Q1 2023 Becton Dickinson and Co Earnings Call

February 2, 2023

[music].

Hello, and welcome to Bd's first fiscal quarter of 2023 earnings call at the request of BD today's call is being recorded and a replay of the call will be made available on <unk> Investor Relations website on BD.

Dot com.

<unk> is also being made available by phone at 80069, $503 95 for domestic calls and area code plus 140 to 2201388 for international calls for today's call. All parties have been placed in a listen only mode until the question and answer.

Session I will now turn the call over to BD.

Good morning, and welcome to Bd's earnings call and Francesca Demartino, Senior Vice President and head of Investor Relations on behalf of the BD team. Thank you for joining us.

This call is being made available via audio webcast at BD Dot com.

Earlier. This morning, BD released its results for the first quarter of fiscal 2023.

We also posted an earnings presentation that provides additional details on our performance. The press release and presentation can be accessed on the IR website at investors Dot BD Dot com.

Leading today's call are Tom Polen, Bd's, Chairman, Chief Executive Officer, and President and Crystal Orifice, Executive Vice President and Chief Financial Officer Tom.

Tom will provide highlights of our performance and the continued execution of our <unk> 2025 strategy. Chris will then provide additional details on our Q1 financial performance and our updated guidance for fiscal 2023.

Following the prepared remarks, Tom and Chris will be joined for Q&A by our segment Presidents, Mike Garrison President of the medical segment, Dave Hickey President of the Life Sciences segment, and Rick Byrd President of the Interventional segment.

Before we get started I want to remind you that we will be making forward looking statements.

Encourage you to read the disclaimer in our earnings release and the disclosures in our SEC filings, which are both available on the Investor Relations website.

Yes, otherwise specified all comparisons will be on a year over year basis versus the relevant period.

Revenue percentage changes are on an FX neutral basis, unless otherwise noted when.

When we refer to any given period, we are referring to the fiscal period, unless we specifically note it as a calendar period.

I will also call your attention to the basis of presentation slides, which defines terms such as base revenues and continuing operation with that I am very pleased to turn it over to Tom.

Thanks, Francesca and good morning, everyone and thank you for joining US we delivered another quarter of strong performance in Q1, our results reflect the momentum of our BD 2025 strategy, which we are driving through a powerful combination of innovation and strong execution.

We exceeded our revenue and earnings expectations in Q1, despite market disruption in China and continue to drive consistent durable performance in our base business with revenue growth of five 2% and $2 98, and adjusted diluted EPS.

Our results are a testament to the continued relentless focus by our team of talented associates, who are delivering BD products and solutions that are enabling our customers to provide high quality cost effective care to patients around the world.

In Q1, we continued to make excellent progress driving all three pillars of our strategy to accelerate growth simplify the company and empower our associates.

Our growth continues to reflect consistent performance of our durable core which has become known as the backbone of health care and our continued shift into attractive and higher growth end markets through investments in both R&D and tuck in M&A.

These higher growth transformative solutions are focused in the three areas, we see reshaping healthcare and where we are currently investing approximately 60% of our R&D.

And that's in smart connected care, enabling new care settings, and improving chronic disease outcomes.

Today, we have what I believe is the most exciting innovation pipeline in the history of the company.

And through our investments we are systematically increasing the wanger across our portfolio and supporting our strong growth profile.

I'll highlight a few of the end markets that are driving our growth and some of the key products recently launched and in our pipeline that were excited about.

Our medical segment is focused on improving medication delivery across a wide range of settings, making it safer simpler and smarter.

Across the end markets that include medication management solutions pharmacy automation pharma and biotech drug delivery and vascular access management, where we recently launched posit flush safe scrub consistent with the expected launch timing, we shared on our Q3 FY 'twenty to call.

Our pre filled flush syringe with an integrated disinfection device positive flush safe scrub is designed to simplify nursing workflow and enhanced compliance with infection prevention guidelines.

It is a good example of how we're driving continuous innovation that extends our leadership in our durable core.

And within the broader 9 billion dollar vascular access management market.

