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

Good morning, everybody. Travis Steed, medical device analyst at Bank of America. And we're kicking off the conference officially with Becton, Dickinson. We have Chris, CFO, obviously; and then Michael Garrison, Head of the -- I guess, the Medical division, right?

That's right.

Medical Division. Correct.

So I guess to start off, just reported Q1 a couple of days ago -- or Q2, fiscal Q2, and strong quarter. Revenues came in a little bit ahead. And maybe just to level set us on the revenue kind of some of the things that you saw, the strength in the quarter, you can start total company, and then maybe you can talk about the Medical division. And I guess, kind of curious how sustainable some of these upside drivers are on the revenue side.

Yes. No, I appreciate it. Thanks, everyone, for taking the time. Appreciate it. Good seeing everyone. So yes, it was a strong quarter. I think importantly, we've been delivering consistent results. I think the quarters, if you're looking, it's really our strategy and action coming to life in the quarter. And when you think about the growth rate, maybe starting there, 8.7% growth, 7% organic, certainly well above the 5.5%-plus that we talked about at Investor Day. And it was actually an interesting quarter because most of med tech had what I would call some of the more kind of recovery dynamics that helped in need of their growth. Ours was actually the opposite. We had 11% growth last year. BD has got that more durable profile. So didn't have as much of our total portfolio kind of flex with some of those COVID-related dynamics. So actually, we had to overcome a 200 basis point headwind alone embedded in that number from the respiratory season dynamics and the outsized COVID combination testing that was in our base last year, coupled with a softer flu season this year. So when you normalize for that, I mean, growth was even stronger. And importantly, our volume growth is approaching about 6% when you kind of take out that comparable. So really strong on the growth front. And again, it's literally our strategy coming to action. We've been making very bold, purposeful choices as it relates to how we're making investments, how we're making portfolio choices. And you're seeing that play out, whether it be CapEx driving that towards high-growth spaces, investing in our pharma systems business, which is growing double digits, Mike can talk more about that, whether it be how we've evolved R&D and transforming that. We've added investment to R&D versus pre-COVID levels. We've increased our productivity, and we've shifted our mix to higher gross basis. So 60% of that spend now is going to what we call transformative solutions. And then, of course, tuck-in M&A is helping. So all that's been contributing to a very consistent growth profile. Simplify, I'd be remiss if I don't mention, too, we did deliver margin improvement, which I don't think you're seeing a lot of that in this environment. That's absorbing over 200 basis points of inflationary impact. So it was great to see year-over-year improvement despite that, and we certainly delivered actually slightly above to in line to what we had shared. So that guide set us up nicely to raise revenue again, and we raised earnings. So we increased our base revenue by 50 basis points. Our midpoint is now 6.75%. When you think of the second half of the year, it's about 6% organic, 6.6% in total. So really strong growth, again, above the 5.5%-plus. And I think, interestingly, when you look at our 2-year average growth, it's 8% all-in, 7% organic. So a really strong quarter. We feel good about the full year. And then when you think of it against those Investor Day commitments, again, we're certainly in the plus side of the 5.5%, margins going really well. If we continue to execute this year, we'll be about 70% towards achieving our FY '25 goal of getting to our 25% margin by '25, so 2 years in a row of positive margin improvement. And then certainly, with that comes strong double-digit earnings profile.

And then I can sort of build on the strategy in action, just how it's playing out in Medical. It was a great quarter for us. There's 3 businesses in the Medical segment: our Medication Delivery Solutions business, our Medication Management Solutions business and our pharma systems business. And the Medication Delivery business, that's really driven from a growth perspective by Vascular Access Management. So if you think about it, every time somebody goes to the hospital, they get a catheter in their hand, or if they get chemotherapy, they get a catheter into their vein. There's probably 3 or 4 different BD products that are used to help make sure that that -- the procedure and that workflow for the nurse goes very well, where you're flushing the medication, you're delivering the medication, you're prepping the skin. And so we get a lot of leverage out of that. That business is growing very well, growing high single digits and had a really good quarter. In Medication Management Solutions business, that's Pyxis, Alaris and now the new acquisition of Parata added to our BD ROWA business out of Europe. We created sort of this pharmacy automation business, which is, I think, the largest in the world now. And that's growing sort of -- it's double digits -- I think, sort of mid-teens in terms of growth, a lot of it greenfield. Because what it's solving from a problem perspective is in the pharmacy -- in the retail pharmacy, where labor costs are going up, where pharmacists are not working at the top of their license, they're counting pills out 5 at a time, these sorts of automation technologies really provide a very quick return on investment for the pharmacy chains and for the local pharmacies as well. So we saw great growth out of Parata. We've really focused on that integration, making sure that we get the best of what they were doing very, very well. And then also, they're able to leverage what's the best of BD for our sales force going into acute care hospitals and then also our manufacturing footprint and procurement strength. And then finally, in pharma systems, I think you mentioned some decisions that were made probably a couple of years ago but we've been continuing to execute on them around capacity planning. It's just -- it's really been focused around what we saw as a trend towards -- instead of small molecule drugs, more biologics and vaccines coming to market. And that pipeline has really paid off. And then -- and we see from the pharma companies then bringing more and more biologics. We see them every day on television. And those are what's coming to our products. We have invested and we have probably about 6x the capacity to serve that particular market than our nearest competitor. And about 70% of the new biologics that are coming to market are coming to market in a BD solution. So I think we're pretty well positioned for durable growth there. It's been a good run. It's been 11 straight quarters of double-digit growth. But because I think we have the capacity to serve, specifically with technology for the products and the molecules that are coming to market, it feels like it's something that's pretty durable.

