Okay. Good morning, everybody. Thanks so much for joining us. My name is Matt Miksic, I cover U.S. Medical Devices here at Barclays. We're so pleased to have with us again this year, Becton Dickinson, Tom Polen, President and CEO, and Chris DelOrefice, CFO. We're going to jump right into kind of a Q&A discussion around, you know, recent and upcoming events. I thought maybe a good place to start, Tom, would be, you know, just, as you transitioned into this year, this fiscal year, maybe a little bit about, you know, some of the differences between fiscal 2023, 2024, and in particular, you know, maybe how the cadence and pace of growth and margins are different. What's driving that this year versus last year?
Yeah, sure. Thanks, Matt. Thanks, everyone, for joining. Appreciate it. Yeah, as you think of 2024, in context of our BD 2025 strategy we outlined, there's actually a lot of consistencies in terms of how we're executing. So past two years, our top line growth rate has been just about 7%. If you look at what we've done for margin, we've been leading in terms of margin improvement, about 400 basis points over the past two years. Actually back above pre-pandemic levels on the margin. And then we've been. That's translated to, on a reported basis, on our base business, double-digit EPS growth. We've been very focused on cash flow. As you fast forward into 2024, those same principles are playing out through our plan.
So the midpoint of our guidance this year is above that 5.5+, strongly. Our three-year revenue CAGR would still be just under 7%. So the midpoint of the guide is approaching 6, you know, 5.8+. So really strong growth there. On the margin standpoint, we're improving margin. The goal is to improve by 50 basis points. There's a little bit of a ramp through the year that we've talked about. We had strong execution in Q1. That ramp is driven by one-time items in Q1 that we've talked about. It is a combination of driving efficient cash that led to one-time kind of inventory absorption dynamics. In Q1, there was a headwind of about 200 basis points, and some FX pressure. But despite that, we actually had strong execution in Q1.
We over-delivered our margin, and we improved our margin cadence through the balance of the year, last quarter. So we expect now Q2 to actually improve operating margin by 25-50 basis points, and we feel confident in delivering the 50 basis points throughout the year. We actually also reduced some of that ramp that happens in Q3 and Q4. So positive execution. It led to a guidance increase at the midpoint of our EPS range as well. And then on the strength of, or the consistency of the delivering of revenue and our confidence in the Alaris ramp, which is one of the new things in 2024, it's another catalyst to growth. So late last year, our number one priority was getting Alaris cleared.
We did get that cleared, and we see good momentum there in terms of executing with our customers and felt good about that. So we had transitioned what we had said, about $200 million in revenue for the year, to that being now of a floor. So on the strength of that, we increased the bottom end of our revenue guidance, we increased the midpoint of our EPS. And then lastly, so you have another year of revenue growth above 5-5 plus. We're delivering 50 basis points of margin improvement. With the focus on cash flow, a strong year of double-digit cash flow is the goal for the year. So I think a lot of consistencies. I think the, the, incremental positive tailwind of Alaris was one of the dynamics.
And then maybe the other nuanced item was, there's been some discussion on China. You saw a little bit of decline in China, about 5%, in Q1. That's absorbed in our growth rate. I think the nice thing about BD's growth profiles, we're not dependent on one thing. The strength of our portfolio allows us to overcome those dynamics, and as we ramp up through the year, we'll cycle over that China kind of one-time VBP impact that's mostly impacting our medical business. We still see strength in Life Sciences and BDI in China, and for the full year, despite the VBP, we're still actually expect to be flat to modest growth in China. So those are some of the dynamics. It lends itself nicely to third year through our BD 2025.
We're actually tracking ahead on all of the metrics that we outlined and feel good as we head into 2025.
Okay. I think, you know, one of the questions that we got a fair amount was, you know, as you know, we headed into last year and the calendar year, I think the theme in med tech, and it kind of continues here in the first quarter, has been sort of the strength in volume, strength in utilization. So I think seeing the company sort of lay out some of the items that you did, Chris and Tom, and sort of starting with this kind of, you know, sort of like, you know, lower than expected, sort of calendar Q4, fiscal Q1, I think sort of first ran against what folks were thinking about the industry.
