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

Good morning, everyone. I'm Robbie Marcus, med tech analyst at JPMorgan. Really happy to kick off day 2 of the Healthcare Conference. We're starting off with a presentation by Becton, Dickinson. I'd like to introduce Tom Polen, the CEO, do a quick presentation, then I'll join on with some others from the company for some Q&A. Tom?

Okay. Thank you, Robbie. Okay. Good morning, everyone. And again, thank you, Robbie. We appreciate everyone's interest in BD. I'm pleased to update you today on the strong progress we have made advancing our BD 2025 strategic goals. This includes consistently exceeding our durable 5.5% revenue growth profile and driving 3-year base organic revenue growth of nearly 7%, inclusive of our FY '24 guidance. This has been achieved by systematically shifting our portfolio into higher growth spaces, both organically through CapEx and R&D, and inorganically through M&A and active portfolio management. I'm pleased to share that we're pacing ahead of our targeted 2025 WAMGR by at least a year, having increased our WAMGR by approximately 75 basis points from FY '21 to nearly 5.25% today. While we have many platforms with strong growth, you can see our strategy playing out in the performance of 6 key platforms that I'm going to highlight today. These platforms are all growing high single digit to double digit, and we expect these key platforms to continue to drive our growth as we progress through the balance of BD 2025 and beyond. Additionally, through our simplification programs, we plan to have delivered about 440 basis points of margin expansion through FY '24. We are well positioned to achieve our FY '25 margin target of 25% and have visibility to continued opportunity beyond fiscal '25 with an emphasis on gross margin programs that I'll comment further on in just a bit. Since FY '21, our revenue growth and our margin progression has led to a 3-year average base reported EPS growth of 14%, which is above our double-digit average growth target. Our performance to date reflects our strategy in action, the strong market-leading portfolio we've built alongside with our simplification programs, which will continue to support durable, strong growth and value creation for all of our stakeholders. Before we move on, I just want to remind you that I will be making some forward-looking statements today, and I encourage you to read the disclaimer in today's slides and disclosures of our SEC filings, which are available on our IR website. So for those maybe a bit new to BD and starting to learn about us, for over 125 years, BD has been advancing health care across the care continuum. Our solutions are concentrated in medical discovery and the diagnosis and treatment of disease. In BD Life Sciences, we serve dynamic end markets like single cell analysis, they're at the forefront of advancing areas like cell therapy and immuno-oncology. And in diagnostics, we're the leader in sample collection, clinical microbiology, molecular diagnostics and point of care. Our BD Medical segment is focused on making medication delivery safer, simpler and smarter from the hospital to the pharmacy and into the home. And in our Interventional segment, we work side-by-side with physicians and surgeons advancing health care with solutions that can dramatically improve the lives of people living with chronic disease, conditions like peripheral vascular disease, cancer and incontinence. We serve these end markets through a balanced portfolio of market-leading durable core solutions and new transformative solutions that create a stable and resilient business that delivers durable consistent growth. Today, about 76% of our revenue is in our durable core, which consists of products that are the backbone to delivering much of health care. These are products like catheters, PICCs, infusion pumps, IV sets, Vacutainer tubes and hernia mesh. We're the leader in nearly every major category we serve, touching more patients than any other med tech company in the world. In fact, about 90% of all U.S. hospital inpatients receive care using a BD device. Our leadership is enabled by world-class manufacturing technologies and processes, resilient local supply chains and a consistent cadence of customer-focused innovation, all done at unmatched global scale. With an 85% recurring revenue base, this generates durable revenue growth and cash flows. Leveraging this foundation, we've been very thoughtfully rebalancing our R&D and M&A investments to build leadership in new transformative solutions in adjacent higher-growth spaces. We now generate nearly 25% of our revenue from these spaces, which is up from 20% just 2 years ago. This is an important part of our growth strategy as these spaces generally are growing high single digits were 2x our durable core markets. We're focusing these investments against 3 irreversible forces that we see reshaping health care not just today but continuing to do so over the next decade. First, we're integrating robotics, artificial intelligence and other advanced technologies to improve the efficiency of fundamental health care processes. We're automating the pharmacy and the laboratory. We're improving nursing efficiency through an