Q3 2021 Becton Dickinson and Co Earnings Call
Yeah.
Hello, and welcome to Bd's start fiscal quarter 2021 earnings call.
At the request of BD today's call is being recorded.
It will be available for replay through August 12, 2021 on the investors page of <unk> Dot com website or by phone at 8558592056 for domestic calls and area code 4 zero for 537 and 3406 for international calls using the.
Confirmation number 9.4 for 7085.
I'd like to inform all parties that your lines have been placed in a listen only mode answered the question and answer segment.
Beginning today's call is Mr. Christian Stuart Senior Vice President of strategy and Investor Relations MS. Stewart you may begin.
Hi, good morning, everybody and thank you for joining US this call is being made available via webcast at BD dotcom.
This morning, BD released its results for the third quarter of fiscal 'twenty 'twenty 1.
You can find the press release, along with the accompanying presentation on the Investor Relations website, and Investor and stopped BD dotcom.
Leading this morning's call is.
Tom Polen, Bd's, Chairman and Chief Executive Officer, and President as well as Chris Reidy, Executive Vice President and Chief Financial Officer, and Chief administrative officer.
Following the prepared remarks, Tom and Chris will be joined for Q&A by our 3 segment Presidents Alberto Mas President of the medical segment, Simon Campion President of Interventional segment.
And Dave Hickey President of the life Sciences segment.
During the call, we will be making forward looking statements and it is possible actual results could differ from our expectations risks uncertainties and other factors that could cause such differences can be found in our earnings release and in our SEC filings, including our 2020 form 10 and subs.
Quint form 10 Qs.
We will also discuss non-GAAP financial measures regarding our performance reconciliations to GAAP measures that include the details of purchase accounting and other adjustments can be found in our earnings release and its related financial schedules.
There are also and the appendix of the Investor Relations presentation slides available on the BD Dot Com website.
Unless otherwise specified all comparisons will be on a year over year basis versus the relevant period.
Revenue per cent changes arent and FX neutral basis, unless otherwise noted.
When we refer to the base revenues, we're referring to our total revenues less our COVID-19 diagnostic testing revenues, which include Covid related revenues from there to our BD Max and swaps.
When we refer to base margins, we are adjusting for estimated COVID-19 diagnostic testing profitability and the related profit we have reinvested back into our business.
When we refer to any given peered, referring to the fiscal period and must be noted as a calendar period for.
Finally, we referred a new co during today's call. We are referring to the planned spin out of our diabetes care business into and independently public traded company. Following the effective trade date of the spin which was announced on our second quarter earnings call remain co refers to BD post separation as a reminder, this transaction is subject to market regulatory and other conditions.
And including final approval by Bts Board of directors and the effectiveness of a form 10 registration statement that will be filed with the S. E C.
With that I'm very pleased to turn it over to Tom.
Thank you Christian.
Good morning, everyone and thank you for joining us on today's call I will provide highlights of the quarter and discuss the continued strong progress. We have made on our BD 2025 strategy will then turn it over to Chris for the financial review and outlook. After our prepared remarks, Chris and I will then open the call up for Q&A.
But first and.
And want to comment on the other announcement, we made this morning regarding Christmas intention to retire from BD and joined the board of our diabetes spin off.
On behalf of the board of Directors leadership team and the company I want to express my gratitude to Criss scores leadership and service to be D.
And I'm confident the CFO transition head will be seamless and his leadership and experience will make him an excellent director for new co sport.
Now, let's jump into our results.
We were very pleased with our third quarter performance powered by strong growth and momentum and our base business across all 3 segments.
Revenues totaled $4.9 billion and our adjusted EPS was $2.70 for both ahead of our expectations.
Total revenues were up 26, 9% on a reported basis and up 22% on a currency neutral basis.
Results included Covid diagnostic testing revenues of $300 million, which contributed 4.8% to growth.
Excluding total Covid testing revenues our base business revenues were up 17, 6%.
And we expected across most business units.
The strong growth reflected the anniversary of the initial COVID-19 wave and the temporary halting of elective procedures and its impact on the medical device utilization and the year ago quarter.
For Q3's result, also reflects the continued momentum driven by the successful execution of our BD 2025 strategy.
Excluding COVID-19 diagnostic revenues base business revenues in Q3 fiscal 'twenty, 1 increased 3.9% relative to our pre pandemic third quarter fiscal 2019 on a currency neutral basis, which includes the impact of the Alere ship hold.
If you exclude the U S infusion systems business. Our total revenues would have increased 6.6% relative to our pre pandemic third quarter fiscal 2019, our pharmaceutical systems and urology and critical care franchises continue to be standout performers, where revenues are up 17% and 11%.
<unk> over 2019 levels Bios.
Bioscience revenues were up 9% surgery and peripheral intervention revenues were both up 8%.
Elsewhere, we see opportunities for improvement ahead in fiscal 'twenty, 2 and beyond for.
For example, our M. D. S revenues are up about 2% versus 2019 levels, reflecting the continued impact of COVID-19 as well as the impact of China volume based purchasing.
And as hospital utilization improves we should see further improvements here.
Also as I mentioned medication management solutions revenues were impacted by the Alere a ship hold and we expect our revenues to improve once we receive our 5.10-K clearance for IBD alert system.
Well I am pleased with how we are accelerating our revenue performance and profile I'm equally pleased with the process, we are making and improving our working capital and cash flows.
Cash flow performance has been a key focus for us since I became CEO and that is evident in our working capital metrics.
Year to date cash flows from operations totaled $3.7 billion and increase of 80% from the prior year period. This.
This improvement and our cash flows allowed us to advance our more balanced capital allocation strategy. This quarter, which included the repurchase of $1 billion and BD stock at an average price of approximately $242.
This marks the first time, we have repurchased shares since 2017, and the largest amount we have repurchased since 2012.
Even with this repurchase activity, we ended the third quarter with nearly $3.2 billion and cash and an adjusted net leverage ratio of 2.4 times.
Overall, I'm really pleased with our performance and the quarter, particularly with the continued positive momentum and our base business.
This gives us the confidence to raise our base revenue assumption.
We now expect our base business to grow approximately 7.5% to 8% on and FX neutral basis.