Yes. No, that's helpful. And maybe kind of thinking about the guidance for the year, there was -- like anything to kind of nitpick if you will, for this third quarter, but like Q3 margins, a little bit more slightly in line with Q2 and then more of a Q4 step-up. And so I don't know if anything changed the way you were thinking through the initial -- initially through the year on kind of the cadence of the year, maybe it was mismodeling on The Street, but it was kind of understanding the jump up to Q4. And then in terms of the upside on EPS and some of the upside this quarter, revenue came in 50 basis points higher. FX ate a little bit. COVID ate a little bit. But at this point, you've got COVID kind of zeroed out of the model. So should we expect -- like as revenue comes in -- if revenue comes in higher over the course of the year, more of that could flow through absent any FX moves?

Yes. It's -- a couple of good questions there. So one, I mean, to be fair, we don't really give quarterly guidance. We try and give really good color to help with the modeling aspects. But actually, that margin progression is pretty consistent with what we expected. Here's the simple way to think. First of all, if you step through the front end of the year to the back end of the year and think through margin, there's some pretty big anomalies throughout the year. One, just FX. 90% of the negative FX was in the first half, right, we've signaled that. And then if you remember, we had almost $0.5 billion of COVID-only testing revenue that had a very high margin. And so the first half of the year, where most of that was inflated margins, and then we also reinvested some of that. So vice versa on the back end of the year, you had the testing dynamic. And then you have -- the other big dynamic was just the natural progression of inflation. We have mentioned that the peak of inflation was going to be a combination of carryover from fiscal year '22 plus continued inflation, and that would roll through the first half of the year. And then as inflation moderates, which we are seeing some moderation in materials as an example, some of that would mitigate, as you go through the back half of the year, plus the growth of our cost improvements and all the inflation mitigation. So if you kind of take those curves, it drives kind of a nice sequential improvement. There's a little bit of an anomaly in Q4 where there is -- there's -- so what you're going to see is in Q3, operating margin sequentially step up, improve, similar to our kind of full year goal of about 100 basis points improvement year-over-year. Q4 steps up pretty significantly from there, but half of it is just natural timing. If you noticed, we're committed to our 6% R&D investment. We've been front-end loaded on that. If you've noticed, we've had a ton of R&D activity on the start of the year. Some of it's natural milestone progression, dynamics like that, that have played out. So it's actually a very positive thing that's enabling growth. We'll moderate that through the year. And then you have that COVID reinvestment dynamic. And we were a little bit front-loaded too on SG&A as related to just getting back to typical like sales meetings, things like that, that hadn't happened in a while. So almost half of the Q4 improvement is literally timing. The other half, we have strong line of sight to because when you think of BDs, cost of goods, in particular, we got 5 months of inventory typically that rolls through the P&L, right? So we have a strong line of sight to what inflation is that's in that inventory. And vice versa, we have strong line of sight to all the mitigation improvements that we've been driving through there. So it gives you a high degree of confidence that we feel good. It's very consistent. I think to your point, just without us given that degree of quarter-by-quarter color, there was just some nuances in terms of how folks were looking at it, but we feel really good about that. Top line is pretty balanced. Like I said, organic growth, 6%, fairly ratable in the second half. You do have a dynamic where we're going to cycle over the Parata acquisition, so I think ratable on an organic basis. But you're going to have a little bit of a lift still on total base revenues from Parata, and then that normalizes in Q4. In terms of the beat in the quarter, like you said it, our base business is really strong. I gave 100% of the operational upside that we experienced on the base. It translates to roughly $0.11 of EPS. There was some true-up of FX, right, which has nothing to do with kind of operational impacts. We actually absorbed that in the number versus just changing the guide. And then to your point, we kind of took COVID only off the table. We're seeing very little business there, and we just sort of called it at $50 million. So we took that down by $25 million but fully absorb that. I think the one thing that folks should remember is year-over-year, because of that COVID-only dynamic, our base EPS is growing nearly 15% year-over-year. So we're working really hard to kind of take that COVID noise out. And just -- so folks don't have to kind of worry about that, we've absorbed that. That's a really strong growth rate in light of over 200 basis points of inflationary headwinds, too. I think there's very few companies in this environment that are doing that. You're seeing most folks having margin challenges. And so we're not only delivering strong growth. So we're -- our focus isn't just about one quarter. I can appreciate the quarterly dynamics that folks may think about, but we want to make sure we preserve this momentum into the future, and that's what we're really driving towards. We're well ahead of Investor Day 25, both top line, what we said, and margin. And I think it's important for all you that we keep that momentum going and don't do drastic things that would hurt investment, et cetera. So it's that nice balance we're kind of…