Another milestone in our vascular access portfolio was clearance of our new power <unk> midline catheter by the Chinese regulatory agency and M. P.

This was designed by our R&D Center in China for China and is our first midline in this geography and offers up to 30 days of continuous venous access while reducing patient complications.

We're excited about the opportunity power me creates to help develop a new category for vascular access in China, and we look forward to the expected launch later this quarter.

Our BD life Sciences segment provide solutions from sample collection and discovery to diagnosis and serves dynamic end markets like single cell analysis clinical microbiology point of care and the molecular diagnostics market, where we continue to advance our strategy of menu expansion with.

Sales outside the U S of our BD, Max respiratory viral panel where RVP.

This multiplex respiratory panel detects COVID-19, flu, a and B and RSV.

A single test.

As an ideal solution for endemic respiratory testing.

This aligns to our strategy to accelerate our growth in the 4 billion dollar molecular diagnostics end market, that's growing about 9%.

The RVP panel is currently under FDA EUA review for U S launch.

We also continue to progress our strategy and blood collection at the point of care.

Point of care is one of the fastest growing categories in diagnostics today that we believe will accelerate as diagnostic testing migrates to new and more convenient care settings, such as retail clinics and pharmacies and even the potential of at home.

Our BD many draw capillary blood collection system as a disruptive innovation that <unk>.

Tables collection of a high quality blood sample without a vena puncture and is designed to provide a better patient experience across the broad range of care settings.

We remain on track for five 10-K submission by the second half of FY2023.

Our BD interventional segment, which provides solutions for chronic disease management serves end markets that dramatically improve people's lives, such as oncology continent advanced repair and reconstruction in the $5 billion peripheral vascular disease market space that is growing about 6%.

Within Pvt, we continued our strategy to globalize the BVI portfolio with the recent launch of our of the Novo venous stent in China.

The first stent in this market specifically designed for <unk> femoral venous disease.

Within the $3 billion oncology end market space also growing about 6%, we achieved a significant milestone completing safety testing for a multi modality vacuum assisted biopsy system and we're on track for FDA submission and launch in FY 'twenty for.

The BD multi modality vap device is expected to be the first vacuum assisted biopsy system designed to work across all three imaging modalities ultrasound and MRI, allowing customers to consolidate capital equipment.

<unk> consumables.

<unk> physician and nurse training.

These launches and milestones are good examples.

How we are strengthening our position in attractive end markets across our portfolio.

Our purposeful strategic investments in R&D as well as tuck in M&A and Capex are supported by our strong flexible balance sheet and disciplined and balanced capital deployment strategy.

This framework also gives us the flexibility to return capital to shareholders through a competitive dividend and share repurchases.

In Q1, we also continued to simplify our company with programs across our manufacturing network our portfolio.

And most recently our operating model.

Where specifically we continue to make progress on our re code portfolio simplification program.

We are reducing skus of older generation products in order to focus on the most important products needed to deliver care today.

Remain on track to remove 20% of our total portfolio by 2025.

Having achieved more than half of these S SKU reductions thus far.

In addition, we have numerous initiatives underway to consolidate our manufacturing footprint and more cost effective locations.

All of these efforts are designed to reduce complexity.

Drive supply chain excellence and make BD more agile, while supporting the achievement of our margin expansion goals.

Our <unk> 2025 strategy is balanced robust and resilient and.

And our foresight planning and agility are enabling us to deliver strong performance. Despite the continued macro environment challenging all companies.

To share some perspective specific to health care.

Overall, the environment continues to stabilize and is in line with our view of the challenges are going to persist not escalate at least through 2023.

While inflation is easing in some areas, we do expect that it will remain well above what we have seen historically and a plan for another year of outsized inflation, primarily in labor and raw materials.

We see continued labor pressure with different market dynamics impacting hiring and increasing wages for certain roles primarily in our manufacturing organization.

Across raw materials some categories of resins used in finished goods are beginning to show signs of improvement.

Other materials, such as packaging in rubber are still inflated versus historic prices.

In terms of the Covid pandemic broadly speaking, we see stabilization.

