get back to kind of pre-COVID levels by 2025. Basically, it's 290 basis points, so 100 basis points a year over 3 years. I'm trying to get a sense for your confidence and if inflation does get worse, your ability to still hit those targets; and two, how to think about the progression of that. It sounds like from the earnings call, it's probably 75 basis points this range, less than 100, and then you could do a little bit more than 100 in some of the out-years. Is that the right way to think about it?

Yes. It's -- so here's how we're thinking about it. If -- and I'll rewind a little bit for folks, because when we had our Investor Day, we had talked about over the 2025 time period, we would strive to deliver about 400 basis points of operating margin improvement. Post-embecta spin, what we committed to was actually delivering more near our prepandemic operating margin levels, which was 25%, which would imply after we execute this year, if you do the math, it's roughly 100 basis points per year. A couple of key things assuming there. One, as it related to our planning stance for 2022, while we certainly would hope there'd be some invasion of some of the inflationary dynamics where we're not relying on that, we're planning that they're going to continue through 2022 into early '23. With that said is by the time you get to '25, you hope that there's some stabilization and kind of reset closer to a normal inflation. I don't know that we're going back to 2% to 3% in the near term. But what will happen with that is all the structural changes we've been building in our P&L this year to absorb those inflationary impacts is you get a carryover effect as we move into the kind of '24, '25 period. So that's 1 thing. Again, our ability to accelerate things like Project Recode, some of the other structural changes we made this year, you'll get a carryover effect. In addition to that, there's a few other drivers. If you remember, we made a decision to continue to maintain a strong service organization, customer support for our Alaris pump in the U.S. region. By the end of that time period, that creates an opportunity to leverage those resources. In addition to that, our strong growth profile will continue to allow us to deliver margin on mix, volume throughput through our plants, driving leverage. You mentioned pricing. Pricing is something that we certainly, while modest portion of the inflation coverage that we're seeing this year, I think it's a small but important part of continuing that strategy, I'll call it, price and mix optimization. So those are some of the things that give us confidence. I wouldn't say 100 basis points is something insignificant. I do think it will be relatively ratable over that time period, maybe a little more back-end-loaded is what I would say, given the fact that you're going to have inflationary pressures continue into 2023, but you would still expect margin improvement heading into 2023. So that's kind of how we're thinking about it.

All right. That's great color. And I guess on down the P&L, you've got some cash from embecta, think about how the debt paydown works, the share buyback. Is that to 2023 as well?

Yes. So the way -- so as part of the embecta, we got about a $1.4 billion distribution from that. The nice thing about that, in fact, it was a profitable business, it generated a lot of cash, that gave us an influx of cash that was equivalent to about 3-plus years of cash they would generate. So it supports us executing against our capital allocation strategy. What we shared on the call was we were going to take about $1 billion of those proceeds and utilize them for debt paydown. So certainly, to your point, that will have an impact on interest rates. Now we also have to look that we're in an inflating interest rate environment. So we can share more color, 1 total interest income and expense kind of as we get into 2023. I think the more important thing there is the debt paydown gives us the most financial flexibility in the terms of borrowing capacity as we think of continuing to execute against our tuck-in M&A strategy. The residual amount, we said we would address as we enter 2023, but the $400 million remaining would likely have a bias towards share buybacks. Obviously, market conditions and making strong value-creating decision with those proceeds, we'll weigh into that in market conditions. But all things being equal, we would have a bias towards share repurchase for the $400 million.

Okay. That's great. And speaking of M&A, the whole BD M&A strategy has basically changed in the last couple of years doing 18 -- or 17 acquisitions, 17 acquisitions in the last couple of years. I'd love to see like how sustainable that is, that playbook is, like if you look at valuations and come in quite a bit, and kind of what the areas that you're interested in and also love to hear from Simon as well, particularly in interventional, the opportunity for M&A in that business.