integrated end-to-end approach to medication management using advanced informatics, connectivity and AI. Second, we're bringing to market new technologies that are enabling care to shift to new settings, including more directly empowering patients at home. These include solutions such as our urinary incontinence platform, blood collection and new care settings, and enabling patients to self-administer biologics and other drugs at home. And third, we're expanding our role in addressing significant chronic diseases, like peripheral vascular disease, and improving outcomes in tissue reconstruction. As part of our Investor Day in 2021, we shared our BD 2025 strategic framework for sustained value creation through 5 key actions that you can expect from us. First and second, we're focused on delivering a consistent, strengthened 5.5% targeted revenue growth rate by building new leadership positions in high-growth markets through targeted organic and inorganic innovation. We complement that with active portfolio management, which I'll comment on in a bit. Third, we're executing a broad simplification strategy to drive a double-digit EPS CAGR and continued margin expansion. Fourth, we're maintaining disciplined and balanced capital deployment to enable growth and strong free cash flow generation. And all of this is enabled by making BD a great place to work and attracting the best talent to advance our strategy and deliver shareholder value. I'll spend a few moments going through each of these in more detail. I'm very proud of our team's execution since we laid out our BD 2025 strategy. First, aligned with our strategy, we've been very actively transforming our portfolio by refocusing our innovation pipeline and M&A strategy towards higher growth markets that I discussed. Over the last 2 years, we've launched 50 new key products with 60% of our R&D dollars invested towards higher growth spaces. In addition, our organic R&D progression, our CapEx investments to increase capacity in attractive areas like Pharm Systems and our tuck-in M&A strategy have both been impactful in transforming our portfolio. We deployed over $2 billion towards 6 tuck-in acquisitions, all of which were allocated towards higher-growth markets. We have also been active in managing our portfolio, focusing our resources in the highest growth markets where we intend to continue to build scale and leadership. This includes us completing the spin of embecta into one of the world's largest pure-play diabetes companies and divesting our surgical instruments platform. Both portfolio actions were accretive to revenue growth and support portfolio simplification. Second, we progressed our Project RECODE simplification initiative, which are targeted to deliver approximately $300 million in savings as we enter fiscal '25. This includes achieving our portfolio simplification goal laid out at Investor Day 2 years early, streamlining our SKU offering by 20% compared to 2019. We're seeing the benefits in our manufacturing plants and with customers and we will continue to advance this initiative as we execute BD 2025. We've also advanced our network optimization efforts to generate savings beginning in fiscal '24. We have multiple site consolidations, either completed or underway to reduce our footprint by approximately 20%. These are designed to reduce our complexity and costs while ensuring we have the right products made in the right places to support future growth. And lastly, we initiated our operating model simplification efforts with early positive results from the launch of a global business service model with a third-party vendor to help optimize certain back-office processes. We also enabled growth and simplification through our focus on improving free cash flow conversion. And we delivered a step-up in fiscal '23 with free cash flow increasing by over $600 million. This included intentional choices around inventory management and continued discipline around CapEx investments through efficiencies gain that enable a focus on the most strategic programs that support growth. We're planning another step improvement in FY '24 and expect free cash flow to increase double digits this year, driven by continued progress in these areas. We believe we remain well positioned to achieve our long-term cash conversion target of around 90%. Lastly, we delivered on our #1 priority, obtaining FDA clearance for the updated Alaris system. We're excited to deliver the benefits of the updated Alaris system to our customers and to their patients. Alaris brings to customers the power of one integrated infusion platform with a single user interface for all major types of infusions. It's the market's leading EMR interoperability and our health site software is the market's only system that connects data from the pharmacy to the nursing station to the pump, enabling safer, simpler and smarter end-to-end management processes for patients and for nurses. We're making strong progress bringing our fleet of Alaris pumps up to the newly cleared device. While we do not normally comment on product revenue, we are feeling increasingly confident in our progression. And at this point in time, we believe $200 million is the floor on revenue in fiscal '24. That said, it is