While there continues to be surges in certain pockets around the world similar to our customers, we have become more accustomed to managing through Covid driven dynamics and.

And have been effective at avoiding any extended manufacturing and distribution disruptions.

Specific to China, we anticipate that the recent COVID-19 restrictions that impacted us in Q1 will affect our peers as well.

Our local teams are navigating these restrictions well, which reflects the resiliency and strength of our China organization, the diversity and durability of our business.

By successfully navigating the challenging macro environment, we are distinguishing BD and supporting our ability to continue delivering strong performance.

Before I turn it over to Chris.

I'll share a few updates on the strong progress our team is making to advance our ESG strategy and goals.

In December we published our second annual <unk> report, which provides details about our progress towards our 2030 ESG goals for promoting a healthy workforce and communities.

The report highlights our improvements towards increasing diversity at the management and executive levels and spotlights, our global associates, who are advancing our culture and driving meaningful change within BD in the communities that we serve.

We also published our third annual Cyber Security report.

But he was the first in med tech to outline our ongoing efforts to advance cyber security and our report, including our work to protect against cyber attacks and empower customers with information about cyber risks and vulnerabilities.

We're proud to receive continued recognition for our ESG efforts, most recently being named for the fourth consecutive year to both Newsweek's list of America's most responsible companies ranking in the top 25% in the Bloomberg gender equality index, recognizing our ongoing commitment to workplace equality.

In summary.

I'm proud of our progress and momentum.

Our associates are bringing our BD 2025 strategy to life as we operate as a more agile innovative med Tech leader.

<unk> is well positioned to drive profitable growth and create long term value.

First our growth profile is consistent and durable.

Second we are enhancing our leadership positions through purposeful portfolio shifts into higher growth markets.

Creasing, the wham grew across our portfolio.

Third we are improving our margin profile through our differentiated growth enhanced simplification programs and ongoing supply chain excellence.

And fourth we are committed to remaining disciplined in maintaining a strong and flexible balance sheet with.

We see an increasing capacity through our BD 2025 time frame to support value creation and continued strong growth through tuck in M&A.

All of this adds up to a compelling financial profile with a long term targeted base revenue growth of five 5% plus and double digit EPS growth.

Our updated guidance for FY 'twenty, three reinforces our confidence in our ability to achieve these targets.

With that let me turn it over to Chris to review, our financials and guidance and outlook.

Thanks, Tom Echoing Tom's comments, we delivered another quarter of strong performance in Q1, which demonstrates our consistent reliable durable growth profile and our BD 2025 strategy playing out as planned.

So first beginning with our revenue performance, we exceeded our expectations for the quarter delivering four $6 billion in revenue with base business growth of five 2% or 3% organic.

We see underlying organic growth more at mid single digits, when adjusting for strategic product exits the.

The licensing fee comparison in life Sciences.

And several toga driven comparisons.

Cobot only testing revenues were $32 million, which as expected declined from $185 million last year.

Total company base business growth was strong across BD medical and BD interventional with approximately 6% growth.

Base revenue growth and BD life Sciences of three 3% reflects the comparison to licensing revenues impacted growth by almost 400 basis points.

Base revenue growth was strong regionally as well with mid single digit growth in the U S.

EMEA and Asia Pacific.

Revenues in China declined slightly which reflects the impact of Covid restrictions.

Offset by strong performance from new product introductions in BVI and research solutions and BBB.

For the full year, we continue to expect to deliver near double digit growth in China.

Our base business revenue performance continues to be supported by our durable core portfolio and an increasing contribution from the transformative solutions.

Our innovation pipeline and tuck in acquisitions.

We also continue to benefit from the organic contribution from acquisitions, we Anniversaried, which was about 30 basis points in the quarter.

Let me now provide some high level insight into each segment's performance in the quarter.

Further details can be found in today's earnings announcement and presentation.

BD medical revenue totaled $2 $2 billion in the quarter growing six 1%.

BD medical performance reflects strong growth in both medication management solutions, and Pharm systems, which more than offset a decline in medication delivery solutions.

