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

Hello, and welcome to BD's Fourth Quarter and Full Year Fiscal 2026 Earnings Call. At the request of BD, today's call is being recorded, and will be available for replay on BD's Investor Relations website, investors.bd.com or by phone at (800) 677-7085 for domestic calls and area code plus +1 402-220-0665 for international calls. [Operator Instructions] I will now turn the call over to Shawn Bevec, Senior Vice President, Investor Relations.

Good morning, and welcome to BD's earnings call. I'm Shawn Bevec, Senior Vice President of Investor Relations. Thank you for joining us. This call is being made available via audio webcast at bd.com. Earlier this morning, BD released its results for the fourth quarter and full year fiscal '26 The press release and presentation can be accessed on the IR website at investors.bd.com. Leading today's call are Tom Polen, BD's Chairman, Chief Executive Officer and President; and Vitor Roque, Executive Vice President and Chief Financial Officer. Before we get started, I want to remind you that we will be making forward-looking statements. You can read the disclaimer in our earnings release and the disclosures in our SEC filings on our Investor Relations website. Unless otherwise specified, all comparisons will be made on a year-on-year basis versus the relevant fiscal period. revenue percentage changes are on an FX-neutral basis, unless otherwise noted. Also, references to adjusted EPS refer to adjusted diluted EPS. The financials discussed here and included in the earnings release are presented on a continuing operations basis. Prior periods have been recast to reflect the spin-off of our Life Sciences business in combination with Waters, which is accounted for as discontinued operations. Reconciliations between GAAP and non-GAAP measures are included in the appendices of our earnings release and presentation. With that, I will turn it over to Tom.