This is higher than our previous expectation of mid single digit growth.
We continue to expect Covid diagnostic testing revenues of 1.8 to $1.9 billion with more revenues coming from international markets than we previously anticipated.
We now expect currency neutral revenue growth overall of approximately 14%.
Our positive base business momentum and a lower tax rate allows us to raise our adjusted EPS guidance by 10 cents, while continuing to reinvest in our business and overcome lower COVID-19 testing profits, including a provision for excess and obsolete COVID-19 testing inventory.
We now expect our full year adjusted EPS range to be $12, and 85 to $12 and 95.
Chris will provide you further details on our financial outlook later in the call.
Next I want to provide and update on our BD alere as pump remediation, which remains my number 1 priority.
Last week, we announced to our customers a positive step and our remediation efforts.
Working with the F D. A wear now initiating remediation of existing alert system devices and the field by updating the software to version 12 Dot 1 dot 2 following submission of the 5.10-K, which includes this software version.
This new software version is intended to remediate the issues identified in the February 4th 2020 recall notice and provide programming operational and cyber security updates to affect the devices.
However, the software update has not been reviewed or cleared by the F. D. A.
To address the question on Alere as Lawrence clearance timing remain confident and our submission and the process, we are undertaking including working closely with the F. D. A.
As Chris will later discuss we believe it is responsible to not definitively predict the FDA clearance and our FY 'twenty 2 outlook. We believe this is a prudent approach given the inherent difficulty in predicting FDA clearance timelines.
Next I want to update you on our BD 2025 strategy of growth simplify and empower.
First I'd like to focus on our growth pillar.
We continue to strengthen our market leadership positions and are durable core business, while purposely investing and new innovations that help accelerate and shape irreversible trends that we see transforming global health now and and the decade ahead.
I've spoken about these 3 innovation and growth focuses before and we've been purposely shifting more of our R&D and tuck in M&A investments into these spaces, which are growing over 6%.
Through this we aim to lift our weighted average market growth rate and performance over time.
And this year, we've launched several innovative products and solutions.
Across the continuum of care across our business units and across the globe.
And after completing our strategic portfolio review last month I can share with you that our pipeline is very deep and wide across our businesses.
It's been further enhanced by our acquisitions over the past 18 months and you'll hear much more about our innovation pipeline at our Investor Day on November 12.
But let me highlight a few of our organic innovations that we're advancing in the near term.
And our life Sciences business I'm pleased that we will start shipping our BD, Max and BD Vera tour combination flu Covid assays and this month.
In time for the upcoming respiratory season R.
Our BD Vera tour combination test can detect and distinguish between COVID-19 flu, a and flu b and a single rapid test with a digital readout we.
We see the combination test, becoming the standard of care moving forward and advancing our strategy to enable better outcomes and non acute settings.
Another innovation area I'd like to highlight is our biosciences business.
And I owe sciences has been a strong performer this year and we expect the unit to deliver high single digit growth for the full year.
In June we launched our new E Commerce site BD Biosciences Dot com.
Isn't entirely new and innovative digital marketplace designed to provide a best in class online purchasing experience for our flow cytometry customers.
Early feedback has been outstanding and we're already seeing excellent traction and early adoption.
We also have and exciting wave of new product introductions. This summer with the launch of our fact Symphony <unk> 5 S E, which is our first BD spectral analyzer and provides an even higher cellular parameter analysis.
We've launched our facts Symphony, a 1 as well, which offers high end technology and our cost effective bench top design.
In addition to these launches we have a healthy innovation pipeline of modular scalable new instruments and next generation dies and will allow our customers to fully leverage our complete and integrated solutions suite of instruments reagents informatics single cell multi omics and scientific support services.
Our products and solutions are being used to uncover new insights on the immune system and develop treatments for many related chronic diseases you.
You can hear more about our life Sciences strategy from Dave Hickey, Our executive Vice President of BD Life Sciences, and Puneet sarin, our worldwide President of BD Biosciences at the upcoming UBS genomics 2.0, and Med Tech innovation summit on Wednesday August 11th.
Next let's turn to our inorganic innovations that we've added to our portfolio.
As you know we continue to be focused on tuck in M&A as a means of adding innovative products and solutions that leverage our core market leadership positions and advance us into higher growth Adjacencies year.
Year to date, we've completed 7 tuck in acquisitions.
While at the same at the time of the acquisitions. These individual deals were not meaningful from a revenue perspective as we integrate these transactions into our portfolio, we expect them to strengthen our growth profile.
Our 3 most recent transactions bolano vascular T for ink and Zebra side are good examples of our M&A strategy. Let me begin with Bolano vascular, which is being added to our M. D S business for launch.
And it has and innovative needle free technology that enables high quality blood draws from existing peripheral IV catheter lines, eliminating the need for multiple needle sticks. This technology will help customers transform the patient experience through the vision of a 1 stick hospital stay.
Bolanos Tivo device will be integrated into our sales team's bag of broader catheter solutions initially and the U S.
This is a great example of how we're expanding and strengthening our base business.
The second transaction is T for Inc. A leading manufacturer of a proprietary resorbable biopolymer technology over.
Over the past several years through our long standing relationship.
We've been commercializing this platform Dr Physics reserve Resorbable hernia mesh platform.
The acquisition benefits are twofold.
First it provides us with a vertical integration strategy for our current phase X platform, but more importantly, it provides us with exciting new opportunities to expand our horizon into new higher growth areas of tissue repair and reconstruction and regeneration.
Lastly, we acquired Zebra side, a pharmaceutical services company.
This acquisition provides the opportunity to expand our pharmaceutical systems business beyond injectable device design and manufacturing to include best in class testing for drug device combination products.
Zebra XI allows us to further engage and collaborate with biopharmaceutical companies and particularly smaller companies, where a large amount of the pipeline is to support the transition of their molecules into pre filled combination devices.
Next I want to update you on our simplify initiatives, which are advancing well.
Through project re code, we are optimizing our portfolio optimizing our plant network and simplifying our business processes.
Project re co remains on track to achieve $300 million of cumulative savings by the end of FY 'twenty for.