The decline in Mds of 1% was driven by Covid related comparisons and the impact of recent COVID-19 restrictions in China as well as planned strategic portfolio exits.

We continue to see strong performance in vascular access management outside the U S.

Yeah.

Double digit growth of 15, 5% in MMS was driven by strong demand for our pharmacy automation solutions.

Clothing, both Perata and ROA.

We've been very pleased with customer response, and the performance of Corona.

As expected growth in MMS also reflects the comparison to higher dispensing installations and infusion set utilization in the prior year driven by Covid dynamics.

We continue to have a very healthy backlog of customer orders for pyxis and BD health site, which reflects the strength of our connected medication management portfolio.

And despite strong growth of 18% in Q1 of last year.

<unk> systems delivered another quarter of double digit growth of 10, 6% driven by continued penetration in the high growth biologic and vaccine markets.

BD life Sciences revenue totaled $1 $3 billion in the quarter.

The decline of seven 3% year over year is due to the expected lower COVID-19 only testing revenues.

Life Sciences base revenues grew over 7% excluding.

Excluding the licensing grow over as previously discussed.

Growth was driven by.

Growth in integrated diagnostic solutions based revenue of one 3% were six 4% when excluding the licensing comparison.

This strong underlying mid single digit growth was driven by BTG stroke.

It is helping to address laboratory labor shortages through automation and informatics and continued leverage of our molecular testing menu across our expanded BD Max installed base.

In addition, there was strong demand for our respiratory testing portfolio.

It was partly aided by the timing of orders.

High single digit growth of nine 2% in Biosciences reflects continued growth from new product launches combined with strong double digit growth in research reagents.

<unk> by our differentiated content and di strategy.

We continue to see demand for our expanded suite of flow cytometry analyzers and <unk>.

As researchers continue to do even higher parameter cellular analysis for cancer and other immune related conditions.

BD interventional revenues totaled $1 $1 billion in the quarter growing five 6%.

Growth was driven by <unk>.

Surgery growth of three 1%.

Which reflects strong performance in advanced repair and reconstruction driven by continued strong market adoption of physics hernia resorbable scaffold and.

And double digit growth in biosurgery aided by the tissue Med acquisition.

Growth in surgery was tempered by planned strategic portfolio exits.

And then expected decline in BD Cor prep due to a tough comparison to the prior year as a result of dealer stocking.

Peripheral interventions grew 10, 8%, which reflects double digit growth in PV D driven by the <unk> relaunch.

Coupled with continued global penetration of rotor Rex and the acquisition of <unk> close which addresses chronic venous insufficiency.

Additionally growth was strong in oncology within greater Asia due to an improved backlog situation associated with prior year supplier constraints.

Urology growth of one 8% reflects double digit growth in our <unk>.

Sure, Rick chronic incontinence solutions, and Endo urology that benefited from reduced back order due to improve supplier performance.

Offsetting this strong performance was a difficult comparison and urological drainage due to short step back order release and distributor stocking in the prior year.

Now moving to our P&L.

We reported Q1 adjusted diluted EPS of $2 98.

Which included gross margin of 54, 7%.

And operating margin of 22, 9% that were consistent with our expectations.

While we are no longer providing a specific breakout of the impact to margins from Covid only testing you will recall the comparison to higher testing and the prior year is weighted to the first half and as expected as the driver of the decline in reported Q1 margins year over year.

Excluding the COVID-19 impacts to margins in Q1 of both years, both gross and operating margins in our base business were up slightly year over year.

The improvement in base margins was delivered despite around 350 basis points of outsized inflation.

But as expected was primarily driven by selling through inventory that included peak inflation impacts from FY 'twenty two such as increases in certain raw materials noted earlier as well as the impact of labor inflation and elevated shipping.

We were able to offset a large portion of this impact to our simplification and inflation mitigation initiatives and the benefit from strategic portfolio exits of lower margin products as planned.

We expect the impact from inflation to moderate as we move through the year.

Base margin performance also includes growing over the impact from licensing revenues in the prior year.

