All right. Welcome back. I'm Larry Biegelsen, the medical device analyst at Wells Fargo, and it's my pleasure to host this fireside chat with the management team from Becton, Dickinson. With us, we have Tom Polen, Chairman, President, and CEO, and Vitor Roque, the CFO. Also in attendance, Shawn Bevec, Senior Vice President of Investor Relations, and Adam Reif, Vice President of Investor Relations. Tom and Vitor, thanks so much for being here.
Great to be here.
Thanks for having us.
You've been a supporter of our conference for a long time, so thank you.
One of the best conferences.
Thank you. Tom, let's start with the big picture question. Q3 was the first quarter for the new BD, and it was a good quarter. Fiscal Q3, 4.4% organic growth. You had 90% of the portfolio growing high single digits. Talk about the benefits of the more focused new BD and your top priorities over the next year.
Sure. Again, thanks for having me. We've obviously been busy getting the portfolio in the position that we want, both in terms of the number of exits that we've done over the last several years. Obviously, in Embecta, BD Mueller, and then most recently in February, the separation of the life science business to Waters, which we think was an outstanding transaction for our shareholders. I think it's recently been valued at about $20 billion based on their stock price, so great, and around 20x multiples as well.
That left our focused portfolio that we have also spent a ton of time building over the last several years, whether or not it's the biologics business that we accelerated with a $1.2 billion investment a number of years ago, to our urinary incontinence franchise, to our tissue regeneration business that was built through a tuck-in M&A that we've done over the last few years. Obviously, to pharmacy automation and peripheral vascular, and of course, APM, another acquisition that we've done. What you saw was, you saw those growth platforms that we've built over the last several years, again, really firing high single digit, double digit growth across essentially all of those growth platforms. They also carry a stronger margin than the average of the company.
As those continue to accelerate and outperform the base of the company, that also has a positive gross margin benefit to us that you continue to see across the organization. At the same time, of course, we're executing our Excellence Unleashed strategy, which is focused on bringing and executing BD Excellence across our compete commercial agenda, our innovation agenda, and our operational or delivery agenda. We can get into those. You saw the power of that strategy come through in another strong quarter after several sequential ones in a row. You can feel in the organization the benefits of the focus on med tech. I think you're just seeing the start of that benefit today.
That's helpful. You have an analyst day coming up in December.
December 10th, yes.
First one in a while.
Yes.
Maybe, love to get a preview from you of what we should expect. Feel free to share any numbers, but I know you won't. How far out will the new LRP go? I think the last one was BD 2025. Is this going to be BD 2030+?
Yeah. This will be boring because there's no surprises here. We're just doing what we said. Yeah, as we think about the upcoming analyst day, what you can expect is we will give a new updated LRP outlook. It's due for that. We'll include that in not only our revenue, which also not be surprising. We've clearly articulated we expect to return to mid-single digit growth after 2027 as BD Alaris pops up. You're seeing us actually do that ex BD Alaris this year, and you'll see it again next year. Then we'll give margin and cash flow expectations on that. I think what some of the most exciting stuff is we'll start digging into exactly what we're doing on our compete agenda, like how we're up-tempoing and transforming the commercial engine of the company, bringing it to the world-class level that we have in our delivery agenda operations.
I don't think anyone questions BD's world-class in the industry when it comes to operational. We're going to be the same when it comes to commercial, and we're going to be known for that. We're very confident of that, and we're making really good progress. On the innovation, you know about a number of things that we've been doing. There's a number of things that you don't know that we've been doing. We'll unveil a number of new innovations that are in our pipeline that we think are exciting, that help secure that growth LRP that we'll talk about. Then we'll dig a bit more into BD Excellence and how that really still has significant runway to continue our margin expansion strategy and the momentum that we've built over the last several years there.
Helpful. Just one or two questions on kind of fiscal 2026. You only have one quarter left. Topline implies a Q4, implies a bit of a deceleration.
Sure.
Why is that, and what could go better than expected? On the margins, it actually implies a fairly big ramp in the margins. Talk about the driver of that, please.