Thank you, Shawn, and good morning, everyone. Earlier today, we reported strong Q4 results with revenue of $5.3 billion, up 5.6% and 27.3% growth in adjusted EPS to $4.15. For the full year, we delivered $19.5 billion in revenue, up 3.9% and 6.7% growth in adjusted EPS to $12.70. Growth remained broad-based with momentum across all our businesses. Excluding the Alaris prior year comparison, we delivered high single-digit revenue growth in Q4 and solid mid-single-digit growth for the full year. Growth was led by the key platforms where we've been investing, including advanced patient monitoring, PureWick, advanced tissue regeneration, biologic drug delivery and roll a pharmacy automation, all of which delivered double-digit growth with accretive margins in both Q4 and the full year. Importantly, fiscal '26 marks a significant milestone. completing BD's transformation to a more focused med tech company with the separation of our Life Sciences business. New BD is doing exactly what we designed it to do. demonstrating the growth and earnings potential of our focused portfolio through commercial and innovation momentum across our key growth platforms, delivering strong operational execution and the expanding impact of BD excellence. Before we get into more details on the quarter, I want to highlight our recent landmark partnership with the U.S. government, which reflects BD's important role in the U.S. health care infrastructure and a shared commitment to expand domestic manufacturing capacity and strengthen access to essential medical technologies. Through this agreement, we committed to invest $19 billion in the U.S. over several years with $3 billion of the overall investment directed toward manufacturing expansion. Importantly, this does not represent incremental investment for BD, rather a reprioritization of investments toward the U.S. to support domestic manufacturing and supply chain resiliency. The partnership also provides relief from future tariffs imposed under Section 232 on covered BD products and inputs, subject to the final scope and implementation of any future Section 232 actions and BD's achievement of agreed milestones. We've already mobilized the organization and begun taking action to deliver on these commitments. Turning to our new BD strategy. We're seeing clear progress against our 3 strategic pillars: compete, innovate and deliver. Our growing commercial innovation and operational capabilities are strengthening the quality of our growth while improving earnings power and cash flow. Starting with compete. We've been raising the bar on commercial execution across BD, investing in every part of the commercial flywheel. That spans talent, AI sales tools, a disciplined sales process and new pay-for-performance compensation plans, all powered by BD excellence and a relentless focus on solving customer challenges with speed and urgency. In Q4, this translated into measurable outcomes across the company. Within Connected Care, commercial execution continued to drive share gains and new adoption across all platforms. In advanced patient monitoring, sales force investments are driving uptake of HemoSphere Alta that contributed to strong capital growth in Q4. APM continues to perform well ahead of the deal model, generating one of its highest annual growth rates in the last 20 years. while significantly expanding margins under BD's ownership by applying BD excellence in APM manufacturing. Alaris finished the year with strong competitive momentum, gaining additional share in Q4 and more than 250 basis points for the full year. Dispensing also continued to gain share. With strong Pyxis Pro order momentum and a 95% attachment rate of our new Incada AI platform. This strong early adoption reflects high customer interest in our new BD AI platform and supports our strategy to build recurring software, analytics and AI revenue. In pharmacy automation, incremental investments we made coming into the year are delivering results. We're seeing increased central fill win rates and an improving growth outlook aided by the recent U.S. launch of BDV MAX. We exited the year with strong commercial momentum, winning all 6 central fill opportunities we competed for in Q4 with VMAX attached to every sale, reinforcing the strength of our portfolio in the growing U.S. health care system central fill market. In biopharma systems, we expanded our position in next-generation biologic drug delivery including continued momentum in delivering GLP-1 therapies. In interventional, incremental commercial investments are translating to stronger growth, with PI accelerating each quarter throughout the year. In UCC, PureWick delivered another quarter of double-digit growth, driven by continued adoption, competitive wins and momentum in the VA channel. Across the portfolio, we're seeing our commercial investments translate into stronger growth and competitive performance. We've added resources in priority areas, introduced new tools, applied BD excellence to commercial execution and better aligned incentives with our growth priorities. These actions are raising execution across new BD. Our second priority is innovate. We're concentrating investments in attractive markets where health care needs BD most and where we believe BD can create sustainable competitive advantage. This is in connected care, enabling the shift in newer, low-cost settings and advancing the treatment of chronic disease. Earlier this year, we moved more R&D resources and decision-making closer to the businesses. We increased investments behind our 6 key growth platforms and our pipeline is expanding. We also deployed BD excellence into R&D this year and are introducing new products faster, having compressed launch times by an average of 10 months. In Q4, we received FDA approval for Liverty TIPS stent graft, and we're seeing strong customer interest. In a market that's seen limited innovation for many years Liverty brings enhanced ease of use, the broadest range of lengths and compelling clinical data, broadening BD's presence in the approximately $2 billion global venous market, which is growing high single digits. We recently received 510(k) clearance for Phasix ST parastomal. a first-of-its-kind resorbable mesh designed specifically for peristomal hernia repairs. It's an underserved market with significant unmet clinical needs. With the launch expected in the first half of fiscal '27, this innovation further expands our advanced tissue regeneration portfolio and strengthens our position in the $1.8 billion served market. We're increasingly seeing the benefits of the strategic choices and investments we've made over the last several years. Combined with our strength and innovation capabilities and execution, we're building a robust pipeline and look forward to sharing more at our upcoming Investor Day next month. Our third priority delivered is about operational excellence at scale. It's about improving quality, service, productivity, margin and cash flow. Through BD Excellence, we've built one of the most resilient supply chains in our industry, which, combined with our scale, has become a meaningful competitive advantage. In fiscal '26, we delivered approximately 8% gross productivity in our plants with customer service levels above 90%. This was driven by more than 2,000 Kaizen events, resulting in higher manufacturing efficiencies and raw material savings as well as ongoing network optimization. We are also generating value from the $200 million cost-out program launched at the beginning of fiscal '26 with 100% of the savings now identified. Turning to capital allocation. Our disciplined framework remains unchanged. Importantly, we're seeing our operational progress translate into stronger cash generation. as free cash flow improves, so does our capacity to invest organically, return capital to shareholders and pursue focused tuck-in M&A. This will continue to increase as we drive towards our 90% free cash flow conversion target over time. In summary, fiscal '26 was an important year for BD. We completed our portfolio transformation to a pure-play med tech company. We strengthened execution and increasingly saw the benefits of the strategic choices and investments we've made over the last several years. Our differentiated growth platforms are strengthening our portfolio and expanding our opportunities for growth. We enter fiscal '27 with a more focused portfolio, and we have confidence in the underlying trajectory of new BD and our path towards sustainable mid-single-digit growth. Looking ahead, we see a compelling opportunity to combine that growth with continued earnings expansion and a step change in cash flow generation to drive long-term value creation. We are still early in realizing the full potential of new BD, and we look forward to laying out that opportunity in greater detail at our Investor Day on December 10. With that, I'll turn it over to Vitor to provide more detail on our financial performance and guidance.