Yes. I think it's an exciting time is, again, going back to kind of that 5.5%-plus growth profile. This is one of the levers that we have at our disposal to continue to deliver not only the 5.5%, but really kind of the plus factor, right? Again, if you look at this year, what our guide implies is really strong growth well above that 5.5%-plus. I think our tuck-in M&A strategy has been a key part of that. So I think a few key things for folks to think about. One, we're going to continue to have a bias towards these smaller tuck-in acquisitions. They're very efficient. They're easy to tuck into the business. We can scale these assets that we acquire. So our goal is not to acquire growth. Our goal is to acquire assets that we can grow. So these are assets that have a strong growth profile, double-digit growth. They're actually accretive from a margin standpoint, either on a stand-alone basis and/or because of leveraging the call point capacity that we may have internally or other factors. When you think of our holistic capital allocation strategy, a few things that we pointed to. One, we want to continue, as part of just our earnings profile, invest in R&D at competitive levels, right? So our R&D investment has gone up about 50 basis points since, call it, pre-COVID level. So that was an intentional choice. We're seeing that pay off. We're also going to maintain a competitive dividend. Actually, we held our dividend post the embecta spin, which increased the payout ratio to just about 30%, roughly $1 billion. We're going to continue to support CapEx in an efficient deployment, but in a way that closely aligns probably to sales growth, to continue to enable growth in key areas. I think our farm systems is a great example of that. It's been a double-digit performer for us here, a lot of opportunity in that space and I think a key contributor to that long-term growth profile. If we're doing those things, it should leave us up to about $2 billion of available excess cash to deploy against both share repurchase and tuck-in M&A. Now a portion of that will go to what I would call ongoing share repurchase that just minimizes dilution from share-based comp. We want to make sure you have kind of a clear planning stance and you're not seeing any dilution in shares. Obviously, opportunistically, we would take -- we would continue to leverage small share repurchases. But our bias definitely would be towards the tuck-in M&A, call it, the $1 billion-plus level on average per year. And again, as I shared earlier, it's already having an impact in Q2. We had about a 30 basis point organic lift from acquisitions that we've brought in that we've already fully anniversaried from a year. So it's been a nice contributor and it's a very efficient way to do it. If you actually go back to what we shared at Investor Day, the amount of sales that we acquired relative to the purchase price of these assets, the multiple was only about a 5 multiple on that. So we're actually doing it in a very efficient way from a capital deployment standpoint.

Yes. So let me talk about how we do it structurally first. So within each of our business units, we do have an M&A or corporate development team. So they identify the targets and where we want to go after. And the lens through which they often look through it is through a lens of technology, is a technology that we're familiar with. Is it -- are they call points that we already call on so we can get leverage? And is it a disease state that we are familiar with? So they are the lenses through which we look at things. Since Bard became part of BD, we've been very fortunate. There have been several deals that we want to do across the whole spectrum of size and business units. We've done -- with the minority investments, we vested in Vicarious Surgical last year. As you've probably seen, we've done early technology deals that you will not have heard of yet. And then we've done the larger scale -- certainly from our perspective, larger-scale deals that both generate revenue immediately, but also set us up for success in the future. So we have a short-, medium- and long-term outlook to those. So if I think back to -- Straub Medical has done extraordinarily well for us, got us into the atherectomy and thrombectomy spaces within the PI business. The acquisition of PureWick in UCC has been a significant contributor to growth there, and it confers a significant benefit on patients. And finally, the Tepha acquisition that we did last summer, where we acquired the overall rights to the P4HB or Phasix technology, allows us to really begin to look at entering the breast market for breast reconstruction, breast cancer patients. But as Chris has said, once we get these acquisitions, we don't just rest on our laurels. We incrementalize them rapidly and frequently. And so just to give you some benchmarks for what we've done historically. When we acquired Lutonix, we've actually launched 18 different incremental solutions from the Lutonix acquisition. When we got the limited rights to Phasix back in 2012, 2013, we've had 12 incremental launches to that. With PureWick that we just acquired 3 or 4 years ago, we've already launched the home version of PureWick, which has been very well received in the home care and nursing home settings, and we will launch this summer the male version of PureWick. So it's a multifaceted approach from early-stage investments in companies to early-stage acquisition of technologies, all the way through to larger-scale revenue now or segment opening opportunities that we go after.

And Simon, I want to get your views on some of the faster-growing areas of interventional mechanical thrombectomy, venous and arterial investments, IVL markets that are growing nicely as well. I'd love to get your thoughts on those markets either from an M&A perspective or R&D perspective.