Sure. If I start with the revenue, I think the confidence on the full year comes with the results we have on the Q3 and the year- to- date. We have been delivering on our commitments and exceeding. That is why we raised the guidance for the high end of the low single digits. The Q4, yes, implies a deceleration, and that is purely mechanics because of the Alaris dynamic we have that in Q4 is the highest year quarter of Alaris last year. Instead of like 100 basis points of pressure, it jumps to about 200 basis points of pressure in Q4, which actually is the same number that we are expecting to have the pressure heading into next year for FY 2027. The dynamic of Alaris is what is actually declining a little bit the growth on Q4.
But we feel very confident on the momentum we have. We are expecting, again, we guided the numbers in Q4, and we are expecting to be very well- positioned to deliver on that. From a margin perspective, it is the ramp on the margin. It is there. I think there is about 300, 400 basis points of sequential ramp on the margin. Actually, we did this last year. It is just not transparent because we had the first quarter of tariffs impacting us and was the biggest quarter sequentially for tariffs we had. But there are a few factors that gives us confidence on the Q4 margins we have. One is we continue to overperform, as Tom said, on our growth drivers.
Those growth drivers have a better margin compared to the other products, and those continue to perform well, and we are going to continue to see the momentum heading into Q4. Another piece, very important piece, is the BD Excellence. The way it works is the springtime of the year is where we maximize our production for the Q4, and that variance, the favorability on the variance, gets capitalized on our balance sheet and rolls to the P&L in Q4. We are going to see the favorability coming in Q4. We have high visibility of that. That gives us confidence on the sequential of the margin. Last but not least is the tariff situation. As I mentioned, this first quarter year-over-year is the first time we are going to lap tariffs.
Until Q3, it was like a headwind for us because we didn't have tariffs last year for the first three quarters. In Q4 we're going to be lapping. It's also sequentially is the smaller tariff number we have because we have been implementing the actions to mitigate those tariffs. The combination of the mix, BD Excellence, and the tariffs just gives us confidence that we are going to deliver on the margin ramp in Q4.
That's helpful. Tom, let's transition to the products. 90% of the portfolio growing at single digits in Q3. Imagine if it was 100%.
Sure.
But there are 10% of the portfolio that's not. Talk about those other areas and the pathway to turning them around.
Yeah, sure. First off, we're really pleased with how we've built the portfolio in that 90% that's performing. The good news is really that we see there's three factors that make up that other 10%, and I can walk through each of those. Two of them have, I think, clear turns coming. The first one is very, very clear and well-defined. That's Alaris. Obviously, we're at now record shares in Alaris. We're going to gain well over 200 basis points a share this year. We're already at that year-to-date with still a quarter to go. The dynamic there is just the comp since we've replaced 100% of the market for Alaris pumps in a three-year cycle rather than an eight-year cycle as part of the remediation that we entered into with the FDA of bringing that product back on market.
That just creates a grow-over. So it's a unique situation where there's a grow-over dynamic, but where actually it has nothing to do with our commercial competitiveness or the success of the business. It's continuing to actually thrive phenomenally. We called it, right? We said we expect 100 basis points headwind this year, and it's playing out as expected. We said at the beginning of this year, we expect 200 basis points of headwind in 2027, and we just reaffirmed in Q3, you can expect that as we think about our outlook for 2027. That'll play out. Then that goes away, right? As we go into 2028, that 200 basis point headwind for the company from the natural grow-over Alaris will disappear, and that will raise back up the overall growth rate of the company. So that's very clear. Second one was vaccines.
Obviously, saw vaccines come down across essentially every pharma company, saw vaccine declines this year. Of course, the suppliers who provide them their delivery devices saw the ripple effects of that. We stated as we went into the year what we expected that to be, and it's largely played out as we expected. This quarter, Q4, will be kind of the last quarter where we lap that, and we'll start getting over that in Q1. We also said at the beginning of the year that we expect to have some better visibility by the end of the summer.
Yep.