Thanks, Tom, and good morning, everyone. We delivered a strong quarter with $5.3 billion in revenue, up 5.6%. Excluding the Alaris prior year comparison, revenue growth was high single digits. As Tom highlighted, performance was broad-based, driven by continued double-digit growth across multiple key platforms and strong U.S. performance. . Medical essentials grew 5.9%. In MDS, solid mid-single-digit growth was driven by share gains and health utilization across the vascular access management portfolio. In specimen management, high single-digit growth was driven by share gains across the BD Vacutainer portfolio, new supply capacity and incremental demand as customers continue to work through competitor disruptions. Connected Care grew 2.1%, led by double-digit growth in advanced patient monitoring with strength in both capital and consumables. MMS declined low single digits due to difficult prior year comparison in Alaris Capital. Excluding the Alaris comparison, MMS delivered mid-single-digit growth, driven by strong infusion set performance from Alaris share gain pull-through and strength in roof pharmacy automation. Biopharma Systems grew 7%, driven by continued double-digit growth in biologics led by GLP-1s and moderating vaccine headwind. Interventional grew 7.6%, with high single-digit growth in peripheral intervention and UCC and solid mid-single-digit growth in surgery. In PI, growth was led by peripheral vascular disease and oncology, reflecting strong commercial execution and new product launches. UCC was led by continued double-digit growth in PureWick while surgery benefited from double-digit growth in advanced tissue regeneration. Turning to the P&L. Adjusted gross margin was 56.8% and adjusted operating margin was 28.6%, up 180 and 280 basis points, respectively, versus the prior year. Margins benefited from productivity gains through BD Excellence in favorable mix, while we continue to invest in selling and R&D to support our long-term growth strategy. Adjusted EPS was $4.15, up 27.3% and ahead of our expectations, reflecting our strong revenue performance and disciplined execution. For the full year, adjusted gross margin was 55.1% and adjusted operating margin was 25%, down 10 and 20 basis points, respectively, versus the prior year. This was driven by a 90 basis point impact of tariffs, mostly offset by our work through BD Excellence in favorable mix. Adjusted EPS was $12.70, up 6.7%. Turning to cash flow and capital allocation. We are encouraged by the progress we made in fiscal '26 and the momentum heading into Improving free cash flow conversion is expanding our financial flexibility, enabling us to invest in growth, return capital to shareholders and pursue focused tuck-in M&A. Full year free cash flow was $2.9 billion, an increase of 42% versus the prior year. This reflects lower working capital and nonoperating cash items such as Alaris remediation outlays. Including separation costs, free cash flow conversion increased from approximately 57% to 74% in fiscal '26, and we expect another meaningful step up this year. In fiscal '26, we returned $3.6 billion to shareholders. This included approximately $2.4 billion in share repurchases with $183 million repurchased in Q4 using proceeds from recent tariff refunds. We also paid $1.2 billion in dividends, and earlier this morning announced our 55th consecutive year of dividend increases. Finally, we paid down $2.4 billion in debt and ended the year with 2.7x net leverage. Moving to our fiscal '27 guidance. Starting with revenue, we expect low single-digit growth for the full year. Based on current spot rates, currency is estimated to be a headwind of about 70 basis points. As previously discussed, this reflects an approximate 200 basis point impact from the Alaris capital comparison. Excluding this impact, we expect mid-single-digit growth at the midpoint of our guidance. Moving down to P&L. We expect adjusted operating margins to be roughly flat year-over-year. Our adjusted tax rate is expected to be between 16% and 17%. Weighted average shares outstanding for the full year are expected to be approximately $273 million. Adjusted EPS is expected to be in a range of $13.10 to $13.30. As you think about fiscal 2017 phasing, we expect Q1 revenue growth to be at the low end of the range, with the first half expected to be in line with the midpoint of our full year guidance. As for earnings, given our Q1 revenue seasonality annualization of last year's commercial investments and inflationary impacts, we expect Q1 adjusted EPS to be between $2.32 and $2.37. We expect earnings growth to accelerate in Q2 and the second half of the year. With that, I'll turn it back to Tom.