And then secondly, kind of raised the question, which I've gotten often, which I'm hoping you can maybe elaborate on, is, you know, if that was the start and fiscal Q2 is the transition, say, you know, sequential improvement, you know, maybe talk about some of the things that reinforce your confidence that, you know, you're gonna track up from this and sort of finish at kind of a strong pace in margins and revenues to get to your or exceed your full year number.
... Yeah, well, I mean, first off, on the most of where that dialogue is happening is on the kind of procedure-related businesses, right?
Yeah.
As you think about it, the Boston, Strykers of the world, et cetera, highly procedure-related businesses. And so you see, you see that in our procedure-related businesses. You actually saw that in Q1 already, and so it's continuing that. I mean, surgery was up, strong double digits, urology procedures up very nicely, the PI, solid growth. So you, we see that. There's actually not even a trajectory change expected, on those procedure businesses as you go through the balance of the year. So that's, that's one. It really drives more from the supply side of the business, which is in MDS, which is where the China topic fits, and we know that's gonna annualize through the back end. We're seeing good growth in kind of the underlying business within MDS, good volume growth as well there, too.
Obviously, the other pieces is within that supply side is Alaris, which is very clearly the ramp in growth, which we feel very, very good about. It's going ahead of our plan, you know, very nicely. That was the spirit under which we raised the revenue side, was purely based on the momentum that we see with Alaris. You know, Alaris is one... Remember, we just launched at the very end of Q4. Capital equipment has typically a 6-month+ selling cycle. We're seeing a much shorter selling cycles with the relaunch of Alaris, but Q1 was always expected to be light, and then it moves up from there, and we're seeing it play out, you know, at or actually above our expectations.
So, you know, we raised the outlook for Alaris on the last call to a floor from an expectation of about $200 million to a floor of no less than $200 million. And we'll continue to give updates on this upcoming Q2 call, but we feel good about where that's heading.
Okay, and then some of the margin dynamics maybe in, you know, there were, as you pointed out, a couple of hits that, you know, specific to Q4 fiscal Q1, and maybe, you know, how do those progress into Q2, and then sort of maybe confidence in the back half?
Yeah, and real quick on the growth, right? I mean, the quarter played out, like, whenever you start the year, you make some big assumptions, right? We, you know, China was one that we had talked about. Alaris was another one coming in. We wanted to make sure we saw good progress there, and then execution against our margin plan. All of those ended up in line to better. So China, which it was a headwind, right, it was as expected, actually slightly better. Alaris, you know, strong momentum there, gave us the confidence to move that number to the floor, to see good progress on the tailwind, and then we outexecuted on our operating plan and margin plan. So it was really good to see all those things play out.
Those were probably a few of the key things that we're looking at in Q1 that gave us the confidence to take up the bottom of the revenue, and raise EPS across the board. So I think good start there. Also, cash flow was really strong. When you think of margin progression, it's in some ways, it's easier than last year. We had a little bit of this dynamic last year because we were managing the outsized inflation. This year, you have two discrete items that played out in Q1, and so the question that you ask yourself is the underlying cost improvement that you expected delivering? And then is the inflationary impacts that you're forecasting playing out? With inflation, we have strong line of sight to that. The majority of it is wage inflation. We set labor rates.
We know what that is. There's not gonna be a surprise there. The second predominant area was still some inflation in raw material packaging. A lot of that actually was carryover from the prior year. So you had outsized inflation in Q1, also of about 200 basis points headwind. That moderates down to 100 basis points for the full year. So as you naturally glide through the back half of the year, it comes down significantly. Those other two items, FX and inventory, they're discrete items that played out in the quarter. By the time you execute Q2, those also moderate significantly, and then you're left with the cost improvement that we were driving significant levels in Q1, and feel really good and have confidence in the ramp of the margin through the year based on that.
So bottom line, we're delivering against the cost improvement programs that'll mitigate those and feel good about the ramp. As a matter of fact, again, we have the confidence of actually increasing the margin goals on Q2 and further de-risking. So we're actually seeing a better glide path than when we started the year.