Labor Day just occurred, so we're there at the end of the summer. I'd say what we see today from order patterns coming in from our pharma customers is that we don't see a repeat of the situation. So we see not necessarily are we assuming a hockey stick back up in the growth, but we're certainly not assuming any continued significant headwind from that as we go into 2027. So we feel good on that. Starting to come back. We'll take a conservative up front and see where that goes, but we certainly don't see that being a repeated headwind that we'll be talking about in 2027. Then the last one is China. China, of the three factors, that one probably still has the most kind of uncertainty for all players there, given value-based procurement.
I think what's most important for us is that business used to be 7% of revenue. The biggest business was, in fact, our life science business. With the separation of life sciences, that business is now down about 4% of revenue, and next year it'll be in the threes. So, it's just an increasingly smaller part of who BD is. We are seeing, and we have built into kind of our outlook for 2027, a similar performance as we saw this year into our numbers. But again, it's something that we expect to not really be talking about given it's just a much smaller portion of the company. So, those three factors, there were about 250 basis points of headwinds in 2026, which is what we called out.
We expect, again, Alaris to increase next year as we planned, vaccines to get better, and China to continue would be a much smaller portion of the portfolio.
So a few follow-up questions. That is super helpful. The 250 basis point headwind from those three in 2026, that should be less in 2027, primarily because of the Pharm Systems piece?
Well, you have Pharm Systems getting better, but you have Alaris getting-
Oh, okay. Got it.
It is similar because Alaris goes to 200 by itself.
Got it.
It goes to 200. Yeah.
China, the decline, you give the numbers, it is about 10% decline the last few quarters.
Yes. Correct.
Is that in VBP? Why does that continue to decline at such a rate?
Yeah. The majority of the portfolio has gone through VBP. What you're continuing to see is provinces amalgamate and do additional VBPs, right? If one province did this, then now groups of provinces will do those, then they'll start pegging off. The starting point is the lowest price province that exists. That still is occurring in a number of areas. We've continued ever since the start to adjust our operating expense base in China to take it down proportionate as the revenue has come down. We've continued to do that. We've added some new capabilities in our commercial team. We've executed well through the VBP, but it's a very challenging environment. I think we've got it pegged right for FY 2027 as we did this year. But it's a situation that's just still not stable overall for China.
Sorry if you said it, but
I think that is true of the overall China market.
...companies have said when they expect to be through VBP. I guess, is there a point at which China flattens out or grows again?
I think there will be. I think one of the things that we have learned is, until that happens, I am not going to peg exactly a date as to when that is going to be. I think China is still just, frankly, the ability to predict exactly what the Chinese government is going to do. You saw, for example, we are not in the space at all, but in diagnostics, right, it was not VBP. You suddenly get into DRG and grouping of products.
There are many different mechanisms that people can do to manage price. The government has a very specific agenda to drive healthcare costs down so that they can redirect that funding to other areas of expenditure within the society. I think until we just see the stabilization, and if I talk to our team, I will be there again in December, was there not too long ago. We have our own view as to when that could happen, but I think the thing that I have learned from spending a lot of time in China over a long period of time is, let us start seeing the signs in the marketplace before I peg and share something on that. Otherwise, let us recognize that it is our obligation to navigate it as best as we can and influence.
We spend a lot of time with the government, helping to make sure that people understand the quality importance, because many of these specs or the tenders do not have quality specifications built into them. We have had some success in that, but obviously we focus on the controllables and what we can control and influencing that and then making sure that we build in the prudent guidance into our numbers so that we can consistently deliver on what we say.
On Alaris, I think the guidance implies about $100 million in sales next year.
Yeah.
But you've been doing well. You've been taking share.
Right.
I think the perception is that's probably a floor, a little conservative, given that you're taking share. Is that fair?
You know, I-
Could you do better, I guess?
It's where we want to start the year at. I think the reality is just from a market perspective, right, we have 60% market share. You've got three other players that divvy up the remaining 40%. We just replaced 60% of the market in three years, so we just moved 20% of the market per year. We upgraded ourself. That's our comp. If you look at the remaining 40%, that's still on the normal 8- 10-year replacement cycle. So you're looking at 4%- 5% of the total market coming up for grabs every year. That's true this year, and so if we took 200 basis points of share this year-to-date, that means we took almost half of all the competitive business that became available for conversion. That's a pretty good win rate, I think anyone would say. We expect to continue that.