One of the things about the space we play in is that there are some aspects of that are -- that it takes a while to get into. So the venous market, for example, venous stenting, back when I started at Bard in 2008, my team and I actually proposed venous stenting as an anchor product to be a solution for venous disease. So from development through qualification, to doing the clinical study, to getting approval in the U.S. has taken time. Then we bolted on the Atlas Gold, which is the only PTA -- venously approved PTA balloon. And hopefully, [indiscernible] clearance on Aspirex. So I don't see it as a stand-alone thing thrombectomy, I see it as complementary to our venous solution, which encompasses Venovo, which we just brought back to the market after a year off the market to the Atlas Gold PTA technology. And hopefully, touch wood, with the Aspirex thrombectomy catheter later in the year. And then again, thanks to Chris and the corporate team, we completed the acquisition of Venclose, and we've already got incremental plans for that. So that enables us to get into the nonacute care, CVI segment that we weren't in before. So our M&A strategy, coupled with our organic R&D strategy, goes after solutions rather than just isolated spaces in general.

And Chris, you mentioned tuck-in M&A. I don't know if you have a definition of tuck-in and you define that.

Yes, it's a good question. And actually, maybe a broader comment that hopefully you're kind of hearing come through. There's definitely kind of a renewed energy and focus on innovation, but a holistic innovation kind of ecosystem, right? What we're doing from an R&D standpoint and driving our portfolio towards these transformative solutions. We have what we're doing on the tuck-in M&A side and bringing those assets in and building on them. Simon also mentioned, we're getting earlier-stage investments from an equity standpoint. So we've added that to our capability as well, which gives us kind of early insight into assets, build relationships, hopefully, kind of a first-mover advantage. I think that's also new for BD. And we're actually surrounding ourselves with key opinion leaders. We created a scientific advisory board. So there's this whole emphasis on multiple levers of driving growth in the business. From a tuck-in M&A standpoint, I mean we've been doing -- all of these have been under $1 billion. What we've shared is, certainly, we can digest $1 billion, up to $2 billion, no problem, and still kind of maintain the leverage position that we've committed to. Those obviously could fluctuate after doing a larger transaction like $1 billion or $2 billion. But that's very consistent with what our cash flow generation and capital allocation strategy would allow. If there was something a little bit north of, call it, 2 strong strategic fit, compelling financial profile, we certainly could do that. But what we've been very clear on is we're not looking for kind of transformative-type M&A, something much north of that, call it, $3-ish billion.

Okay. No, that's really helpful. And I did want to ask on Alaris, and it's obviously a big topic. Is -- I guess the question I would have is like, is it at least possible that we could see that in the next year's numbers? Like obviously, I'm not going to guide for that, keep that out of guidance. But is at least a possibility that, that could come back next year? It sounds like that's at least embedded somewhat into the path back to your old pre-COVID margin, so before 2025, at least.

Yes. So as we shared kind of on our earnings call, there's really no new news to share other than just to reinforce, this is the highest priority we have, certainly a top priority. We're putting a lot of resources in there. We're being extremely responsive to the process, continue to progress against all the activities that you would need to do. We've shared publicly the pump and clearance process with regulatory authorities. It's a highly complex space that you've seen kind of more from a class standpoint, which is why we've intentionally been nonspecific as it relates to specific timing. I think importantly, as you noted, in this year, right, we're not dependent on that to deliver really strong growth. And we've made a commitment to keep a strong service organization and support of our customers as we embark on this. And so we'll continue to provide updates as appropriate in the future. But I think at this point, it continues to see us execute against what we need to do from a priority there and just deliver strong results on our core business.

And you can do 5.5% plus without Alaris. So Alaris would be the plus part of that if it does come back.

Yes, we did talk about it because it was mentioned kind of as part of the margin. Certainly, by the 2025 time period, we had framed that. But I think you've seen here in the short term, we're certainly not right dependent on that to continue to deliver really strong performance.

Okay. All right. Great. And then I did want to ask on China as well. Just any kind of view on when the China recovery comes and then growth this quarter and kind of overall like strategically, how big of an opportunity is China, price has been coming down there in certain products, at least.