We're also continuing the rollout of our BD production system, which is a standardized BD approach to driving and next level of lean processes and continuous improvements across our plants.
The BD production system is already helping to drive improvements in quality and reductions in our inventory days.
We also continue to advance inspire quality, our quality regulatory and risk mitigation program.
The last pillar of our BD, 2020.5 strategies and power.
Each represents the changes and our culture and capabilities that we're driving to empower our strategy.
In Q3, we completed our voice of associate survey with over 86% participation.
And what stood out was that our associates said, we're making strong progress with.
With improvements in 95 per cent of the metrics since our last survey in 2018, and most notable were improvements and our focus areas of growth mindset strong teams quality and excitement about the future of BD.
We're also advancing our 2030 sustainability strategy, which addresses a range of challenges and our industry, helping to make a difference on relevant issues that affect society and the planet.
Our strategy will ensure we remain focused on shared value creation, meaning how we address unmet societal needs through business models and initiatives that also contribute to the commercial success of BD.
Next I want to provide a brief update on the progress of our proposed diabetes spin off which remains on track for the first half of calendar 2020.2.
We are making steady progress with our separation activities.
We recently announced that 2 directors for Bt's board will be appointed as future directors of the diabetes new Coke.
Retired Lieutenant General David Melcher will serve as a nonexecutive chairman of the board and Doctor Claire Pomeroy will serve as a director.
And their appointments will be effective upon the completion of the spin at which point they will transition from the BT board to the board of Newco.
Lieutenant General Melcher brings extensive experience and spinoffs, having served as the CEO of zealous following expand off from ITT and under his leadership <unk> spun off its mission systems business as a separate public company Dr.
Doctor Pomeroy brings broad experience and health care delivery administration medical research and public health.
I'm confident their combined experience along with future planned board members were helped to set new co well on its path to.
And to becoming a successful independent publicly traded company focused on growth.
While continuing to evaluate additional board members. We are also continuing to build a new diabetes care leadership team through a combination of current BD leaders and new hires including debt courtesy car, who will be new co CEO, Jay <unk>, who will be CFO and most recently Jeff man.
And.
Jeff Man joined our diabetes care organization and will be general counsel and head of corporate development for Newco.
Jeff brings more than 2 decades of experience and M&A and transactions Securities law and corporate governance. Most recently he served as general counsel and Secretary of Cantel Medical group.
We're also progressing with the form 10, which will have the carve out financials and we expect it to be publicly available around the end of the calendar year.
Before turning it over to Chris I will leave you with some key thoughts.
First our base business momentum and a recovery from Covid.
And it is broad based.
We expect that momentum to carry into fiscal 'twenty, 2 and beyond as.
As Chris will share with you today's results underscore our confidence and strong mid single digit top line growth for our base business next year.
Second we are executing well against our innovation driven growth strategy, which includes our internal R&D as well as advancing our tuck in M&A strategy.
And third I'm proud of the substantial progress in advancing our BD 2025 strategy and how that will unleash our growth potential and the years to come.
We will deliver innovations for our customers and power our associates and create value for you our shareholders.
I've been with BD for 20 years and I've never been more excited we just completed our annual strategic review process as I said and the road ahead is looking more exciting than it did a year ago. We look forward to sharing our BD 2025 strategy in greater detail at our November 12th Investor Day.
And we hope you can join us.
With that let me turn it over to Chris to review, our financials and our outlook.
Thanks, Tom and.
And also very pleased with our overall performance and the quarter, particularly with the base business, which showed continued strong momentum.
Third quarter revenues of $4.9 billion increased 26, 9% on a reported basis and 22% on a currency neutral basis, and we're ahead of our expectations. Our current quarter results also include $300 million and Covid diagnostic testing revenues compared to $98 million and the pre.
For year period.
Excluding COVID-19 diagnostic revenues in both periods our base business revenues increased 17, 6%.
Our base business reflects continued strong performance as the market continues to recover from the Covid pandemic the impact from which was most acute and Q3 of last year.
The BD medical segment revenues totaled $2.4 billion and were up 7.7% versus the prior year M.
M D S revenues increased 24%, reflecting a strong recovery and the U S led by strong growth and catheters and vascular care devices. Additionally worldwide revenues included $18 million from Covid vaccination devices.
And MMS, the double digit increase and our dispensing revenues was more than offset by the expected declines and our infusion solutions as you may recall when the pandemic started we saw a higher level of demand for infusion pumps and sets globally.
Diabetes care benefited from an easy comparison to the prior year, the timing of sales and slightly better than expected market demand.
Pharm systems continued to deliver strong growth with revenues up 12% driven by demand for our Prefilled devices.
BD life Sciences revenues totaled $1.4 billion and were up 43%. This included the 300 million and Covid diagnostic testing revenues 212 related to our BD very tour system with the remaining $88 million from BD, Max collection transport and swaps.
Year to date Covid diagnostic testing revenues for over $1.6 billion.
Lower average selling price is driven in part by geographic mix. We are still on track to deliver on our target of total worldwide revenues of 1.8 to $1.9 billion for the fiscal year.
Excluding COVID-19 diagnostic testing revenues, our life Sciences segment grew revenues, 27% driven by strong performances in both integrated diagnostics solutions and Biosciences.
Ideas revenues increased 49%, excluding COVID-19 diagnostic testing ideas revenues increased 27% driven by strong double digit performance across specimen management and microbiology.
Biosciences increased 27% driven by both research and clinical solutions, we continue to see strong demand for research reagents and instruments as lab activity is returning to normal levels. We also continue to see steady demand for research reagents globally fueled by Covid research active.
It is related to vaccines and variants, especially from academic research and Biopharma companies.
BD interventional sales totaled nearly $1.1 billion and were up nearly 35%, reflecting the COVID-19 anniversary impact on elective procedures.
Surgery revenues increased 68% and peripheral intervention increased 32% both businesses saw the greatest recovery and the U S and western Europe, which experienced the greatest impact on elective procedure volumes and the prior year quarter.
We saw sequential improvement and both surgery and peripheral intervention, however, and the last several weeks we are seeing some impact from the Covid Delta variance on elective surgeries and certain U S States.