It's still, just to put it in perspective, if we take half of the business that becomes available from competition every year, it's 2.5 points of share versus what we've just been upgrading, which is 20 points of the marketplace from a comp perspective. Could there be some opportunity? Yes. I think there also can be some opportunity on the pull-through of the sets, because the sets don't have the comp dynamic, right? The sets never had a drop. They just continue, nor did they ever have a peak. They just consume, and the more pumps you have in the marketplace, the more sets that you have. They're higher margin than the pump revenue. So that's a positive, and obviously the more share that we gain, the more pull-through we're going to have on those sets.
Last one on the headwinds you talked about on Pharm Systems, mid-single digit growth, I think, in Q3.
Yes.
That was historically like a high single-digit growth business. I just can't remember, you've given color on the vaccines, maybe 30% of the portfolio. My question is, based on what you told us, which sounded positive, how should we think about Pharm Systems growth going forward?
Yeah. We're not going to guide a business unit for 2027.
But can you get back to the high single digit growth?
Yeah, I think long term, let's call it an accretive business to BD long term. We even said last quarter, the business grew in the teens.
Yes.
Ex vaccines, right? Continued very strong double-digit growth in biologics, way past 20% growth in GLP-1s. So continued strong performance there, strong pipeline. We've got presence in the right molecule mix that we want. So more to come there.
So you said vaccines won't be a headwind, something along those lines, right?
Right.
Going forward next year. So if it's mid-teens ex the vaccines, you don't want people to extrapolate, oh, this is going to be mid-teens next year.
Well, that's a quarter, right? That was a quarter I was commenting on.
Okay.
We don't want to say that, but I think it will get back to. It doesn't mean that vaccines are going to be accretive, right? I said we don't expect it to be a significant headwind. Let's assume vaccines are neutral, kind of a 0%. So you go from a
-20-some to a neutral. That's a big jump in a year. I think we want to be prudent on how we think about vaccines for next year. Vaccines is something that there's a lot of dynamics that impact that, both seasonal intensity, geopolitical dynamics obviously had a big role in vaccines this year. What we can say is that the order patterns from our pharma customers are coming in much more solid this year, early still, but are not showing the types of signs that we saw going into the back end of Q4 last.
Similar to, just complement, similar to China, vaccines is becoming a smaller part of the business as well. We came from $450 million to towards $300 million of revenue in total. So it's becoming a smaller part of the business. We are having good signs that we are not going to see a headwind of the same magnitude, but it's becoming a smaller part of the business as well.
That's helpful. Tom, I wanted to ask you about the growth drivers. A bunch of questions here, but maybe talk about the ones you're most excited about, the ones that are driving the most growth, please.
Yeah. A lot of them. APM, right? That's been a fantastic acquisition for us. That business fits really well inside of BD. You can see since we've acquired it from Edwards, which is a great organization, and did great things with it, but we've been able to accelerate the performance, both on the revenue and the margin perspective. We'll be coming up on the three-year anniversary very soon. We'll have expanded gross margins by about 1,000 basis points on gross margin by applying BD Excellence there. That's something we do exceptionally well as operational excellence. We applied that in the factories at APM, and we've been able to increase gross margins by about 1,000 basis points.
On the revenue side, that traditionally was a high mid-single, kind of low high single-digit growth business, and you've seen that posting double-digit growth here for quite a few quarters in a row. We still would call that long term more of a high single-digit growth business. But the moral of the story is we've been investing in sales force expansion. We expanded their U.S. sales team by 15% this year. We also put more money in the R&D pipeline. They were trading off against high margin, high growth, cardiac, heart valves, et c. That business inside of BD, a high single-digit growth that we've been able to expand margins on. We'll put more money in that every day of the week from an R&D perspective and a selling perspective, and that's exactly what we've been doing, and you're seeing that pay off. We see an exciting pipeline ahead.
