Good morning, everybody. Travis Steed, medical device analyst at Bank of America. We're kicking off the conference officially with Becton Dickinson. We have Chris, CFO, obviously, and then Michael Garrison, head of the medical division, right?
That's right.
Medical division. Correct. I guess to start out, you just reported Q1 a couple days ago, or Q2, fiscal Q2. You know, strong quarter revenues came in a little bit ahead. 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. I guess kind of curious how sustainable some of these upside drivers are on the revenue side.
Yeah, no, appreciate it. Thanks, everyone, for taking the time. Appreciate it. Good seeing everyone. Yeah, it was, it was a strong quarter. I think importantly, we've been delivering consistent results. I think the quarters, if you're, if you're looking, it's really our strategy and action coming to life in the quarter. When you think about the growth rate, maybe starting there, 8.7% growth, 7% organic, certainly well above the 5/5+ that we talked about at Investor Day. 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 and aided their growth. Ours was actually the opposite. We had 11% growth last year. BD has got that more durable profile, right?
We didn't have as much of our total portfolio kind of flex with some of those COVID-related dynamics. 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. When you normalize for that, I mean, growth was even stronger. Importantly, our volume growth is approaching about 6% when you kind of take out that comparable. Really strong on the growth front, and again, it's literally our strategy coming into 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. Michael 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 growth spaces. Sixty percent of that spend now is going to what we call transformative solutions. Then of course, tuck-in M&A is helping. 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.
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. That guide set us up nicely to raise revenue again, and we raised earnings. We increased our base revenue by 50 basis points. Our midpoint's now 6.75%. When you think of the second half of the year, it's about 6% organic, 6.6% total, so really strong growth, again, above the 5/5%+. I think interestingly, when you look at our two-year average growth, it's 8% all in, 7% organic. You know, really strong quarter. You know, we feel good about the full year.
When you think of it against those Investor Day commitments, again, we're certainly in the plus side of the 5/5. Margin's going really well. If we continue to execute this year, we'll be about 70% towards achieving our FY2025 goal of getting to our 25% margin by 2025. Two years in a row of positive margin improvement. Certainly with that comes strong double-digit earnings profile.
Great.
I mean, I can sort of build on the strategy and action, just how it's playing out in medical. It was a great quarter for us. You know, there's three businesses in the Medical Segment, our Medication Delivery Solutions business, our Medication Management Solutions business, and our Pharma Systems business. In the Medication Delivery business, that's really driven from a growth perspective by Vascular Access Management. 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, you know, vein. There's probably three or four different BD products that are used to help make sure that that 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.
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, you know, that's, you know, Pyxis, Alaris, and now the new acquisition of Parata added to our BD Rowa business out of Europe. You know, we created sort of this Pharmacy Automation business, which is I think the largest in the world now. That's growing sort of, it's double digits, 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, you know, labor costs are going up, where pharmacists are not working at the top of their license, they're, you know, counting pills out five 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.
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. Also they're able to leverage what's the best of BD, you know, for our sales force going into acute care hospitals, and then also our manufacturing footprint and procurement strength. Finally, in Pharma Systems, I think you mentioned, you know, some decisions that were made probably a couple years ago, but we've been continuing to execute on them around capacity, planning, 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. That pipeline has, you know, really paid off. We see from the pharma companies them bringing more and more biologics.
You know, we see them every day on television, and those are what's coming to our products. You know, we have invested, and we have probably about six times the capacity to serve that particular market than our nearest competitor. About 70% of the new biologics that are coming to market are coming to market in a BD solution. 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. 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.
Yeah. No, that's helpful. Maybe kind of thinking about the guidance for the year, there was, like, anything to kind of nitpick, if you will. It was a good quarter, but like Q3 margins, a little bit more slightly in line with Q2, and then more of a Q4 step up. I don't know if anything changed the way you were thinking through initially through the year on kind of the cadence of the year. Maybe it was mismodeling on the street, but kind of the understanding the jump up to Q4. 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. 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, you know, absent any FX moves?
Yeah. It's a couple good questions there. I mean, to be fair, right, we don't really give quarterly guidance. We try and give really good color to help with the modeling aspects. 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 all in the first half, right? We had signaled that. If you remember, we had almost a half a billion dollars of COVID-only testing revenue that had a very high margin.
The first half of the year where most of that was inflated margins, and then we also reinvested some of that. Vice versa on the back end of the year, you had the testing dynamic. You had the other big dynamic was just the natural progression of inflation. We had mentioned that the peak of inflation was gonna be a combination of carryover from fiscal year 2022 plus continued inflation, and that would roll through the first half of the year. 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.