Yeah, and just to note, the margin has extremely high visibility because one is the, the inventory takedown, right? That's just a discrete event. It's done. It's giving us the benefit of growing cash flow, right, mid-teens, this year, after very strong growth last year in cash flow. That's a great thing as we think about value creation that we can do with that. So that's, that's just got a natural... It's an event happened. You can model it. It's very clear. That's, that's what we've, you know, shared in our, in our guidance. The other thing is our cost base is basically set, right? We cap and roll. There's what, about 60 days left in our year on costs. Everything else then caps and rolls to the next year.
Remember, our costs came in with production costs that we were making at the end of last year. Basically, the last four or five months of last year was all getting cap and rolled into this year. So we had very high visibility on the costs, the product costs, coming into this year, and we have very high visibility even through the balance of this year because we're actually planning for 25 here very shortly. And our operations is executing very well, really driven by the progress on BD Excellence, which we've been talking about, but we're seeing strong performance there, which translates into strong manufacturing costs.
Okay... That's super helpful. And I wanted to—I'm glad you brought up cash flows. I wanted to come back to some of the components on that. But just on one of the themes so far, the conference and folks we've talked to recently at a Medical conference this past weekend, it seems generally that, you know, that volumes are kind of remain strong here in the first quarter. And you know, just you know, not that you're, we're in the middle of the quarter, but as you go out and talk to customers or, you know, the things that you see through your field force or whomever, you know, what's your sense of, you know, continued strength and maybe what are your assumptions for the duration of your fiscal year?
Yeah. No, we expect to continue to stay at this rate. I was just thinking, we shared it at our breakfast session. I was with about 20 of our customers last week, all hospital CEOs of major systems, and they weren't—they're not seeing any trajectory change in what they're seeing. Their emergency rooms continue to be filled, their hospitals continue to be filled, and procedure volumes, they're expecting to remain at where they are. So we don't have any increase in procedure volumes built into our alloc for the year. We have continuation of what we've been delivering.
Okay, so no acceleration, but kinda continue to-
We think it's gonna continue to stay strong.
That's great. And then back on cash flows, I mean, that was maybe, I think, a little bit lost as you set out the, the guidance for this year, was like, what some of the cash flow benefits of your activities for the year. So if you could maybe, maybe elaborate a little more on that, Chris, and then also on, you know, this idea of, like, ongoing, you know, both fixed asset optimization, you know, CapEx allocation, and, and the kind of benefits you get there, both, I guess, in terms of cash flow effects and flexibility for things like, you know, what to do with that cash, and as well as gross margin opportunity in terms of more favorable absorption.
Yeah. Yeah, I can take that. And maybe just one last comment on the ramp on the top line as well, as I didn't address that previously. When you look as we move through the back end of the year, Alaris alone, right? We had said that when we talked about originally getting clearance, it'd be a 50 basis point contribution at the BDX level. That was before we moved it to the floor. And a lot of that growth happens based on the natural phasing in the back half, right? Like, so if you take that, you put in the back half, you know, you have order of magnitude of, you know, a point or so of growth.
So when you take that out of kind of the ramp you're seeing, it should give you more confidence as you look at kind of what then that natural growth rate is in the back half of the year, plus the fact that we'll be cycling over, you know, the China headwind, which really started in Q4 last year. So there's a couple of discrete items that kind of have our sales ramp look a little bit back-end loaded, but it's very explainable, and again, on the back of the Alaris progress, we had confidence in that and feel good about that. So just to clarify the top line. On cash flow, yeah, we've been very focused on that.
So again, if you look at our guide this year, right, we're strong revenue growth again on an organic basis, we're, we're growing earnings faster than revenue, which is also-- which is healthy. But cash flow is growing faster than EPS as well, and that's been intentional. We've been focused on a few things. One of the big ones is in working capital, getting that inventory down. We talked a little bit about that. We saw significant progress year-over-year, coming off the peak of inflation, coming off the peak of macro complexity, have done a nice job there, so that was one. The second one was our, just our CapEx investment. We've moderated that back north of $100 million plus, and that's on the back of a lot of the supply chain optimization work we're doing.
So as we simplify our footprint, there's less capital requirements. We've been very focused on driving BD Excellence throughout the organization, which is essentially very focused on driving better yield, improving waste. The more you do that, you can run your lines more efficiently, it frees up capacity, drives OEE, and you need to put less capital in place. So that's been another big focus area for us. Obviously, the strong growth profile on EPS, you get natural leverage as well. We're gonna continue to see... You saw a big step change in our free cash conversion by almost 15 points last year to the 2023 to 2022. You expect to see another significant step this year with double-digit cash flow.