If you recall, one of the reasons that we acquired that business was to combine it with our BD Alaris platform as well. We've been hard at work. I think the first week of the announcement, I said that we had already immediately put R&D dollars into that project. Stay tuned at Analyst Day to see more on what we've been up to over the last several years. We've got some pretty exciting new innovations coming on that one. Other areas, PureWick. I think we had shared a number of years ago that we expect that business to be a billion-dollar growth platform by 2030. I think we're up to $40-some million consecutive quarters of that growing double digits. It's well past the halfway mark, towards $1 billion by 2030. Very much on track to hit it by 2030, if not a bit sooner.
And there, again, we'll show more at Analyst Day, but we continue to expand outside of the hospital. We also announced building a new VA sales force this year. Just again, in perspective, going into 2026, we put about $40 million of incremental selling investment beyond what we would normally do into a number of areas, including Advanced Patient Monitoring, into UCC, and into surgery, which I can talk about in a moment. But that new VA sales channel that we built at the start of this year, they're already well over a million-dollar run rate a month platform that they've built. The VA fully reimburses PureWick for veterans at home, and we see a significant runway there. We see other groups beginning to reimburse PureWick at home based on some studies that we've recently published, and so we see more opportunities there.
We have mobile PureWick launching, which we will share more details of. This is a wearable PureWick, which will be the first one. We have it for at home, we have it for hospital, we have it for people in wheelchairs. Now we will have it something like in a fanny pack that you can just walk around the conference and you actually can never leave the meetings. You can just stay in the meetings all day in this PureWick. We will have that coming very shortly. And then we have one in the works for patients with cognitive disabilities as well, too, which is very specific needs that they have. Moral of the story, there is a long runway there. I think maybe I will share one more of the many different growth drivers, and I will not talk about all of them, but regenerative medicine is another one.
If you step back, at the beginning of the BD 2025 journey, we bought a company called Tepha. And Tepha was really a material science company that had a material called P4HB. And it is an amazing product that we grow it with E. coli, and we sew it into threads, this material. And ultimately, then we started using it for hernia mesh and to replace plastic mesh. And it biodegrades in 18 months, and it leaves your abdominal wall stronger than it was before. And we are now up to eight-year data that says the recurrence rate of a hernia with this material that disappears in 18 months is just as good as if you had plastic mesh in your body for the rest of your life.
Moral of the story is you should get our Phasix mesh, not plastic mesh in your body for the rest of your life. And now we have expanded into other hernia indications. This is a higher price, higher margin product, highly differentiated. Ex-U.S., we now have indications for plastic surgery. We see people as their GLP-1s weight loss, and they are getting skin tucks and removals and chin lifts and arm lifts and breast lifts. This is being used significantly there. That was another one of the investments we made at the start of FY 2026 was expanding our plastic surgery sales team in Latin America, specifically Brazil and across Europe, where we have those indications, and we are seeing great progress there. We are now taking it into other areas outside of plastic surgery and outside of abdominal reconstruction.
We launched parastomal hernia coming up in FY 2027, which will be the first kind of new innovation in that area of high unmet need. And we have at least three clinical trials underway for getting into the breast space in a number of different indications as well too. A lot of exciting opportunities there. And we have earlier stage things where we are looking at everything from skin substitutes to other broader reconstruction using that same biomaterial. We have actually been able to bioengineer it to actually degrade not just in 18 months, but we can make it degrade in 24 months, in 36 months, in 12 months if we want, which has allowed us to start opening up these other indications that did not exist when we acquired the company. Some exciting times ahead in surgery.
Super helpful. One product question before I turn to the environment and 2027. Specimen management grew 14% in the U.S. in Q3, partly due to a competitor supply issue. When do you expect that supply issue to be resolved?
Yeah. First, just huge kudos to our specimen management operations team. That type of growth, while it is certainly not usual, nor would we ever, no one should model 14% for U.S. specimen management. But to capitalize on a situation just shows the strength of our operations team, to be able to move very nimbly and grab that amount of business from competition that quickly, is not easy to do when you are talking about making billions of things.