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 what you're gonna 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 notice, 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. You know, we'll moderate that through the year.
Then you have that COVID reinvestment dynamic. We were a little bit front loaded too on SG&As related to just getting back to typical, like, sales meetings, things like that that hadn't happened in a while. Almost half of the Q4 improvement is literally timing. The other half we have strong line of sight to because when you think of BD's cost of goods in particular, we got five months of inventory typically that rolls through the P&L, right? We have 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. It gives you a high degree of confidence that we feel good. It's very consistent.
I think to your point, just without us giving that degree of quarter-by-quarter color, there was just some nuances in terms of how folks were looking at it. We feel really good about that. Top line's pretty balanced. Like I said, organic growth 6%, fairly ratable in the second half. You do have a dynamic where we're gonna cycle over the Parata acquisition.
Right.
Think ratable on an organic basis, but you're gonna 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. That 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 absorb that in the number versus just changing the guide. 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 absorbed 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. 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'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, we're not only delivering strong growth. You know, our focus isn't just about one quarter. I can appreciate the quarterly dynamics that folks may think about, but we wanna 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, 2025, both top line what we said and margin. I think it's important for all you that we keep that momentum going and, you know, don't do drastic things that would hurt investment, et cetera. It's that nice balance we're trying.
Yeah. No, that's great. You know, 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. You know, 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? I guess part of that, you think you have the super cycle new products coming that you've talked about.
Yeah.
You've got 25% of the portfolio growing, you know, high single digits. It feels like this is kind of the new normal for BD. Not easy, obviously.
Yeah.
It feels like a lot of this stuff is sustainable.
I think you're right in terms of our strategy and action, and you're seeing the effect of all those areas. In just one 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. That's after we anniversary these from the first year, how they're now contributing and additive to the base. We've done other things like the Embecta spin, which had about a 25 basis point impact. 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 things, 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 healthcare, where we have strong leadership positions. 85% of our revenue is recurring. Even in those durable spaces, you have strong mid-single digit growth on average. You get this nice benefit of durable derisk, let's call it. Now you're seeing this kind of pivot with BD, where we're driving towards the plus side of our Investor Day.
I think the other nice thing about that growth is this isn't coming with, like, high-risk R&D programs and new spaces, new markets. This is us being very systematic about how we're strategically positioning ourselves in high-growth end markets like Parata Pharmacy Automation. It fits perfectly with the BD growth profile. Our R&D portfolio's got a lot of singles, doubles, you know, 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+. I'll just share, like, we were very intentional with the plus side. That's what we're driving towards. We wanna 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, you know, where we see ourselves, but I certainly think, you know, our past actions are consistent with what we're trying to do, and you're seeing the that strategy play out. I think it's there's not too many companies that have that balance that I talked about in the setup, and we're gonna 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. As you've dug in, and started executing on the margins, like, do you feel like the whole opportunity is bigger than it is, or is it more like you're just tracking faster than it's a little easier to get to with that revenue growth coming in, you know, versus the overall opportunity for the margin of this business to be actually higher?
Yeah. 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've gotten us back to, call it, an Embecta adjusted margin, right? 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, you know, depletion due to the Embecta spin, right? Our core operating margin, 25%. We're 70% of the way there. We delivered 280 basis points in FY 2022. We got a goal of at least 100 basis points this year. By the way, that increased target we set as inflation dynamics were starting.
Inflation hadn't really kind of hit when we had our Investor Day. We were maybe on the very front end and seeing some signals there. We're achieving those goals in one of the most complex macro environments we've operated in, with two years in a row of over 200 basis points of outsized inflation. That's above kind of normal 3% inflation. I mean, you're talking well over $1 billion of absorbing. One, we've shared we feel really good about the progression, and the path to 25 and 25. Certainly, I think just with the sales growth alone, you get really strong leverage. We also talked about deleveraging with Alaris. There'll be some opportunity there that we've talked about with Alaris being part of our FY 2025 plan.
We're gonna 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. We have that will benefit us. 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'll 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 talked about that we've been posting?
I think that would be better for everyone, right? It establishes a bigger moat and a bigger base. you know, feeling good about that progress in this environment.
On the Alaris side, to get them to the FY 2025 numbers, I would assume it has to be a little earlier at the beginning of FY 2025 versus the end. Just to make sure that's the right clarification. Then, Michael, maybe talk about how your organization's getting ready, you know, for that launch. You know, things you can do ahead of, you know, the FDA reapproval, if you will.