Thanks, Vitor. Before we open the call for questions, I want to take a moment to recognize our associates around the world. Completing the Life Sciences separation, while simultaneously executing against our new BD strategy, require tremendous focus and commitment across the organization. Our strong finish to fiscal '26 reflects their work, and I want to thank each of our associates for everything you've done. We enter fiscal '27 with a more focused portfolio, clear priorities and confidence in the long-term growth, earnings and cash flow potential of the new BD. With that, let's begin the Q&A. Operator, please open the line for questions.

[Operator Instructions] Our first question is from Patrick Wood with UBS.

If I take a step back and look at it, it looks like a decent chunk of the growth that you guys have is coming from investments, stuff like the sales force in PI and things like that, helping you to take share -- so I guess, I'm sure you'll chat about it more at the Investor Day. But big picture, how are you thinking about the rate of investment to help drive that top line relative to margins? And is it just that you've got a flywheel going on the excellence that enables that recycling? Just how are you thinking about the interplay between the investment for the top line and the multi structure, big picture.

Patrick, thanks for the question. And I'll start off and then I can turn it over to Vitor. We are, as you said, really pleased with the momentum that we're seeing, particularly in the growth drivers that we've been investing behind. You could see ex-Alaris, about 7% growth in the quarter. led across essentially all of our growth platforms performed very strong and where we've been investing. We invested in the APM sales team, you saw near 20-year high in the quarter. Certainly, those investments help fuel that. Same thing in PI, same thing in UCC. Obviously, capacity investments that we had made in the past in our biologic capacity in farm systems you're seeing play out with a strong quarter there at 7% growth, driven by our Biologics business and some stabilization of the vaccine space. So we're going to continue focused investments there. Obviously -- we obviously absorbed tariffs this year, which was meaningful. We expanded margins outside of that, and we're going to continue to take a prudent approach to making targeted investments behind our growth levers. We've reallocated R&D as well behind those growth levers. We've been doing that over the last several years. We're seeing those pay off. We're going to look forward to sharing more. on our pipeline and the momentum in that at Analyst Day on December 10. But we expect that we will continue to -- we will continue to drive operating margin expansion as we go forward as well. Obviously, again, you've got a tariff dynamic this year and the Alaris grow over. But as that normalizes, we're going to continue to see the mix benefits of that growth -- the growth drivers that we're investing behind because they all come with accretive gross margins to the company. So the larger that those growth platforms become a percentage of our revenue, actually, it has a flywheel effect on our gross margin. Obviously, BD Excellence has a flywheel effect on our gross margin, and then that flows through the P&L as we continue to be very prudent. You saw the cost actions that we took on G&A. We continue to do additional work there as we're streamlining and simplifying and focusing the company very aggressively as part of new BD and then making targeted investments in selling as well. So Vitor...

No, I will just complement, I think we are very happy with the investments we have made during FY '26. I think that clearly generating results from a top line perspective, but also on the bottom line perspective, given Tom was explaining, we were able to cover topics like tariffs and other types of pressures we had to navigate. But when we see our advanced patient monitoring business is growing double digit in FY '26, our PI sales force expansion continued to result very strong growth. Those are all going to be accretive for us as we move forward, not only in '27 but beyond '27 as well. '27 as we expected, we -- and it's part of our plan we are expecting to have an inflationary environment into our numbers, but our continued mix and efforts on BD Excellence will result the benefits of offsetting those and continue to expand our operating margins down the road. .

And we'll move next to Travis Steed with Bank of America.