As expected we had favorable FX that was recorded in inventory that benefited our GP as it flowed through sales.

R&D of six 4% of sales reflects our innovation investments aligned to our strategy in support of our long term growth outlook.

Q1 reflects timing of project spend we expect R&D to remain elevated in Q2 and normalize over the balance of the year to around our long range target of 6%.

Our tax rate in Q1 was lower than anticipated due to the timing of certain discrete items that were planned for during the year.

Regarding our cash and capital allocation cash.

Cash flows from operations totaled approximately $400 million in the quarter operating cash flow reflects an impact of approximately 300 million from higher inventory balances.

The increase reflects the impact of inflation and our strategic investments in raw materials to optimize product delivery and meet customer demand.

We've seen good progress in December and January on width, and finished goods right sizing with January inventory dollars down sequentially from December .

We are working to moderate strategic raw material purchases a stability improves in select markets.

However, we continue to make prudent tradeoffs were necessary to ensure we support our customers while delivering strong results.

Assuming continued stabilization of the macro environment and supply chain, we expect to continue to manage inventory levels down and by the end of the fiscal year have this be a positive source of cash and meaningful progress towards meeting our long term cash conversion goals.

Yeah.

We paid down approximately $500 million in.

Long term debt in Q1.

Ended the quarter with a cash balance of approximately $600 million and a net leverage ratio of three times.

As the year progresses, and we build cash we can increase our capacity to deploy cash towards tuck in M&A.

Moving to our guidance for fiscal 'twenty three for your convenience the detailed assumptions underlying our guidance can also be found in our presentation.

Given our first quarter performance, we are confident in increasing our revenue and EPS guidance, given the strength of our base revenue growth.

Consistent execution of our margin goals and reflecting the latest FX rates.

Starting with revenues I will provide some insights into some of our key guidance assumptions.

First we are well positioned for strong growth across our three segments, which are delivering at or above our initial expectations. Despite the impact of restrictions in China.

Thus, we are increasing our base revenue guidance.

On a currency neutral basis, we now expect base revenues to grow 575% to 675%.

This is an increase of 50 basis points from our prior guidance of $5 two 5% to $6 two 5% and is driven by our Q1 revenue outperformance and the confidence we have in our consistent durable growth profile.

Our base revenue guidance continues to include planned strategic portfolio exits.

That will enable increasing manufacturing efficiency and capacity and ensure the reliable supply of the products that matter most to our customers we.

We initiated these actions in Q1 and for the full year continue to expect that impact to base revenue growth of approximately 100 basis points, while being accretive to margin.

Offsetting this revenue impact we continue to expect a positive contribution of approximately 100 basis points from the full year benefit of our recent acquisitions with <unk> being the predominant driver.

While we arent providing segment specific guidance, we're on track to deliver strong performance across our segments. This fiscal year in line with our long term plan commitments.

We expect medical segment growth to be above the total company range, which includes the acquisition of Perata life sciences' growth to be below given strong prior year comps.

An intervention to be above the midpoint.

For Covid only testing, we're now assuming about $50 million to $100 million in revenue versus our previous expectation of about $125 million to $175 million and is driven by reduced testing volumes in.

And the continued shift in the market to combination testing for respiratory illness.

Regarding <unk>, we continue to only model shipments related to medical necessity inline with fiscal 'twenty to demand.

Regarding our assumptions on earnings.

We continue to expect operating margins to improve by at least 100 basis points, while absorbing the decline in Covid only revenue, which has a higher margin profile.

Despite the challenging macro environment persisting, our focused execution on driving profitable revenue growth combined with our simplified programs gives us the confidence that we will be able to continue to mitigate inflationary pressures and make meaningful progress to achieving operating margin levels.

25%.

Fiscal year 'twenty five.

We continue to expect over 80% of the improvement in operating margin to come from SG&A, driven by internal cost containment and leverage.

The balance is expected to come from slight improvement in gross margin and.

And R&D as we normalize back closer to our target of 6% of sales.

Below operating income our assumptions regarding interest other and tax remain unchanged.