It is still going on a bit now. We see and obviously our commercial team does not like to just ship things to help competitors while they are on back order. We tend to seek to get contracts to have that business long term. We will see where that plays out, but we will expect some longer term benefits of that back order, as we do often seek to get longer term contracts when we supply customers in those situations.
That is helpful. Tom, obviously there is a lot of focus on utilization and the capital equipment environment. You gave some helpful comments on, I think, the Q3 call.
Yeah.
Have you seen any changes since then, and how are you thinking about those two areas in your fiscal 2027?
Well, we're not seeing any change in our capital sales. Of course, capital today, more than 90%, 95% of BD's revenue is I think more than 90% of BD's revenue is recurring revenue, not capital, which is a great part of our portfolio from a cash flow generation. The small portion of BD revenue that is capital is highly connected to driving efficiencies in hospitals. You're talking about pharmacy robots, which are really part of the cost-savings solution. It's Pyxis, which we also lease Pyxis as well, but that's also around efficiencies for nurses, et c.
Those are the major capital categories. Pumps obviously as well, which we can also lease. But that's a dynamic which is coming to an end of the upgrade cycle. We expect a continued steady capital environment, particularly for solutions that we focus on, which are solutions which drive efficiencies and cost improvements for healthcare.
And procedures?
Procedures, we're seeing a steady procedure volume. I think we've got a very unique perspective across the industry where essentially anyone's procedure can't be done without BD. 95% of every surgery is done with a BD device, whether or not a ChloraPrep or our syringe. I assume that's a BD syringe that that robot's holding, or I would hope it is. There's a 95% chance that it is in the U.S. We see a good view of what's happening from an overall procedure volume, and we saw steady procedures. What we don't see necessarily, nor do we necessarily focus on is orthopedics going up, and is cardiac going up and down? Because we just see overall procedure volume.
I think even with the other good one that we see that's a good indicator is blood collection, just given a very high category share that we have. That's just a good ubiquitous factor of how much testing, which is a good indicator of healthcare consumption. Even though that 14% in the U.S. is an outsized number, even if you strip away the competitive kind of dynamic that happened there in the quarter that we benefited from, it was still robust. I think you saw the same thing from Labcorp and Quest. They posted quite robust numbers as well. You're seeing just general testing consumption going up. We're also seeing one of the ratios we look at is the number of tubes per draw, and we continue to see that tick up a little too.
That means there's a bit more complex testing that's happening as well. People are drawing a couple extra, or they're drawing a bit more tubes today than they did a year or two ago. Whether or not that's more cancer screening that's going on or other complex testing that's happening, it's moving from a utilization perspective upward.
Do you guys have the ability to look by therapeutic area, cardio, orthopedic if you wanted to? Could you analyze that data?
We have subsets of our product that are very specific, of our portfolio that are very specifically used in there. Obviously, we have aspects of our portfolio, like consumption of APM is a good indicator of cardiac. That's a lot of. Basically, there's no cardiac procedures, significant, don't use APM. It has 90% share. So that growth rate is highly associated with cardiac. It can be, although we're expanding, like our new sales force is going into new areas outside of it. But for the most part, once we send kind of the general supplies category products into a hospital, where they end up, we don't track that.
Got it. Okay. I wanted to ask about 2027. I think the top line's been pretty clear. I think you basically said, similar to 2026, low single digits.
Yep.
I don't know if you want to comment. Maybe what could go better this year. It's low single digit plus, right. What would it take to get to the same place?
Well, when we put out, of course, the 200 basis points of pressure on Alaris is what puts us on that category of low single digits. We feel that that's the right place to start the year. I think we did it this year. We want to make sure that the guidance we give out there is executable, is prudent or responsible, so allow us to deliver on that number. Of course, we have good momentum on several of the platforms, the growth platforms that Tom has been commenting on. We expect that momentum to continue, but we believe the low single digits is the right place to start for FY 2027.
It sounds like at least Pharm Systems could be better next year than this year.