No, that's great. And I guess, as we move forward here, carrying the momentum on the top line, maybe talk about that, like you're well ahead of those Investor Day goals. Obviously, the question here is like, is BD -- is this normal growth rate sustainable that you've been putting up 7%-plus growth. The things that you've been coming in ahead, how much of that is sustainable versus not? And I guess part of that, you think you've got the super cycle new products coming that you've talked about. You've got 25% of the portfolio growing high single digits. It feels like this is kind of the new normal for BD, not easy, obviously, but it feels like a lot of the stuff is sustainable.

Yes. So I think you're right in terms of our strategy and action, and you're seeing the effect of all those areas. In just 1 year, we actually increased our WAMGR by 25 basis points. We have the organic contribution from tuck-in M&A that's 30 basis points. We expect to exit at 50 basis points. So that's after we anniversary these from the first year, how they're now contributing an additive to the base. We've done other things like the embecta spin, which had about a 25 basis point impact. So to your point, the cadence of R&D you're starting to see the innovation, all those are playing into that. When I step back and I think of the BD growth profile, I think there's a couple of things, and I actually think it's very unique in that you still get this very durable defensive profile, right? We talked about the dynamic of COVID and procedure dynamics that many companies had to navigate. We don't have as much of that, right? It's -- we're in these core areas that are essential to health care, where we have strong leadership positions. 85% of our revenue is recurring. And even in those durable spaces, you have strong mid-single-digit growth on average. So you get this nice benefit of durable, derisked, call it. But now you're seeing this kind of pivot with BD where we're driving towards the plus side of our Investor Day. And I think the other nice thing about that growth is this isn't coming with like high-risk R&D programs. And in new spaces, new markets, like this is us being very systematic about how we're strategically positioning ourselves in high-growth end markets like Parata pharmacy automation that fits perfectly with the BD growth profile. Our R&D portfolio has got a lot of singles, doubles, maybe there's a bigger one here and there. But -- so you get this nice balance of both durable, reliable, higher growth that's derisked. I think that's unique. Investor Day, to your point, we said 5.5%-plus. I'll just share like we were very intentional with the plus side, and that's what we're driving towards. We want to keep doing that. Obviously, you can have little fluctuations by quarter or by year, but I think you're seeing a nice trend. It's hard to be more definitive about where we see ourselves, but I certainly think our past actions are consistent with what we're trying to do, and you're seeing the -- that strategy play out. And I think it's -- there's not too many companies that have that balance that I talked about in the setup, and we're going to continue to try and do that. It goes a little bit back to making sure that we're investing behind that, too, to sustain that. So...

On the margin side, kind of 70% of the way almost to the long-term targets. And as you've dug in and started executing on the margins, like do you feel that the whole opportunity is bigger than it is? Or is it more like you're just tracking faster and it's a little easier to get to with that revenue growth coming in versus the overall opportunity for the margin of this business to be actually higher?