So I mean China is a very strategic market for us. It's our second largest market. 2021, we were about $1.3 billion. We shared as part of our Investor Day that it's certainly a high single-digit to double-digit growth opportunity, achieving probably $2 billion by 2025. That contemplated an environment of VBP or anything else. So we still feel strong about that opportunity. Simon can even amplify the really strong growth that we've had on the BDI side of the business. As it relates to this kind of more temporary disruption that we've all been going through as we continue to navigate some of it, COVID puts and takes, obviously, they took a view towards kind of a more strong approach to trying to temper the impact of the virus spreading. We shared in our results, it definitely had an impact in our most recent results. Our growth rate was about half of what it used to be. We were kind of more mid-single digit. We expected in May for them to start releasing some of those restrictions, which they've done. So it's starting to get back. By the way, BD, in terms of kind of operating its plants, we continue to operate through this, which I think is a testament to the relationships and navigating the complexity and focusing on delivering for our customer. I think the way to think of it is you would expect kind of a slow ramp-up through our fiscal Q3, and you wouldn't kind of be back to normal, so you'd have residual impact of these lockdowns. And then as we move into our fiscal Q4, you would expect that to stabilize and we would get some recovery. So while we haven't shared specifics in terms of the total net China impact over that time period, what we did was we actually more than reinforced our growth profile, right? Our guide, we took up 100 basis points on our base business, which was more than the over-delivery that we experienced in Q2, which implies that we're actually more confident in our back half despite the China headwind. Now we'll keep watching it. If there's another kind of more severe lockdown, I don't think folks are contemplating that, kind of, but we feel really good about that business.

Very good. And then just kind of last question here. It's on -- obviously, you had some COVID testing profits. You've reinvested that. At what point are we going to see the fruits of those investments? And I don't -- you probably don't have a view on this, but how to think about COVID testing going forward? Do you think there's -- maybe in line with flu, a little bit above flu longer term?

Yes. I think the reinvestments are already paying out. I mean it's hard to share too many specifics. But one, it's been part of funding. A lot of the acquisitions that we've done, there's always onetime costs with those. Some of that reinvestment went against that, which is a nice opportunity. You're seeing that pay off in our organic growth rate. We've accelerated innovation. Certainly, some of the testing assays itself that we've done, it's gone there. It's accelerated our simplification programs. It's been one of the factors that's helped enable some of the SKU rationalization and portfolio simplification. So those are some of the examples that are already playing out both in our growth and in our margin profile. It's not significant this year, right, in terms of the reinvestment levels. Our guide was $450 million of COVID-only testing. We said there'd be some reinvestment similar to the ratio of last year. So it's roughly 10% of sales. So you're talking $40-ish million in our margin profile testing versus base. It's modestly above on the testing after reinvestment. But basically, you now have a more normalized margin profile, which I think is also helpful for you. I think going forward, the way to think of COVID-only testing is all signs point to this moving more to kind of an endemic phase. I think you'll see another step-down off of our $450 million as we enter next year. And it will not remain a prominent part of our portfolio. With that said, I think the nice thing about BD, if you do get this larger resurgence, we have the ability to flex up, capitalize on that. And if deferrable procedures go down, it's kind of a natural hedge within our portfolio that I think is a bit unique from a BD standpoint, which is good.

Great. And Simon, just anything else that you'd like to highlight in the interventional portfolio that you think investors are missing?

Well, just coming back to the -- Chris' China comments. China has been super important for interventional. We've doubled the size of our business there since the Bard acquisition. PI has been a source of tremendous success for us there. And in fact, we will -- we expect to launch the Venovo venous stent there in the back part of this calendar year. But I think importantly, again, back -- connecting it back to the M&A discussion that we've just had, we did complete a deal for a sealant in China that was based out of the U.K., but they had Chinese approval. So we are not afraid to do geographic M&A as well where it suits. So China is really, really significant for us, and we expect it to continue to be so in the future.

Great. Thanks for coming, and...

Great. Thanks, Travis. Appreciate it. Thanks, everyone. You guys have a great day. Take care.