Urology and critical care revenues were up approximately 14% driven by continued growth and our pure wig and targeted temperature management franchises.
Now turning to our P&L as we expected and have communicated our gross margins. This year are being negatively impacted by COVID-19 related expenses manufacturing variances and FX headwinds, which are more acute and the second half of the year.
Also as expected our gross margin declined sequentially.
Our gross margin was 51, 5%. However, this included a net negative 90 basis point impact from Covid testing and Reinvestments.
And 90 basis point impact includes a negative 140 basis point impact from an inventory provision related to COVID-19 testing.
Adjusting for the net impact of Covid testing and Reinvestments, our underlying base business gross margin was $52.4 per cent.
On a sequential basis, our base business gross margin declined from our second quarter rate of 53, 7% due to 3 factors.
70 basis points of incremental FX headwinds 40 basis points from inflationary pressures, including higher raw material costs and inbound freight as these costs rolled through our inventory and 20 basis points of other expenses, including <unk> quality remediation.
Now turning to SG&A, our total S. SG&A spending increased 21% on a currency neutral basis to $1.2 billion for 25, 2% of revenues.
As a reminder, and the third quarter of fiscal 2020, we implemented several cost containment measures in response to the Covid pandemic.
In addition, we are continuing to see higher shipping costs.
This quarter also included higher expenses related to our Covid profit reinvestment initiatives.
As a reminder, the COVID-19 testing and Reinvestments, we made and FY 'twenty, 1 will not reoccur.
Our R&D spending totaled $321 million and increase of 31, 1% on a currency neutral basis.
The higher R&D reflects the timing of project spending, including a higher spending related to the BD innovation and growth fund.
And our R&D spending was 6.6% of revenues, which is higher than our long term target of 6%.
On a currency neutral basis, our operating income increased 26, 5% as compared to our revenue growth of 22%.
Our operating margin of 19, 8% was slightly below our guidance of below 20%.
The inventory provision related to Covid testing I referenced earlier negatively impacted operating margins by approximately 150 basis points.
Interest and other expenses were essentially flat year over year at $98 million.
The adjusted tax rate was 5.8% lower than we previously expected due to discrete tax items that occurred this quarter.
The lower tax rate essentially offsets the impact from the Covid diagnostic inventory provision and the quarter.
The average diluted share count used to calculate our EPS and the quarter was $291.9 million.
We repurchased a total of $4.1 million shares for a total of 1 billion at an average price of approximately $242.
Our adjusted EPS increased 24, 5% over the prior year to $2.70 for on a reported basis and were up 25, 9% on a currency neutral basis.
Now I'd like to turn to our guidance for.
For the balance of the fiscal year.
Our guidance continues to assume no major widespread hospital restrictions on elective procedures related to the Covid pandemic.
And as for full year fiscal 21, and provide you with an estimate of the net impact of Covid testing and the related reinvestment of profits on our margins.
We expect our full your adjusted gross margins to be and the range of 53.5% to 54% and this range includes and net neutral to slight positive impact from Covid testing and Reinvestments.
We expect a full year adjusted operating margin to be and the range of 23.5% to 24%. This range includes at 200 basis point contribution from the net impact of Covid testing and Reinvestments.
Finally, I'd like to address F Y 22, we've.
We plan to provide our specific physical 20 twenty-two guidance on our November earnings call, but we wanted to provide some directional color today.
To give you a sense as to what a floor could look like and fiscal 22, we have taken the following approach.
And as you know there was a great deal of uncertainty around the level of Covid testing.
Therefore, we have not modeled any testing revenue beyond the typical flu season.
With a continue and momentum where you're seeing we have increased confidence and our ability to deliver strong mid single digit revenue growth and fiscal 2002 over our fiscal 22, 21 base revenues, which as a reminder, adjust for COVID-19 diagnostic testing revenues.
With respect to hilarious are filing is comprehensive and more complex than most submissions and.
As we have previously stated it is possible that the review could be in line with past pump timelines. However, as we have also mentioned it was more likely to take longer for the F. D. A to review and ultimately Grand Clarence.
It is inherently difficult to predict clearance timing, we're not assuming hilarious 5.10-K clearance and.
It is difficult to predict how things will play out and shipments are only being made under the medical necessity process at.
At this time, we have incorporated the assumption that revenues associated with hilarious will be approximately similar to FY 21.
We believe it is prudent and responsible not to definitively predict FDA clearance timelines that said, we remain confident and our submission and the process, we are undertaking including working closely with the FDA.
Pain and comprehensive 5.10-K Clarence.
We expect to drive base business growth and operating margin expansion we.
And we expect the operating margins for our base business to expand more than our traditional annual target of at least 50 basis points and translate into double digit operating income growth.
For reference we expect our base business operating margins to be between 21, and a half for 22% and fiscal 2021.
With these assumptions, we expect and adjusted EPS for of at least $12. This represents approximately low teens growth over are expected based business earnings and fiscal 2021.
Now before opening it up for Q&A I want to take a moment to comment on today's announcement of my upcoming retirement.
With our strong base business momentum are strengthened balance sheet and improve cash flows which is evident by the increased number of tuck and acquisitions that we've been doing and the restarted for a sharp share buyback program for the first time since 2017.
Feel that now is the right time for the transition as the company is well positioned to continue to drive shareholder value and impact the lives of patients around the world.
I look forward to helping to ensure a seamless transition to the new CFO and I'm very excited about the value creating opportunities ahead for new co and helping to ensure the success as a member of their board.
And with that let me turn it back to Tom.
And thank you, Chris and Chris and I think it should open up the operator open up the line and Q&A.
Okay.
The floor is now open for questions.
At this time, if you have a question or comment please price star 1 on your Touchtone phone if.
If at any point and your question is and so and you may remove yourself from the queue by pressing the pound key.
In order to allow for brought participation and please limit your questions to 1 and 1 follow up.
We ask that while you pose your question. Please pick up your hand and set to provide optimal sound quality. Thank you. Your first question comes for an online of Bob Hopkins with Bank of America.
Oh, great. Thank you and good morning, and can you hear me, Okay. We can Bob good morning.
Great Great Good morning, and Chris Congratulations on your decision much.