Congrats on the good quarter. Maybe I'll ask on the guidance. Q1, obviously, you focused this morning. I heard you say it was below the full year guide. I don't know if there's any more kind of quantification on the top line in Q1. But also just trying to understand I think your guidance philosophy, Vitor, you've been executing really well since you've been CFO. So how much of this is conservatism and then the Q1 being below, how much of this is just like functional stuff from like Alaris and other stuff that's kind of very explainable.

Sure. Thanks, Travis. So yes, so I'm completing now my first full year as the CFO, I'm very happy with the results we have delivered to the organization and to the shareholders. The philosophy continues to be the same. I want to make sure that we have a guidance that is responsible and prudent and we can deliver during the year with upsides to our shareholders. If we think about Q1 specifically, there are a few dynamics there that is -- that are important to explain. So first, we have very good momentum coming out of Q4, and that momentum is continuing as we head into Q1. If we see segments like biopharma or interventional or even medical essentials, we continue to see good momentum there. What we have in Q1 is the dynamic with the Alaris as you mentioned. We mentioned that Alaris is about 200 basis points of pressure for the year. In Q1, Alaris is more acute than the rest of the year, about 250 basis points just in Q1. That includes a little bit of a pressure on the connected care number. We also have a dynamic happening because on our APM business first, we have very great momentum in APM. We continue to be solid. And we are coming to the conclusion of our integration and now we are going live with the systems inside APM. So we took a prudent approach to make sure that we reflect that like scale of the new system during that's another impact we had in Q1 that is putting our growth rate at about the low end of the range. But in general, the momentum is very positive. The orders are very -- is coming in. And the APM actually, we are tracking this on a daily basis now. We have very good momentum. We are seeing orders coming and actually shipments happening. We just took a conservative approach from an APM perspective. But other than the MMS situation and the APM, we feel very good about the numbers, the underlying -- of the other segments we have in the Q1 as well.

Travis, I think you know that clearly, and as Vitor shared, right, is it's really those 2 factors. We see strong momentum continuing across the company, a little bit higher grow over in Alaris and then the APM. And I think kudos to Vitor, as we -- again, we're really pleased. We've had a lot of focus. Vitor's brought around our forecasting process. And we want to make sure that we continue that and set it up right going into '27. And I think with APM, it's a big cutover from the Edwards system going live for us. Many times, companies don't kind of plan that in their numbers. We assumed, hey, we want to make sure if everything doesn't go perfectly smooth. We're going to assume that some room in that, and so orders are still coming in. There's no demand difference at all. It's just we may end up shipping a bit more in Q2 than in Q1 with that. Now with that said, we actually went live this week, and things are going as planned. So right, there could be actually -- we'll continue to play that out. And if it goes even better than we expected, we could see a little bit more rebalancing between Q1 and Q2 on the positive of Q1, but we'll -- again, we want to take a prudent approach to do that the right way starting FY '27. But those are the only -- those are the 2 dynamics.

And we'll move next to Vijay Kumar with Evercore ISI.

Congrats on a nice print here. Tom, I just want to go back on this performance here in Q4, 5.5-ish, close to any onetimers or timing because this came in well about, I just look at the back half of '26 performance, you guys have done 5 organic inclusive of headwinds rates. So with that kind of execution why is 2% or 2.5% the right number for fiscal '27?

Vijay, it's Vitor. We are very pleased with the back half performance of the actually with the entire year performance in '26 with the acceleration of 5% in the back half of the year. from going into '27, as we mentioned, we want to make sure that we take a prudent approach from our guidance -- of course, we -- as Tom mentioned, I'm spending a lot of time with the teams in terms of forecasting, making sure we have the right processes in place and across in our numbers. As pressure increases, as I mentioned, 200 basis points with a more acute impact in the first half of the year. But it's a matter of making sure that we have a number that is a responsible guidance that we can deliver and even exceed during the year. That's what we are looking for heading into FY '27.