still early days, and our focus remains delivering for our customers and delivering outstanding service. Our strategy has driven solid results, and we're on track to deliver on our BD 2025 financial commitments, which, as a reminder, exclude the impact of COVID-only testing. Inclusive of our fiscal '24 guidance, we're positioned to deliver both strong top and bottom-line performance, above our targeted growth profile and achieving 80% of our targeted margin expansion by the end of FY '24. While it's still early in our process and report our Q1 financial results in February, we remain on track to deliver our full year FY '24 guidance. Based on what we know today, specific to Q1, there are a couple of items to highlight. First, the quarter sales growth played out as expected, other than one dynamic with respect to the timing of the respiratory season. For the full year, we continue to expect a normal sized flu season. However, we do see a timing shift relative to our original expectations, which translates to the movement of approximately $30 million of flu testing revenue from fiscal Q1 to the remainder of the year. In addition, we now expect a modest favorable shift in our tax phasing due to the accelerated timing of a discrete item that was planned for this year and does not change our full year anticipated ETR. Again, we remain focused on executing and remain on track to deliver against our full year plans. Through our focus on investments with the potential to move the needle in terms of growth, we're at least a year ahead of schedule on achieving our FY '25 WAMGR target, having strengthened our WAMGR to nearly 5.25% today, further strengthening our durable 5.5% targeted growth profile. As we move forward, you can expect us to continue executing our value creation framework. This includes investing over $1.1 billion in R&D to advance what I believe is the strongest pipeline in the company's history with multiple high-growth opportunities. With another 25 key product launches planned for fiscal '24, we're well on track to achieve our target of over 100 new product launches by FY '25. And that's a good indicator that we're also well on track to double the incremental revenue from new products by FY '25 creating a new wave of margin-accretive growth for BD. Our approach to accelerating our growth profile through purposeful organic and inorganic investments is evidenced in the 6 highlighted growth platforms we've been investing behind. And then I'd like to highlight here, let's start with BD's PureWick portfolio. It's now the market's leading platform for noninvasive urine management. We see this as a $1 billion opportunity in a market growing double digits. We began with PureWick for females in hospital settings and launched this into the home with PureWick DryDoc. Last year, we launched the male version for hospital settings, and this is on track to be one of the fastest-growing product launches in our history. Later this year, we plan to launch male PureWick into the home setting, and we have a series of additional line extensions in our pipeline to expand to new additional patient groups. Through the acquisitions of GSL and most recently Parata systems, we've built the world's leading pharmacy automation business. At nearly $700 million in revenue BD Pharmacy Automation is one of the largest robotics and health care process automation businesses in med tech. There's never been a greater need for improving pharmacy labor efficiency and for technologies that enable the trend towards mail order pharmacies and solutions for patient compliance. In Pharm Systems, at the start of our BD 2025 journey right in the middle of the pandemic, we made a bold decision to invest $1.2 billion in additional capacity for prefillable syringes. Today, we're seeing this capacity investment along with several new innovations we've brought to market, paying off as we're ideally positioned to enable delivery of the large wave of biologics coming to market, including GLP-1s. Our investment in technology, such as our on-market Vystra pen, and future Libertas wearable injector and Evolve wearable infuser create new ways for patients to self-deliver injectable drugs for chronic disease at home. In our BD COR and BD MX molecular diagnostic platforms, we continue to leverage our growing installed base through investments in menu expansion that include our new vaginal panel and our Onclarity HPV assay for ThinPrep on BD COR and now greater than 20 assays on BD MX. During the COVID pandemic, we also shared that we reinvested a portion of COVID testing profits to accelerate our R&D pipeline. And the #1 space for those investments was our Bioscience business, where we now see a super cycle innovation. These include our new to world FACSDiscover S8 Cell Sorter with CellView image technology and Horizon spectral dies and antibodies. These apply novel technologies like high-speed cell imaging and AI-led assay optimization to provide researchers new insights into the immune system and advanced discoveries in areas such as cell therapy and immuno-oncology. Just last month, for the first time ever, the first-ever 50 plex flow assay was run by using these new technologies, will be published shortly. And we expect multiple