Yeah, absolutely. So I guess for the first question I would have and thank you for all the detailed today and early thoughts on 20 twenty-two so it it it looks like you're suggesting operating margins and and <unk> next year will might be you know and the 22 to 23 per cent and kind of range you know that's C.
Bill multiple hundreds of basis points below where you were and fiscal 19. So can you just help us understand the difference between.
You're 2019, and and this new Guy and it's for 2022 and my ear you know, there's a couple of hundred paces points below that that level.
Sure I don't care uplift Dot Chris responded sure Bob. Thank you. Thank you for your comments to yeah. We as we think about margins, we do see the opportunity to get back to those.
2019.
Margins overtime, and and we'll see that is hilarious comes back into the market and as Recode and are normal continuous improvement.
Occur and we will see that improvement and also as we grow mid single digits and we provide leverage that drops for the bottom line and and that will also increase there's a number of things that that have pushed those thing those margins down.
We've talked about those in the past you know you have <unk>. The ship hold obviously has an impact but that will come back. We also have the the drop and.
The.
China volume based procurement is and impact and obviously seeing some pressure from inflation et cetera that have run through so.
They have come down, but the model is intact and we're very confident that we can drive those margins back to the the the 19 levels.
And and the next and the near term as Ah Laris comes back and.
And as we get the continuous improvement from Recode.
Okay. So just to make sure I'm hearing and so the primary difference between those 2 as you guys see it is it really goes 3 things <unk>.
The the China price card and then inflation just want to make sure we have it sounds for all the moving pieces uhm could I <unk>, yeah, okay that that's it and and.
Okay, and then you know in terms of the.
The timeline to get back to those levels and got something like a multiyear process or or do you think that that can happen you know within a year or 2 and then I'll I'll get back and queue. Thank you. Yeah. So so a couple of things will help us improve and and the other thing that I should mention is there is some F X drag.
On margins as well.
And that's been flowing through but as we think about and improvements going forward will see improvements from utilization as utilization comes back and so that that will help will also comparatively to the margins that we have this year, we'll see continuous improvement recode kicking in.
We'll see less 1 time items, you know, we took and a number of 1 time items. This year, the spending and the territory proceeds et cetera. So those come back. So you would expect to see us getting back to those kind of margins as hilarious kicks in in twenty-three and we see.
And that impact.
And you know as we make continuous improvement and 22 and 23.
Okay. Thank you.
Your next question comes for an online or Vijay Kumar with you have a car I S. I.
Good morning D J.
Uhm morning, calm and thanks for taking my question and crest up all the best out to you and also can enjoy and progress.
I I comment and maybe starting with that Mark and is back on Bob's question. It's.
[laughter], what 1 and stuff looking at it as you are pre paint them and gross margins for 56, I think your base for the fiscal and 21 and this 53 and a half for 50 for.
And what's with a doctor about 70, Pepsis App seems to be inflationary costs 70, Pepped F. X you do have this uhm and mccorry charges related to Covid diagnostics and hilarious for moving parts I guess my question is.
When when do and say for any costs, a bed and do we have the and and licenses that are made of next year should F X there'll be a drag next year and when you think about Covid inventory charter to shop are we done with that into for or is that gonna be a crack and first for 22 have.
And have he's yet let me I'll I'll take a little bit of that question and again, let Chris comment further on the margin details.
And when it comes to just any inflationary question that you had certainly I think we felt the the most significant impact of inflation and alrighty and we have a good and are you aware that's going to be and in 22, as we rolled up our costs and.
And as you know, it's and it's been an unprecedented period of time there as you look at everything from the cost of resins to electronic components and and shipping and shipping is up for X to move products, Let's say from Asia Europe to the U S or vice versa. So we are also being very.
Proactive and we're not looking to absorb all of those increases and raw material costs silver time, we are beginning to pass on some of those we've raised our shipping rates for customers and we are passing on price increases of course as you know, we do have longterm contracts and and tenders.
Around the world and so that's not something that we can pass through those price increases immediately but we do have a very active program to share those increases we have to share those increases.
With customers that that will not happen overnight. So just share that that will also be something that will have an impact as we look forward, we're not going to absorb and all of those raw material costs, just what can be D.
Chris other comments on March or Yeah, I think it would be helpful to look at the the the flow from the third quarter to the fourth quarter. We do expect margins to improve I think we said that with our margins would be 53 to 53 and a half that's up full point from from the.
<unk> Q3 margins and that's coming from improved utilization come.
Combined with some of our continuous improvement efforts. We also have less 1 time and afraid that we saw and and the the.
And the back half of 21, and and we'll have some pricing actions as well, we do expect it to improve operating margins more than that the normal 50 basis points relative to that 21 to 22 and that again comes from utilization.
Is that improves next year, there's less less impact for them FX, we have seen FX flowing through our inventory and so you'll see that abate going forward.
And then we see are continuous improvement and.
Items offsetting any continued flow through of of of inflationary pricing when.
And when we look at the impact on our raw materials resins as you know as a big piece of that resins is a combination of some inflationary pressure, but it's also a function of of other things supply and demand and the oil market and we took a big hit on that and 21 and.
And we would expect that to a baked somewhat.
And that's something that we're watching very closely as we think about giving guidance and.
And 22.
Gotcha, and and maybe com want 1 and the queue for revenue guidance and and some of the comments and made on <unk>.
The queue for it looks like <unk> your base crew and a 4% for preparing to make <unk> 19 levels.
Q for I'm not sure if I'm doing the math correct, but I'm getting into a 2 person and a slight <unk> is that just conservatism and and you know, let's do that down the being lessons and extra making should we expect any new product flow through and for school at 22. Thank you.
Yeah, It was a little bit difficult to hear what you said there V. J on the the queue for topic and all that Chris comment on that low as we said and the past and we do expect that day, and we will share a lot more about this on our Investor day, and and November which were obviously, we hope to see you. There is we expect the impact of our.
Our our investments of the Covid private reinvestments to begin having an impact and the back half of next step towards the tail end of next year and we'll talk about what those specific up programs are some art for.
For short term R&D lifecycle management programs that will be hitting but also include non R&D initiatives such as Reinvestments. We made to establish new for example, telesales organization and Europe, that's helping us access smaller hospitals that we weren't calling and before and we're getting new growth from or expanding our non.