Yes. So it's a great question. To your point, we're 70% there. If folks remember, back at Investor Day, we actually set a goal of about 400 basis points of improvement, which would have gotten us back to, call it, an embecta-adjusted margin, right? And then in 2022, we increased our goal. We said we'd do over 500 basis points, and we would get back to BD even not contemplating any depletion due to the embecta spin, right? So our core operating margin, 25%. We're 70% of the way there. We delivered 280 basis points in FY '22. We got a goal of at least 100 basis points this year. And by the way, that increased target we set as inflation dynamics were starting. Inflation was -- it hadn't really kind of hit when we had our Investor Day. We may be on the very front end and seeing some signals there. So we're achieving those goals in one of the most complex macro environments we've operated in with 2 years in a row of over 200 basis points of outsized inflation. That's above kind of normal 3% inflation. So I mean you're talking well over $1 billion of absorbing. So one, we've shared we feel really good about the progression and the path to 25% in '25. Certainly, I think just with the sales growth alone, you get really strong leverage. We also talked about the deleveraging with Alaris. So there'll be some opportunity there that we've talked about with Alaris being part of our FY '25 plan. We're going to continue to get the benefits from ReCoDe. We're really on the front end -- while we're further along on the execution of ReCoDe, the savings were always more back-end loaded. So we have that. That will benefit us. So we certainly think there's opportunity. I think at the end, as the CFO, this is where it's nice to have flexibility. Our core goal is to get to the consistent double-digit EPS growth. Some of that will be top line. Some of it will be margin. We're committed to the 25%. If we see opportunity to do better, I think it becomes a question of how do I create the most value for shareholders. Do I reinvest some of that and keep driving the plus side of the equation and maybe consistently doing numbers that you've talked about that we've been posting? And I think that would be better for everyone, right? It establishes a bigger moat and a bigger base. So feeling good about that progress in this environment.

On the Alaris side, just to get into the FY '25 numbers, I would assume it has to be a little earlier that -- so the beginning of FY '25 versus the end, just to make sure that's the right clarification. And then -- and Mike, maybe talk about how your organization is getting ready for that launch, the things you can do ahead of the FDA reapproval, if you will.

Yes. I mean we're pretty clear we don't talk about timing. But yes, it's in our plan for 2025. So you would think between now and then, it would have to occur at those numbers. A couple of things that we've done. If you think about operational readiness, there's a preparation of the sales team, the service team and the operations team to actually make the product to then go out to the customers. And so the things that we're doing, starting with the operations, like let's make sure that we have the line of sight to the supply chain. We've made some strategic buys to maintain our ability to serve customers even through the pandemic, which was really important, and then to continue to keep our supply chain healthy so that they can stay with us. So that's been really important. We've made some significant -- very strategic buys there. Secondly, making sure we have the labor in place. So we've got the labor in place from an operations perspective. To make that happen, again, being able to continually support the customers that are existing today, that have stuck with us over the past 3 years, that's really helped as well. So we've been able to have a good labor force there. From a service perspective, in sales, we've kept those people. They've been helping us in other areas. They've been really helpful in terms of with the Parata acquisition, helping to gain entry for Parata salespeople to talk to some of our acute care hospital customers. And then from a service perspective, making sure that we have really high-quality response and NPS scores and things like that with our dispensing business, which is also growing really well. So I think that's been sort of the operational readiness that we feel pretty good about right now.

So it sounds like you'd almost have some inventory kind of available, some components available and kind of more ready to go. Maybe it could be a little bit of a bolus because some -- when I talk to the hospitals, I feel that there's like some pent-up demand here for this product.

Yes, it's -- the hospitals are going to make the decision on their time frame. They need to do good capital planning. They needed to have the labor force ready to accept the changeover product, things like that. But we're preparing for -- to talk to everybody day 1 and get that off the ground very quickly.

When you think about share, like your other competitors filed with the FDA, they've got components back, their supply chain is improving a little bit, like do you expect share to shift much in the near-term, things you can kind of do to hang on to customers in the near term?

Yes. I mean it's hard to say. I mean, COVID been a disruptor. So we've been very fortunate. We haven't lost a lot of market position. Over the past 3 years, we've lost some but not to any one competitor. It's been like a hospital here, a hospital there. Yes, we have relaunched this product in -- outside the U.S. market, so in Canada and Australia, some other places. And the dynamic that you talk about where there's been another competitor over the new product in the market, has happened in Canada. We've maintained very good competitive -- we didn't lose share. And as Alaris came back on the market, we were able to be very competitive in tender bids and things like that. So we feel like we're well positioned. The product has demonstrated through the pandemic those core features that -- why nurses and why clinicians really respond to it. One, it's very modular. It allows you to sort of set the pump up for the therapy that, that patient needs. Two, it's got very good patient safety profile in terms of the Guardrails dose error reduction software. That's really something that's very important to make sure that you reduce medication errors whenever you're under stress in working with the patients. And then third, it has probably the highest degree of bidirectional interoperability with the Cerners, the Epics and the electronic medical records. So that reduces the inefficiency of the clinician, where instead of them spending 85% of their time programming in key strokes on the pump, the order is automatically populated on the pump, and it reduces a lot of their time there, where they could be better spent caring for the patient. So those 3 things, we think, are what makes the product pretty unique, and it's why customers have stayed with us.