additional FACSDiscover instruments and Horizon reagent launches. And lastly, in our peripheral vascular disease platform, we leveraged our strong commercial channels to expand our served markets by over $900 million through a series of acquired products, such as the Rotarex Atherectomy system and then closed RF ablation catheter for chronic venous insufficiency. While improving -- while expanding proven products like Lutonix and Venovo in new geographies, these solutions help to address an area of high unmet need for the 10 million patients each year who are suffering from venous disease. To give you some perspective, back at Investor Day, these platforms represented about $3.5 billion in revenue. Today, these 6 platforms represent approximately 25% or about $5 billion in revenue and all have the potential to deliver high single to double-digit growth, which combined contributes approximately 200-plus basis points to BD's overall growth profile. We expect to keep driving these areas as important growth catalysts. Combined with our durable platforms where we have strong leadership positions and a mid-single-digit growth profile, this gives us confidence in delivering our 5.5% plus targeted growth profile. Moving on to simplicity and our strategy to continue to drive EPS expansion -- EPS growth. To date, SSG&A has been the primary driver of our margin progress. As we leveraged our strong revenue growth profile, executed our RECODE portfolio simplification program, simplified our operating model and established our global shared services outsourcing partnership for optimizing back-office efficiency. Our progress also reflects modest gross margin improvement after offsetting over $1 billion in outsized inflation. Looking ahead, we believe we are well positioned to achieve our fiscal 2025 margin target. In addition to continued benefits from strong revenue growth and portfolio simplification, our Project RECODE manufacturing network simplification program will begin to deliver savings this year and the relaunch of BD Alaris infusion system is expected to drive positive leverage, particularly in FY '25. We're also beginning to see benefits from deploying the BD Excellence system alongside BD 2025. Last year, thousands of BD associates participated in BD Excellence Kaizen events across the globe. And this is continuing to scale with a number of events and participants tripling in, in FY '24. Beyond fiscal '25, we are confident in continued momentum with an emphasis on gross margin programs that we've begun to advance as we realize the full benefit of existing programs and continued momentum of BD Excellence. The foundations we're building now will be catalysts for the next phase of performance beyond BD 2025. In summary, while I'm pleased with the progress and results we've delivered to date, I'm even more excited about the future. You can expect to see continued execution of our BD 2025 and our framework to drive profitable growth and value creation. First and second, we're focused on delivering a consistent strength in 5.5% growth profile through executing in our core business and building new leadership positions in targeted high-growth markets. Third, we're executing a broad simplification strategy to drive double-digit EPS CAGR and continued adjusted operating margin expansion to 25% by FY '25 with visibility to continued margin expansion beyond that period. Fourth, we're committed to disciplined and balanced capital deployment that enables growth and strong free cash flow generation. And all of this is enabled by our team's focus on execution and delivering sustained shareholder value. So thank you for your continued interest, and I look forward to providing our Q1 results on our February earnings call. Chris and I are now happy to take questions. Thank you.

Great. Well, Tom, Chris, appreciate it. Maybe, Tom, I'll start with you, Chris, feel free to jump in. Obviously, when I look at Becton's results the past few years, after you issued the new long-range plan, we've seen pretty strong, consistent top line growth, especially during the time when a lot of med tech peers were suffering during COVID. And you've been able to put together a bunch of consistent beat and races on the top. If I look at this year though, with fiscal '24 and mid-single-digit organic sales growth just right in the middle of the LRP. If I look down the P&L, looking at 4% to 6%, 4% and 6% to 7% with rounding like mid-single-digit reported EPS growth. So maybe I could dig into this and address in 2 parts. And let's start with that bottom line? And what -- how do you feel about Becton's ability to consistently deliver reported EPS growth in the double digits, in line with the long-range plan, which does exclude COVID testing sales but I feel like at this point that it's a bit more de minimis.

Yes. I think for '24 going forward, as we said, we've just included COVID testing within our base business [indiscernible] a call out anymore. It went from $500 million down to less than $100 million last year. So that was notable going forward, it's -- it was less than that and so going forward. We feel really good about our ability to continue to drive strong EPS CAGR as we have been. And maybe I'll turn that to Chris actually.