Cute sales channel and the U S. We use some of those investments to accelerate investments there tapping into a high growth market at the non acute space is now growing much faster than the acute care market, where we've had our traditional sales strength and and so obviously those commercial investments have near term payoffs and we expect actually the <unk>.
Vestments that we're making on the commercial side this year to be fully funding self funding next year. So they're quick paybacks and we will see those benefits as we've said that strong mid single digit profile and our base business next year on your other question, let me turn that over to Chris Yeah. So V. J I would just remind you there.
That going back to the history. If you look at the queue for a F. Y 19, that's a tough compare that was the biggest M. M S quarter for a number of reasons and so that's what you're seeing as you're doing your calculations.
And that's helpful guys. Thank you.
Your next question comes down the line of Robbie Marcus with J P. Morgan.
Hi, Rob and good morning.
Good morning, and all I had my congratulations Chris will be sorry to see you go and I appreciate it.
You know I I I don't want to beat a dead horse here, but I I wanted to focus on the fourth quarter March and guide and and the floor of $12 for next year.
It's been probably if I go back a decade, plus and 2 last had operating margins as low as your guiding for fourth quarter.
And you know even to get to a floor $12 vs, where you are and that fourth quarter March and is pretty tough to do so I was hoping you could really you know it as best as you can walk through the building blocks of.
Why the the fourth quarter March and is so low, especially after you said last quarter at B and the low twenties for the back half of this year. It looks more like high teens and then some of the building blocks you used to get to a floor of $12 and.
And on top of that and how you're thinking about what a floor and means and relation to and where numbers might settle out and hey, Robyn and this is Tom So on the let me take the outlet.
Address the queue for question that you had on the 12 dollar floor I think Chris walk through for a clearly how we how we built up the 12.12 dollar for their and essentially that takes out all COVID-19 Standalone Covid diagnostics. So all of that comes out any standalone COVID-19 testing.
And that we were to have would be incremental to the $12 and you know how much that is this this year again, it's very difficult to predict what type of Covid.
Testing is going to occur and next year and so we thought it's most prudent to focus on projecting our base business. We do have some very tour flew sales and fluke Covid combination, which is really a next generation flu tests built in but much more aligned to what you would see and a normal flu season, rather than inquiry.
Demand from.
Testing for Covid patients and as I said, we have no COVID-19 standalone revenue and so that how we felt and R$..12 for is Chris also mentioned, we don't have a laris 5.10-K assumed at all we do believe that just given inherent.
And for ability to predict FTA approval timing and it's not prudent.
To to try to peg when that would be and so we do not have anything beyond a larish revenues being flat year on year, which as as a reminder, we said was a little over $100 million in and FY 21, and so we have that flat.
Going into 22, obviously.
So that that that's that those are the main factors Chris went through a number of others. We can circle back on any other questions you have there, but let's go back on your queue for question I'll turn it over to Chris sure. Thanks, Tom and and what I would remind you Robbie is that we have pointed to the fact that we're making investments this year.
And not to really look at the second half margins. We we said they were gonna be lower and he said not to use those as a indicative base to jump off for for 22, which is what we're seeing today the the queue for margins.
And are pressured by an additional amount of of Covid.
Reinvestment. So you know we made that reinvestment announcement early it takes awhile it tends to be back and loaded. So there is a pre.
Preponderance of reinvestment there.
And the quarter and we continue to see some drag from FX and and the quarter, although less than the third quarter. We also expect to see the impact of inflationary costs running through the.
Through our inventory and we see that coming through and the fourth quarter as well. So when you some old that up and we talk about the baseline of 21 and a half to 22.
As the.
The the jumping off point, we said that it was more than hour 50 basis point and target going forward and that how much more is is where you have to to plug it in to get to the 12 dollar a number that we gave us a floor and I think Tom.
Articulated what that that 12 dollar floor was meant to be it doesn't have any testing assumption.
For Covid and it although.
We would assume some water level of stand alone testing. It also assumes the testing for flu and Covid combination which is.
Equal to a normal flu season, that's still pretty early to call that and that's something that will will give more clarity on as we get into November.
And so it is it is just that a baseline we wanted to make sure people understood that we can grow more than normal off of 21 and get to at least at 12 dollar level and 2 closeout anything lower than that.
And then we will build from there as we as we give more specific guidance and November.
Great and and maybe just 1 quick follow up on the tax rate came in a little lower this year. What do you think we should be thinking as we head into next year and I think I think you flow that through for this year and then for next year, we should be we've traditionally guided 14 to 16 person.
<unk> and I think you should you should consider that being at the low end of that range.
Alright, our next question your and your next question comes from the line of Larry vs. We'll send with Wells Fargo.
Good morning, Thanks for taking the question Chris Congratulations on your decision thanks, a lot and.
There's a couple questions on on the margin. So when we look at the 2020 and a half base for queue for you know what's the ramp through fiscal 2022 look like on the on the last call. You said you know it would kind of ramp through the year and and Chris just a multipart question on and on the margin. So.
I apologize in advance you know the you had guidance for 25 to 26, you know post hilarious post China V. B P. So it's a difference here, mostly inflation you talked about the moving parts and and the $200 million reinvestment that alone you said would come off that that's 100 basis points. So just <unk>.
Lastly, here are any other headwinds tailwind to consider on that March and commentary okay.
There are multiple parts of that I'm not sure I I got the mall so let's start.
With.
For the phasing, let's let's talk about the phasing I think it's still too early to tell you know we can't give that kind of of specificity for for November I would say you know 1 of the things that I did mentioned was was utilization I do think that builds throughout the year, but that's that's as much clarity as I would give to.
That what's the second part of the question well.
Well just on the you know people who have looked at this closely post hilarious recall, the China V. B P. You gave guidance of 25 to 26 per cent for the operating margin. Yeah is is the difference really here, mostly inflation and and just lastly, the 200 million dollar and reimburse me.
2021, and that goes away next year that alone is 100 basis points.
Yeah that that does come back from that baseline and that's and and the assumptions that get us to more than the normal 50 basis points. So that that does go away and it does come back and margins the difference between the whether it's the 56 issue and gross margin or 25 to 26.