Yeah. I mean, you know, we're pretty clear we don't talk about timing. Yes, it's in our plan for 2025. You know, you would think between now and then it would have to occur to hit those numbers. You know, 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. The things that we're doing, you know, starting with the operations, like let's make sure we have the line of sight to the supply chain.
You know, 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. That's been really important. We've made some significant, very strategic buys there. Secondly, making sure we have the labor in place. 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 three years, that's really helped as well. We've been able to have a good labor force there. From a service perspective and sales, we've kept those people. They've been helping us in other areas.
They've been really helpful in terms of, you know, with the Parata acquisition, you know, helping to, you know, gain entry for Parata salespeople to talk to some of our acute care hospital customers. From a service perspective, making sure that we have really high quality of response and NPS scores and things like that with our dispensing business, which is also, you know, growing really well. I think, I think that's been, you know, sort of the operational readiness that we feel pretty good about right now.
It sounds like you'd almost have some inventory kind of available, some components available, and kind of more ready to go. Maybe that could be a little bit of a bolus because some when I talk to hospitals, they feel like there's, like, some pent-up demand here for this product.
Yeah. It's, you know, the hospi`tals are gonna make the decision on their timeframe. You know, they need to do good capital planning. They need to have the labor force ready to accept the changeover of product, things like that. You know, we're preparing to talk to everybody, you know, day one and get that off the ground very quickly.
Yeah. When you think about share, like your other competitors, you know, filed with the FDA, they've got components back. Their sort of supply chain's improving a little bit. Like, do you expect share to shift much, you know, in the near term, things you can kind of do to hang on to customers in the near term?
Yeah. I mean, it's hard to say. I mean, COVID's been a disruptor, so, you know, we've been very fortunate. We haven't lost a lot of market position over the past three years. We've lost some, but not to any one competitor. It's been like a hospital here, a hospital there. You know, we have relaunched this product in outside the US market, so in Canada and Australia and some other places. You know, the dynamic that you talk about where there's been another competitor with a new product on the market, has happened in Canada. You know, we maintained very good competitive, 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. We feel like we're well positioned.
The product has demonstrated through the pandemic, you know, 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, you know, very good patient safety profile in terms of the guardrails dose error reduction software. That's really, you know, something that's very important to make sure that you reduce medication errors whenever you're under stress in, you know, working with the patients. Third, it has probably the highest degree of bidirectional interoperability with the Cerner, the Epic, and the electronic medical records.
That reduces the inefficiency of the clinician, where instead of, you know, them spending 85% of their time, you know, programming in, you know, keystrokes on the pump, the order is automatically populated on the pump, and it reduces a lot of their time there, which they can be better spent caring for the patient. Those three things we think are what makes the product pretty unique, and it's why customers have stayed with us.
While you're talking, maybe we can jump to Parata a little bit. That's about to go organic.
Yeah.
Feels like you're getting some revenue synergies already there. Like, just the opportunity there, is that gonna be material to the organic growth rate for overall BD?
Yeah, I think so. You know, first of all, you know, step back, the strategy around Parata, if you look at it, we were already very strong in the acute care setting, with Pyxis, already very strong with our Pyxis Logistics software, some other acquisitions that we'd started to make in this space. We already had some knowledge about the retail sector outside the U.S. with our BD Rowa. We had tried a couple of times to bring the Rowa technology into the U.S. and hadn't really, you know, gotten traction. Parata really fit very well because they were already making very good strides in the greenfield opportunity of automating the retail pharmacy.
You know, we saw that as having a long runway in addition to transforming the pharmacy for the acute care setting, where instead of having, you know, one pharmacy for that hospital down in the basement, you can really get economies of scale by moving to more of a central fill facility, you know, servicing their own employees with scripts. A really good opportunity there. I think that it is gonna be a pretty consistent growth driver for us.
No, I was just gonna say, I think it's just a great example of capability we've been building-
That's right.
... in BD. It starts very early around strategy, target profiling, building relationships. The success we're experiencing now is because a lot of the front-end work in terms of understanding the marketplace, understanding the model, understanding what they can do, where can we bring kind of the power of BD to bear.
Yeah
... to drive outcomes, a disciplined approach when thinking of the acquisition and the value creation. Then a ton of already, I think, I mean, in, in less than a year, 3, 4 post-AC kind of discussions, like...
Yeah
... where are we? Are we on the model? Like, all of that. I think as we explore our tuck-in M&A strategy, this has been another thing that's kind of behind it that's leading to successful integration of these assets.
Mm-hmm.
That's the whole tuck-in strategy is kind of new, the new muscle that you guys have built up and executed well on. Like, when you think about the path forward, like where do you kinda see this tuck-in strategy going? Is it certain businesses or like, are there all these assets out there like Parata? You know, no one really knew what This was out there, then oh, this is an awesome deal. Just curious what you see out there as you're kind of scouting the environment.