Yes. Sure. Thanks for the question. It's a fair question. Look, I do think it's important to note. I think when you look at BD results over the past 3 years, obviously, in 2021, we had $2 billion of COVID-only testing that either jump over as we went into '22 and '23. The reality is, if you look back the past 2 years and even if you include our current year guidance, we're well ahead of our Investor Day investments. And I think there's 2 things we've been very focused on. One, transforming our portfolio, right? We're doing that organically and inorganically. We talked about that in the presentation. You're seeing that show up in our strong growth rate. So our 3-year growth rate, as Tom noted earlier, is almost 7%. So well above the 5.5% plus. That's an organic number. We're not dependent on M&A but we are doing is driving an M&A strategy where after anniversarying the assets that you add to your portfolio, you get the ongoing benefit because we're bringing in assets that are accretive to growth and actually accretive to margin. So growth is very much intact. Margin also when we actually launched our initial Investor Day, we talked about 400 basis points of margin improvement. We already achieved that in FY '23. And then before FY '23, we actually raised the bar to deliver over 500 basis points of margin improvement with our '24 guide, we'll be 80% on the way to that. So really strong progress on margin. As a matter of fact, as I look across kind of the landscape of health care, in particular, I think there's only a few companies that have a combination of that degree of margin improvement, coupled with getting back to pre-pandemic levels. So really strong performance. And by the way, that is inclusive of absorbing FX headwinds. And then we get to earnings. I think this is where we have some of the most noise and some of it is with the testing dynamic. If I just take the testing out, again, $2 billion of revenue that had a very high margin drop-through given the nature of testing and really ask the question, what's your base dealing with that growth, that kind of margin profile. And this is inclusive of any FX dynamics. We're 14% growth on our adjusted base earnings. So again, we've done it in the past 2 years. I know this year with the timing, mix and dynamics of FX that played out really late in the year. FY '24 looks a little bit differently. But when you think of things kind of on the long-term horizon and say, "Can BD do this?" The business is doing it. The business is healthy. It's strong. We've been advancing our strategy really well. As a matter of fact, I think it's important to just kind of unpack the '24 guide a little bit, right, growth, to your point, of 5.75%. If you take out the COVID-only testing dynamic, that's 0.25% point, really, it's 6%. So we're well above 5.5% plus. That includes absorbing some headwinds that we talked about as well in the market. Margin is 50-basis points of improvement. That gets us to 80% of the way towards our 25% goal. Again, that includes absorbing FX. So it's not like FX is causing us to go backwards from a margin standpoint, we'd be well over 100 basis points if you take out the FX impact. And then again, on earnings, on an FXN basis, I recognize the FX comment, we're 9.25%. I think the important thing is we made some very bold decisions throughout this journey, whether it be investing $1 billion in CapEx to keep driving our Pharm Systems business. But even in this most recent guide, there's 2 key things that we've done to drive cash. Get our net leverage down, which will help drive create future value. It's focused on inventory takedown. That actually had a 50 basis point impact on our margin profile as well that's absorbing there, but it's generating excess cash. We expect to grow cash flow double digits again. That's following 40% growth in free cash flow in FY '23. The other thing we did is in the spirit of simplification, and again, generating cash, creating accretive growth, accretive margin is we divested our surgical business, our V. Mueller portfolio. And so again, that's about 75 basis points. The inventory alone has 200 basis points impact on EPS growth. So we're strategically thinking about the business. And at the end of the day, cash is actually what creates value. And so while I know the earnings was a bit soft relative to that. We are generating really healthy double-digit cash flow. When you look at it over a multiyear period, the business has definitely been well above double digits on an all-in basis. And I think that, that's enough kind of historic proof point that the business keep performing at that growth level. We'll continue to do that. Look, we're focused on executing the year. It's still early. I think importantly, that simplifying slide that Tom presented, we have a strong portfolio of next level of opportunities that can kind of continue to create momentum within our P&L that can fuel future growth, investment, capability building and drive the margin improvement and get to double-digit. So that's how we're thinking of it.