Oh and operating margin.
Is that really inflation, it's more around the China V O B P. A laris and some FX impacts that on the combination of those bring you down and the area of about 150 basis points on a gross margin basis for example.
You take a step back we're pulling and all of the levers and unnecessary to drive that up so the base business doing well, that's a great Foundation, where reinvesting the virtue of proceeds to drive revenue growth going forward, but also to drive recode and and.
Help there.
We've got a balanced allocation strategy your sorrows buying back shares that'll help on the bottom line wood divesting non strategic businesses that'll help with the growth profile going for it to all of those things give us great confidence that will get back to those kind of margins and the near future as we take those.
Steps and headed and the right direction and the the fundamental assumption of <unk>.
Mid single digit growth on the top and double digit T. S. R and the bottom implies a certain amount of leverage that we feel very comfortable with we feel good with that operating model, it's intact and that will drive margins up overtime.
Thanks, Ed I'll drop given the multipart question there. Thanks for taking my question [laughter] sure Ed type.
Your next question comes for an online a free check nowhere with S V P link.
Hi, Thanks.
Thanks, a lot and and that that last 1 was really the the question I was looking to ask but just.
If you could just go through those parts a little bit more clearly <unk> you've got China.
D V. P. You have inflation, you'll have a laris and and FX as the bad guys. But then you have reinvestment going away as the good Guy could you just add those up again for US 1 more time just to make sure I'm clear and what the pluses and minuses are I think that would be helpful. Thank you. Okay. I think you did a good job of it.
That that is the summary, you have exactly those parts and that is the headwind you know the Ah Laris headwind is is something that you know should come back to us and 20 twenty-three overtime and.
And I think you've got got the parts.
Okay, and then you know going back and I think it was robbie's question you know that he just puts.
Putting a little bit more of a framework about how to think about what a floor truly needs and and you know any kind of broad strokes had it had to thinking about what testing you know could look like based on everything that you know today and.
And and and and and and what you know what what a reasonable base base case my might look like based on what you know today. So so I would refer you back to the prepared remarks, because I think we were very clear as to what's included and that $12 and and what is not included the ability to to.
And estimate what testing is going to be next year is very volatile frankly, if you ask me 2 weeks ago. It would've been a different answer than it is today with the delta variant and it'll be very different and November. So when we give November guidance will give you a better sense of that but the floor is exactly what it is it's no testing other than.
A normal flu season, and nothing and for a laris and that's all I'll say about that.
Okay. Thank you very much and good luck, Chris congratulate Angela.
Your next question comes from the line of Travis Steven Barclays.
Hey, and and congrats Chris again from.
And.
And the the calculus for them and some of them into and revenue growth and a double digit shoulder and return when you. When you think about that and is there a minimum operating margin and you're committed to longer term without calculus.
I I remember, what really I think it's really an improvement and the margin here and you're out and that's been you know the the the model and we're very confident that we can return to that and to drive those margins back up to the 19 levels and beyond as we move for.
Forward.
Okay, and then do you expect <unk> to be accretive right away to your operating margin or is there gonna be a period, where it takes a bit longer to get accretive and then on the Covid testing margins you mentioned, a lower price point Oh U S is is there a big difference and and margins and Covid testing you have to know U S.
Yeah. So you want to cause I'll just take the on the the X U S. And then 1 of the main differences is as we had shared and the past we did launch an annual test.
X you asked particularly and in Europe, we don't sell that and the U S and that is at a lower price competitive with manual manually red lateral flow tests. So that's 1 and there's a product mix difference and and there is a slightly lower price even on on the base of Air tour and in some cases, given the way that those per.
Products are purchased and and very large quantities on government country based tenders. So therefore, it gets it gets a little bit better pricing given the scale of the purchasing so that's the the main thing there on Vera towards we think about the mix again, we really pleased that we're right in the the revenue range that we preach.
Jack you were actually ahead of what we projected at the beginning of the year and then I have continued to be and that 1.8 to 1.9 outlook for the full year and.
Mm there obviously on your your other question Travis was.
On the operating margin difference.
Okay, Yeah, yeah, Chris and on that the operating margin from Oh, when it comes back Okay, Yeah, and the only thing I would say is you're you're you're you should be thinking about when the laris comes back that the it takes a while for the sales to ramp and.
And that's all I would say on that.
And and we have said before Travis as well, we do have that we very purposely kept a number of expenses on the P&L that stay at the G. P line that as hilarious does.
It is 5.10-K approved.
Those expenses when I'll get absorbed by the higher revenue as soon as the higher revenue starts to come through so those expenses it stay and the G. P. Line. For example are very large service organization that we know we need it's it's extremely experienced strong team deep relationships with our customers and we've kept that those expenses and place.
<unk>, because we want that that team and place to continue to service our customers and as we.
Ultimately get the 5.10-K approved and and back fully to market same thing on our commercial side right. We've kept our while the revenue has gone down we've kept that that commercial team and place.
We have many many people with that decade, plus experience and long relationships with our customers, who have great expertise and in that not only that space, but overall medication management and so we want to keep that expertise and and place as we think about it long term. So those expenses of courses as revenue ramps.
We don't see they need to add those service or or sales investments because we've actually kept him and place similar to what we had when it was a much higher revenue numbers.
Alright, great. Thank you yep.
Your next question comes from Matthew I'm, Michelle and with Keybanc.
Thank you for taking my questions and good morning morning, not.
And not just throw another moving piece at Ya, but but I'm assuming that the floor doesn't include the diabetes spend do you have a better sense of what solution is from that and and packed the operating margin on a pro forma basis.
So I'll take that uhm the floor does not contemplate that as we complete the spin and as we get closer to the spin and we'll make adjustments to any kind of outlook or guidance. So we have so the $12 relates to 2 P. D X for.
As a whole and as it relates to dilution. What we have said is that the dilution and remain co would be primarily stranded costs will have transitioned service agreements in place and we'll have some time to to offset any potential dilution that we have.
During that transition services period of time and more to come on that as we get closer to the spend it.