Yeah, we, obviously, we have a robust process where every business kind of assesses spaces. There's some common themes where we're anchored against this, these Transformative Solutions principles, new care settings, Connected Care, chronic disease. There's sort of kind of a filter lens. We're certainly looking for accretive growth. We're looking for things that there's kind of plug and play, again, that bring the power of BD to bear, which also lends itself to nice margin profile. If you look at BD pre-CareFusion and Bard, which are obviously two very large transformative kind of acquisitions, we've been very clear we're not looking to do any of those. Pre those dates, there was literally, I think, one acquisition of like $300 million. It was not a core part of the BD growth story.
Since then, we've done, you know, approaching 20 acquisitions. The first 17-ish were about a billion and a half of capital, and then we did Parata for another billion and a half of capital. Those first 17 were smaller tuck-ins. They're serving us really well. Some of them targeted to specific markets or building out PVD as an example, a good high-end market on the peripheral interventional side of the business. They served us well to kinda jump-start that strategy. What we've talked about is trying to find these chunkier assets now. I think we'll probably reserve... We talked about having about a billion and a half to $2 billion per year of excess cash that we could deploy towards tuck-in M&A.
Maybe about a third of it would be the smaller ones, and then we would try and really preserve dollars for these sort of chunkier assets that I think have a more meaningful impact to the business, as you can see with Parata.
Yep. Another muscle that BD's kinda built up, the inflation task force can also be the offsets on inflation. Curious how much of that is like more of a one-time thing that you've kinda dealt with as inflation has been a little higher than normal versus some of that stuff that can be kind of a new muscle that levers BD can pull going forward.
Yeah. I mean, some of this, you know, Tom, when he launched kind of BD 2025, there was the Grow, Simplify and Empower strategy. Simplify was a critical tenet to that. I think any strong performing company, it's healthy to have a simplify pillar where you're sort of reinventing how you did things in the past, getting more efficient, creating capacity, and then using that capacity to invest in new spaces, deliver your performance goals, et cetera. We certainly doubled down on that. We've done a lot internally, whether it be strengthening kind of our supply chain task force. We've done a lot around profitable growth and even organization metrics, changing how our leaders all think about growth. It's not just growth at the cost of P&L. It's profitable growth and then making trade-offs.
There's literally comp structures training around that. How we go to market, understand the value of our pipeline, especially in light of more transformative R&D, I think is another good example. You just saw us announce another kind of leg of the third leg of RECODE, which was operating model simplification this year, including, doing some more outsourcing to, you know, a large third-party provider in kind of back office areas. You know, we have an inventory of things we wanna keep doing. Our posture has been that inflation, certainly in the short term, is gonna persist.
We've said it's not gonna escalate. You've seen some dynamics where it's stabilized in areas like materials. I think labor is something to keep watching, but we've structurally dealt with this, and it positions us really well to either navigate that if it continues or if it continues to abate a little bit, that's great. It just drives upside for us that we can think about how to deploy, where I think others will need that maybe more to kind of get back to where they were. There's definitely been what I would call some like core structural principle-based changes that have happened.
Okay. Last one. We're out of time, but I did want to ask about the GLP-1s and impact of the injection systems.
Sure. Yeah, we're aware of the GLP-1, you know, as a category. It's one of those, as I mentioned before, it's a biologic. And, you know, we don't talk specifically about any particular molecule or any particular company 'cause we tend to have confidentiality agreements with each of them. If you think about GLP-1s or, you know, the Alzheimer drug that I think recently came out with some good clinical data or, you know, other types of drugs for obesity or multiple sclerosis, things like that, these are all biologics. Biologics have certain requirements for primary container closure systems in terms of the sensitivity.
A lot of times they, their sensitivity and the reaction to the materials of the container, you know, create, you know, barriers to entry for, you know, any sort of, you know, lower quality type of product. We've been serving that market for quite some time and built trust with, you know, I think the top eight, you know, pharmaceutical companies that make these types of products. I think the combination, again, of our capacity expansion for this area, you know, predating, you know, the advent of the GLP-1s and the weight loss claims. Then, our trust, because we've already got relationships with a lot of these companies, and they know that we can deliver high quality product, and then our ability to scale up and meet their needs.
I think we're well positioned for it without getting into any real specifics around them.
Right. That's super helpful. We'll end there. Thanks a lot.
No, I appreciate it. Great questions. Thanks again, everyone.
Thank you.
Have a great day.