That'll also help create the flywheel in terms of how we think of our capital allocation. Wanna drive more towards value creating, tuck-in M&A that we've done a nice job of, and so we're gonna continue to focus on that, get our free cash flow into that 90% range, and you'll see us step towards that this year.
Excellent. And then, you know, one of the questions we didn't have a chance to talk about earlier this morning was, you know, within all the volume growth, another theme for our space has been this kind of build-out and capacity, acceleration of growth in ASC and outpatient. I'm just wondering, you know, whether it's through the interventional, you know, business or other aspects of your business, you could maybe talk about what's your exposure to that dynamic?
Yeah.
and kind of the provider base in the U.S.?
Yeah. So we've talked about, you know, we have three very specific areas that we focus the vast majority of our R&D spend in, and over 90% of our M&A over the last several years have been focused in three very specific areas, right? Three very specific strategic themes that we identified back when we set BD 2025, several years ago, of reshaping the future of healthcare, right? And that's the role of smart, connected care, automation, and robotics in transforming care, enabling the shift to new care settings as a backbone of healthcare. We see it as a tremendous opportunity for us to be an enabler of that shift to new settings.... And then the third one was the application of medical technology to radically improve outcomes for patients with chronic disease. And so that's where we've been investing.
And so the middle category there, right, enabling the shift to new care settings, pretty much every one of our business units has programs and opportunities today that are doing exactly that, enabling that shift. And we've been investing behind. So we have a dedicated commercial team that focuses even at the key account level on the non-acute space. That's something we put in place, over the last several years, and we've actually built it up, even another stepwise investment this year in the non-acute space. But if you think about the different business units, so everything from, if you look at in the diagnostic space, as an example, we recently got FDA clearance for BD MiniDraw. It's, you know, we invented modern blood collection with the Vacutainer product, right? In the U.S., almost 90% of blood is collected in our devices.
It requires a phlebotomist, a trained, skilled phlebotomist, to stick a needle in your vein to collect blood. You know, MiniDraw democratizes that and allows a store clerk in a retail pharmacy to collect your blood through your fingertip. Right, that's actually in pilots. It's going into pilots right now in a grocery chain in Texas, where people will literally get their blood drawn at the grocery store in Texas to have all their routine chem panels, CBC panels, glucose testing done. That's enabling the shift in a new way to a new care setting. We have our point-of-care molecular platform launching next year. That's gonna launch with GC/CT. It's gonna allow STDs to be screened in the clinic, treated in the clinic. The focus that we had from the start was to have the fastest, rapid molecular test and platform available, right?
We're gonna achieve that with this launch. It's gonna allow, within 10 minutes, diagnosis of, of STDs, give the-- literally the medication to someone while they're there, and then we're obviously launching respiratory and other things coming there. But again, enabling the shift and, and care to be delivered in different ways. I think a press release went out today or is, is going shortly on some new data around our Pyxis for non-acute. So we made an acquisition of a company called MedBank several years ago. It was under this vision that as care shifted into new care settings, you know, many of those new care settings are owned by IDNs and integrated delivery networks, who may need different types of products for these smaller surgery centers, but they want to have visibility. They want to know, "Are narcotics being appropriately managed and not diverted in these settings?
What is my inventory level of drugs in these settings?" Et cetera. And so, MedBank is a mini Pyxis that sits on the benchtop, but more importantly, it has a low-cost architecture from a data perspective. It's a cloud-based platform. You literally—It's like an iPhone. You take it out of the box, you set it up, and it pretty much auto sets up, which is great for those settings. That's been growing very strong double digits. There's some great new data that's recently been published around the benefits of those settings, both in terms of lower inventory, lower cost, clinician satisfaction, and traceability of medications. And so that's, you know, a great example there. We have non-acute infusion pumps in our pipeline.