Okay, and and then excellent and then what's a little bit tough about about the guidance for next year that I think everyone. It seems there will be some COVID-19 testing. So there will be upside from that but you know the flu season. This problem is is also probably a little bit lower than what's normal what what is what is the normal flu.
Season for you is is as far as far as like revenue goes. So we can can adjust that that that delta and that and the first thing I would do is just correct. Your statement that we didn't give guidance for 22, so that using the term guidance as is and accurate. We just gave you a floor and a way to think about it and.
So I just wanted to make sure that that's that's clear and what we said was a normal flu season, and we have talked about and the past that that normal flu season is and the range of $80 million to $100 million and it. It it remains unclear as to what type of flu season flu slash COVID-19.
And we have last year. The flu season was basically non existent. So that's why we outlined that assumption as clearly as we did.
And my apologies and it seems like.
Yeah that that Covid testing the upside would be would be greater than you know downside from from flu.
And my point is that is that correct.
I'm not sure what you just said there, but I think the would there be some COVID-19 testing stand alone that's something that will give insights going forward and November.
And think just as a reminder, Matthew we we do have a COVID-19 flew combination test.
Rapid test right, which we we can set that and that flew category as well. So we do think even if there's a lighter flu season the availability of symptoms.
Like it will be testing for combination as well, we do expect there will be some continued testing.
Of of Covid, only as well, but the ability to predict that number right now and again, we're not giving guidance, we just share to floor number.
The ability to predict how much standalone COVID-19 testing is going to happen next year is not not something once you do.
Thanks for your question.
Your next question comes from the line of Matt Taylor with you B S.
Alright, thanks for <unk> and <unk>, Thanks for taking the question and and congrats Christopher you'll be best.
I think we've got margins back so I'm gonna ask a couple of growth questions. So the first 1 and.
And as I wanted to ask you about your assumptions for disruption I I know, there's some states that are seeing that and the electric procedures now.
Would you characterize the build into your guidance is relatively minor any any framing that you can do for us in terms of how much disruption you think we could see here and the coming months yeah.
And Ah this is Tom.
I appreciate the question there so I'd give it a little bit of color on what we're seeing overall, both and just general utilization and then I'll I'll talk about what we're seeing more recently and just the last 1 or 2 weeks.
So as I think most folks are aware, we've we'd have 1 of our informatics platforms. It's called Med mind, which is a software that allows us to see real time admission data and utilization data test data outbreak data.
Resistance data and literally real time, it's hundreds of hospitals across the U S and so some of the details that we see generally are over Q3, we saw about 91 and 92% utilization vs. Pre COVID-19 about 92 per cent exit and June.
And and that was a sequential.
<unk> improvement from 2.2 average which was in the eighties.
And we expect to see further sequential improvement as we think about 2 for overall uhm.
[noise] in the non acute sector. It was already and we saw 105 per cent you.
Utilization and vs pre Covid and May June and sequential improvements from Q2, which was in the 95% range as we think about the the impact of and Europe by the way or the data. We look at show that bed utilization first pre COVID-19 or utilization of robbers pre COVID-19 was estimated around.
92% exited the quarter around 93%, which was sequentially up from Q2, which was about 86 per cent.
So as we think about the.
The impact of Covid Delta variant and the last 1 or 2 weeks, we've seen it really.
And as was expected I think when there would be uhm outbreaks day, you'd start seeing them and concentrated geographic pockets and that's certainly what you're seeing with the delta very and at the last number I had was there was 16 meaningful U S health care systems that had stock or significantly reduced <unk>.
<unk> procedures and many of those the largest 1 of those U S systems that have done that and that was as of last week that was the number I had was 16.
And.
They were down in Florida, Louisiana.
Number of those were in the south so it's.
We're seeing it in those areas, but not certainly not across the country broadly and and we're not seeing really any significant change globally, certainly there's pockets, where that's happening but for example, and Europe, which is a major market for us we're not seeing a change there we have built in some.
Some continuation of that Matt into our guidance and so if it doesn't continue at that level that could be and opportunity, but again being prudent as I think we've been all year long, we took and approach that said well if the delta and where to continue and there were to be some impact on procedural volumes would be absorbing that.
And within our our guidance would have to be a significant change vs. What's being seen.
Okay, great. Thanks for that and I just had 1 quick follow up you did a bunch of tuck in and so I was wondering if you could quantify the contribution we could expect for those you know as you as you purchase that we're going forward.
That could quite we see that is built into our outlook mat and when we talk about the.
Strong mid single digit performance next year, and continuing to help fuel or mid single digit growth profile. None of those acquisitions have any meaningful impact in in Q3, many of them closed actually either at the very end of Q3 or even more recently and in queue for so not and impact and <unk>.
2.3 and and part of our growth equation as we as we look going for it but as you said and we're excited about the tuck and we're doing it's a combination of both strengthening our base business like what you see and villano offering a really unique innovation into and already extremely strong portfolio and and bag that we have 2 areas that are.
Entering us into new spaces, like what you saw with <unk> or the the zebra side, which both to enter this into new spaces, but connects us deeply with and important customer segments small biopharma, providing them services uhm debt zebra sigh as the leader and providing them combination and drug device.
Testing services allows us to build those relationships further and as you know many of the new drugs coming into the pipelines are in that small bio tech segment that we think is attractive to invest behind.
Thanks for the question.
At this time, we have reached our a lot of time for questions I want and I'd like to try and the call back over to Tom pollen and for closing remarks.
Okay.
[noise] [noise] [noise], okay. Thank you operator for.
Before we sign off and on behalf of the board and the entire executive team I want to thank BT 70000 associates around the globe.
This past quarter I had a special opportunity to travel to a number of our sites, including our our warehouse in Georgia 2 of our plants and Nebraska cause all been working tirelessly to produce essential medical devices. Some that are being used for the pandemic response and.
And I'd like to say a special thanks to them and all of our manufacturing associates around the globe.
And they're the essential part of our frontline team and make me proud to be B D and so I think you directly on behalf of and the entire organization.
For all of you listening hope everyone stays safe and healthy and thank you for joining in hope you have a great day.
Thank you. This does conclude today's teleconference. Please disconnect airlines at this time and have a wonderful day.
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