Well, there is always puts and takes. Of course, the vaccine situation is going to be a better dynamic than what we had this year, but there are going to be dynamics across our multiple divisions. We still think that low single digits is the right place to start as we head into FY 2027.
Price, Tom, has been a little bit better this year versus last year, s hould we expect that to continue?
We are actually stepping up our pricing work. We have been doing that. We started that right when the whole situation in the Middle East occurred. We did not hesitate. We believe that we need to assume that oil will stay high, and we were not going to watch to see where it landed. Obviously, it had been below $100 for the last couple of months. I do not know where it is today. But we assumed it was going to be at $100 or above, and we started acting like it.
$100 today.
Right, $ 100 today.
$100 today.
But that's not new because that's been our assumption.
That's not new.
For us.
That's what we have been expecting.
That's what we've been expecting.
Yes.
Under that premise, we started taking additional price action, already about two quarters ago. We do expect 2027 to have a bit more pricing in it than 2026. Obviously, you saw 2026, there was over $130 million of negative price from China.
Yeah.
Because VBP is all price. When you see us having positive price as a company, much better price rest of world, partially offset by China. At least we are fully able to more than offset China to have a net positive number still across the company. Obviously, as China continues to come down in size and stabilizes over time, we would expect not to change what we are doing on price. That will become another positive for the company.
Yeah. The team has been doing a very good job on price. It has been positive since we came out of COVID, and the discipline and the execution on price has been very commendable to the team, and we expect that to continue into 2027.
We spent a lot of time on price.
Yes.
That's helpful. On EPS, Vitor, you talked about on the Q3 call, modest EPS leverage. The Street came out at 5% EPS growth. We're at 4%. Can you maybe just put a little bit more precision around what you meant by modest EPS growth, please?
Well, I'm not going to be steering to any number at this time. We're going to give formal guidance in November. But we believe that, of course, starting with the baseline of low single digits on the revenues line, the modest EPS inclusive of our capital allocation strategy, we believe is, again, the right place to start. I cannot steer 4% or 5% or whatever number, but we believe that, I think the modest EPS leverage is a good place to think about as we head into FY 2027 right now.
How much upward pressure is there on the tax rate next year?
Right now, the tax rate is, we are navigating tax rate as we have today. There's some pressures here and there, but nothing significant that would change dramatically our view.
So low single digit top line growth, we can assume what that is. 50% of free cash flow goes to buybacks, right? That is what you have said, Tom?
Yeah. We have not shared exactly.
You have not said exactly.
The 50%, but the share buybacks will be a priority, and we are expecting to continue to do that next year. So this year, we executed about half of the proceeds from the Waters transaction, about $2 billion straight to that, plus an additional $250 million we did it in Q1. And what we are planning to do, and we are going to share more in December, and also on the Investor Day as part of our long-range plan, is using capital allocation and share buybacks as a sustainable way of returning value to the shareholders. So more to come on that piece, but we are expecting to use the lever as buybacks as well again in 2027.
We are doing exactly what we said. We just never shared a specific percentage.
Okay. The 50%.
We said a meaningful portion. It is a priority for us, a top priority.
Okay. The 50% was not a specific target.
I don't recall us ever saying that, a specific target like that.
Okay.
I think one of the objectives we have is continue to increase our free cash flow conversion. We have been navigating that, and we're expecting to make significant headways into free cash flow conversion. Of course, a portion of this free cash flow conversion is going to be turning into, of course, continue our dividend policy, but also the share buyback in a more structured way going forward.
As an example, this year it was well over that number.
Got it. Tom, we're almost out of time. Want to give you the last word here. Ay closing remarks you'd like to make?
I think it's really the great question that you started us off with, right? We're really excited by the momentum that we have for new BD. We've got a clear strategy that we're executing against. You've seen us share that strategy around Excellence Unleashed. Our focus is across our compete, innovate, and deliver elements. We're really excited by the portfolio that we've got and the growth platforms as they continue to scale, and we'll look forward to sharing more, obviously, on December 10th and on our upcoming earnings call. So thank you guys for the focus today.
Great. Thanks for being here.