Great. Maybe same sort of question but on the top line here. Guidance is for 5.25% to 6.25% organic sales growth in fiscal '24. I guess 2 parts here. One, how do you feel about the sustainability of that mid-single-digit growth going forward over the long-range plan? And then part 2 of it in fiscal '24, specifically, how do you feel about the current economic environment, macro conditions around the world and the health of the hospital systems?

Yes. Great, great question. We feel very good about durable 5.5% revenue growth. And as Chris mentioned, we've been doing that. If you include even our FY '24 guidance, it's 7% CAGR expected since we launched BD 2025. That's been driven by exactly what I described. We've been very active in portfolio management, moving out some of the lower growth areas to be focused on independently as stand-alone companies or providing, for example, spinning out our selling off our surgical business to a group that's going to focus on that, both accretive moves to the company. At the same time, we've been highly focused in reallocating our R&D investments as well as our CapEx investments into the highest growth opportunities. And so you've seen those 6 platforms that I described, very active components of our strategy come to life in those. So PureWick bring that into the home, bring in the male version, bringing that into the home and then other applications in our pipeline. It's been a great area of focus, again, creating one of the fastest-growing platforms in company history. Really excited about that and its ability to drive growth. That's a tremendously unserved population space, both in the U.S. and globally. Our pharmacy -- Pharmaceutical Systems business, obviously, has been doing extremely well. Normally, med tech is -- what's the negative of GLP-1 is going to have in the med tech industry for us. And it's a little different, right? We're a beneficiary of that because most GLP-1s are in a prefilled syringe of which we're by far the market leader with 5 to 6x the capacity of the #2 player, right? And so if you're launching the biggest drugs in the world's history, we are the largest capacity provider and the best, most advanced technology in that space. Our Bioscience business, you're seeing it continue to deliver very strong growth, catalyzed by a whole new wave of innovation. It's a whole new category of flow cytometers in FACSDiscover. And we're seeing those do extremely well in the marketplace. And as more and more publications are coming out like the one I mentioned, the first ever 50-plex assay in the history of flow being published because of this new technology. It's creating more and more interest in scientists to get a hold of this technology because it's unlocking new discoveries. But we're seeing the same thing. I won't go through other areas, but our pharmaceutical automation business. Labor shortages are going to persist, right? To your point, customers have financial pressures and labor is a key component of that. And so robotics and automation that are helping them solve that are important. Now with a $700 million global pharmacy automation and robotics business, we're extremely well positioned to serve that space. That's been growing double digits. We expect that to continue to grow double digits. And there's other categories that I haven't mentioned. But I think key message is we've been very purposely building large-scaled growth platforms, and I walked through 6 of those, which are really starting to fuel the growth of the company, right? Those 6 platforms by themselves are 200 basis points of company growth that goes on top of our durable core base performance. And we're going to continue to double down in those spaces, potentially some near adjacencies, but we see lots of growth opportunities ahead. Continue to expect us to pull our tuck-in M&A lever as well as very purposeful CapEx investments and prudent R&D investments, as we've been doing to fuel that growth and to do so profitably.

Great. Chris, since the November earnings call, currency, which you guided 75 basis point headwind on the top line, 375 basis points headwind on the bottom line. You're exposed globally to a lot of currencies. They've been shifting around pretty meaningfully in some areas. Any update on the mark-to-market of where currency stands for the year?

It's a little premature, obviously, right? There's a good portion of our currency is more still a forward-looking view, and I want to be thoughtful about continuing to watch it before we give a formal guide. We're in our quiet period. Look, the good news is I certainly don't see downside with where things move but I will say there's been puts and takes like, so they've been kind of ebb and flow throughout and I don't see anything material but I don't see any downward pressure. Obviously, that's as of this moment in time but we'll share more of an update on the quarter call.

A couple of interesting incremental updates in the formal presentation. Maybe we could start with first quarter. It sounds like you're reiterating your view on the year, first quarter, which in the guidance you already gave is the low watermark for the year, both on the top and the margins. And it sounds like flu season, $30 million is moving out to the rest of the year. So maybe you could just walk through some of the dynamics and then also tax maybe coming in a little better. So maybe walk through some of the dynamics. Does this lead to maybe something below guidance in first quarter or more in line? And just how we think about that flu season revenue and why the shift?