On the BD Interventional side, obviously, all the surgery center work that's happening there is something that we have dedicated folks who are walking in the vein clinics. A lot of those peripheral vascular procedures are now happening in non-acute settings. Obviously, most hernia surgeries are happening in that environment. We made acquisitions like Venclose is exclusively a non-acute play for chronic venous obstruction. So that's an area that will be of continued focus for us going forward. Maybe the last thing I'd mention is in that space as well, is pharmacy automation. So we've built. One of the things that's probably the best-kept secret in BD is, I think, and correct me if I'm wrong, we're probably have the second-largest robotics business in med tech, right, next to Intuitive. We have a $750 million robotics business.
We're the world leader in pharmacy robotics, through several different acquisitions that we've done over the last several years, we've created this. It's a great business, growing mid-teens, as we've shared in the past, right? What that's enabling is it's enabling, again, care to be shifting and thought about in new ways. As part of population health management, what you're seeing is the formation of these very large, kind of lights out pharmacies. When I say lights out pharmacies, it means, like, there's just robots in a massive room like this, filling amber vials, and they're getting shipped to people's homes with their, their routine prescriptions. There's no need to go into a pharmacy to pick those up. That's how care is gonna be delivered.
Things like PillPack, which was acquired by Amazon, those types of platforms are being run on our systems and equipment and on our software. So that's again, we see that continuing, pharmacy automation and robotics. There's zero need for any pharmacist to ever be counting pills. They certainly do not go to school to be able to count to 30, on how many pills go in an amber vial. We do it way more accurately, super efficiently, and we can do it at mass scale in a way that actually fits with where population health is going. So we're seeing strong demand on that globally.
Okay.
Just a few good examples of how we're-
Sure. No, that's super helpful. I'm just looking out to the audience to see if there's anyone with a pressing question. You know, I'd be remiss if in the minute or so we, we've got here, just to sort of touch on another question we get often, I'm sure you get, is just around pricing. You know, so there's a pre-pandemic, sort of pre-inflation price profile-
Yeah.
-that you'd laid out. There's obviously what you did actively, proactively, during that period of strong inflation and then kind of where you are now. So if you could talk maybe about that, and then, you know, with the, with the time we have left here, is just maybe talk a little bit about your 2025 and, you know, 25% goal-
Yeah.
and how you feel about that, and what could come after
Yeah.
You reach 25.
Yeah. So, you know, BD, if you look—I'll walk through the journey. If you think about, BD pre-pandemic, we were basically flat, slightly down on price each year. It was actually good if you benchmark us versus other large-
Sure
-cap companies. As the pandemic moved through, of course, BD is also very unique in that there's really, there's no other companies that are remotely at the scale of us from a manufacturing perspective, right? We make 40 billion medical devices a year. I think about, that's like 6, 7 devices per human on the planet. And many of those devices we sell, again, very unique in healthcare, where we're selling, right, 10 billion Vacutainer tubes at $0.10 a piece or, right, billions and billions, similarly, you know, nearly 10 billion syringes at pennies on that. And so those specific categories where we're selling products between, for the most part, between $0.10 and $2, which again, is very unique to be doing that at scale. Those products, during the pandemic, had disproportionate amounts of inflationary impact.
You can imagine a box of syringes with 100 syringes in it sells for $10. Did shipping costs go up? Anyone who's caught a FedEx lately would recognize it's not unusual to think that shipping costs could go up $1 or $2 on that. That's a 10% or 20% price increase that's needed to happen on those products to hold margin. And so you saw us take higher price increases on those product categories, specifically, that then weighted out to that 3%-4% price increase that you saw us take, in 2022, that really rolled into, and you saw realized in 2023.
That was specifically and very focused on just offsetting inflationary pressure on those types of product categories, holding gross margin, as you've seen us today, along with a lot of activity we're doing on manufacturing excellence and our BD Excellence system really playing out. As we look forward, those systems and processes that we put in place, we see allowing us to do a bit better on pricing, more in the 1%-2% range, which is what we have in our expectations for this year and going forward. So-
Okay.
We really see that phase behind it. This is a very acute phase associated with, you know, what was tremendous inflation that happened, and it was highly focused within those types of products that I just described.
Okay.
Yeah.
Great. Well, I think with that, we're at time. We should probably break, but but thanks so much again for everyone for joining us, and Tom and Chris, really appreciate you.
Thanks, Matt.
Great discussion. Thank you, Matt.