Thanks for the question, Vijay. But we are very pleased with how those -- our execution is playing out. And again, as part of our BD excellence strategy, we were really doubled down on commercial excellence in FY '26, right? Whether or not it's our comp plans our hiring approaches, our training approaches, our digital systems, we are seeing benefits of that coming through complemented by physical expansion of more people selling behind our key growth platforms. And you can see that momentum as it built through the back half of the year.

And we will move next to Robbie Marcus with JPMorgan.

Congrats on the quarter. Maybe a more macro-related one. Tom, you're very plugged in through AvMed into D.C. The sector was up a lot yesterday on the blue wave maybe speak to any of the immediate or intermediate term changes that you could foresee with Congress held by the Democrats. And then also maybe on the other side of the world, in Europe and China, just speak to any trends you're seeing from health care policy. We've heard a number of your competitors talk about negative pricing in China. It'd be great just to get a global overview.

Yes. Thanks for the question, Robbie. So just from a U.S. perspective, I can start with just some utilization comments and then I can mention on the political side and then we can go around to the rest of the world. Just from a utilization perspective, obviously, we've got a very unique view there, as you know very well, as our products are used across essentially all types of procedures in all care settings. And so particularly indicators like our blood collection tubes, syringes, catheters, kind of core products that have broad use, they're fantastic. utilization indicators. We -- in that regard, we continue to see strong utilization in the U.S. U.S. MDS, 4%. That's a solid number. And SM was 9% growth. A bit of that was because we've had new capacity come online and some competitive share gain. But underlying that, was still very solid, and we continue to see more tubes collected per patient, which is an indicator that we're seeing more testing going on, which is a good sign of health care utilization. Capital, we continue to see it constructive, I'd say, but selective and they're prioritizing high ROI investments. We're seeing that come through in really robust growth in our pharmacy automation business. We're seeing it come through with Pyxis Pro doing very well. And you heard us comment that we have a 100% attachment rate of our new AI platform, which is an upcharge from Pyxis Pro. Everyone's choosing it, though. And that AI platform is bringing new capabilities that help customers reduce their inventory levels, improve their cash flows, improve service levels for patients for drug availability. And I think that's also a new revenue stream from a SaaS model that we're going to continue to be focused on building. But I think it's an indicator that, again, the solutions that we have fit well with the needs of hospitals today, and we're seeing strong continued capital placements. APM had a great capital quarter and actually significant acceleration. and we don't see a slowdown in that. As we think about the government, obviously, we've been around for 125-plus years. We work with any party levers and we're focused on helping patients and helping advance health care. I think clearly, there's been a perception that Democrats appreciate investing and the value of health care more broadly, I'm assuming that's what happened yesterday. But we're focused on continuing to do our work around optimizing access for our solutions and technologies. Obviously, we're focused on executing our tariff agreement with the government, which doesn't change and making that come through. And obviously, that opportunity is not in our guide for FY '27. And if 232 are implemented would be an upside option that exists within our current guide. As we think about around the world and in China, China is pretty stable for us. So I know there's organizations that have talked about it in their earnings and maybe it's new for them. fortunately, unfortunately, it's not new for us. It's something we've been managing for a number of years. On a positive side, China now is a much smaller portion of BD. We really don't see it as a separate headwind this year. It's just part of our base business dynamic. It's kind of a continuation of last year. It's not an incremental item, and so we continue to -- we're just executing that, focusing on our commercial excellence and driving that, but we don't see that as anything incremental to us. And then in Europe, well, we saw a strong performance in Europe. And again, we're seeing strong partnerships with governments, particularly around medication management. We've had some great performance there is pharmacy automation in Europe, you heard us call out ROA. It did exceptionally well double digits for both the quarter and the year. Again, that's a labor improvement, a cost improvement. We see Europe actively consolidating pharmacies, both in the hospital and health care systems to these mega centers, which are all requiring our pharmacy robots to get put in place. We're also seeing solid underlying demand on the consumables stream. And you can see that across our different businesses. So we expect that to continue. I think our team feels good as we're going into '27 in Europe as well. And we're not seeing a specific change against the solutions that we offer. So thank you for the question.

And we will move next to Matt Taylor with Jefferies.