We continue to expect adjusted EPS before the impact of currency to be around double digit growth in within a range of approximately 9% to 11%.

This includes absorbing about a 350 basis point headwind from the anticipated decline in Covid only testing, which.

Which is about 50 basis points more than we previously anticipated.

As a result, this implies a very strong low teens base earnings growth of approximately $12 five to 14, 5% compared to 12% to 14% previously anticipated.

Let me now walk you through the estimated impact from currency.

As a reminder, we manage our business and provide guidance on an operational basis will provide perspective on currency using current spot rates.

Since our last call in November the U S dollar weakened against all of our major currencies.

Based on current spot rates, which assumes the euro at one <unk> for the remainder of the year for illustrative purposes.

Currency is now estimated to be a headwind of approximately 200 basis points were about 370 million to total company revenues on a full year basis.

Which is an improvement of approximately 250 basis points compared to our prior view.

The currency headwind to adjusted EPS growth has also declined significantly since our November earnings call.

At current rates currency would represent a total headwind of approximately 230 basis points to adjusted EPS growth compared to approximately 420 basis points previously.

All in including the estimated impact of currency, we are increasing our reported revenue guidance by approximately $500 million to a range of $19 one to $19 $3 billion compared to 18 six to $18 8 billion previously.

We are raising our adjusted EPS guidance to be between $12 seven.

And $12 32.

Which is an increase of 22 at the midpoint compared to our prior guidance range of $11 85.

$12 10.

As we think of fiscal 'twenty three phasing there are various items to consider.

We have outlined more detail and the accompanying presentation slides with the following are key areas to note.

Yeah.

First regarding margins, we expect Q2 operating margin to be similar to our FY 'twenty two full year margin.

This demonstrates our strong focus on profitable growth given the continued impact of inflation and the grow over impact of our cobot only testing revenue.

Of which we expect to be most prominent in the first half of the year.

As a reminder, cobot only testing has a higher margin and reinvestment of Covid only testing profit was weighted to the back half of the year.

As the year progresses, and we continue to benefit from our simplification and inflation mitigation programs we.

We anticipate margin expansion to be most prominent tend to increase through the second half.

Second regarding FX at current spot rates, we expect the headwind to revenue and EPS will be over indexed to the first half with about 90% of the full year impact to revenue.

80% of the full year impact to EPS occurring in the first half.

For the full year, we expect the FX drop through to earnings.

To be in line with our Bds operating margin.

Lastly, a couple of timing items to note.

We expect R&D as a percentage of sales to remain elevated in Q2 and normalize over the balance of the year to around our long term target of 6%.

Additionally, the midpoint of our full year effective tax rate guidance indicates an effective tax rate over 16% for the balance of the year, which is best to assume occurs evenly throughout the year as the exact timing of any other discreet items is hard to predict.

In closing we are very pleased with our performance, which demonstrates our consistent reliable durable growth profile and our BD 2025 strategy continuing to progress as planned as.

As we look forward and as reflected in our FY2023 guidance, we are well positioned for growth with excellent momentum in our base business.

With that let me turn it back to Tom for a few additional comments.

Thanks, Chris the future has never been brighter for BD, we have demonstrated a powerful combination of innovation and strong execution and have the talent vision and momentum to continue delivering robust performance.

As we move through the back half of the fiscal year, you can expect to see continued relentless focus on execution of our strategy.

I'd like to thank our associates worldwide once again for their tireless commitment to our purpose of advancing the world of health.

With that let's start the Q&A session, operator can you assemble our queue.

Certainly and at this time, if you have a question. Please press star one if at any point. Your question has been answered you may remove yourself from the queue by pressing star too in order to allow for broad participation. Please limit yourself to one question and one related follow up.

Lastly to provide optimal sound quality. Please pickup your handset while you ask your question. Thank you and our first question comes from Vijay Kumar with Evercore ISI. Please go ahead.

Okay.

Hey, guys congrats on the quarter and thanks for taking my question.

Maybe at a high level when I look at the guidance here in Q1 performance.

Think prior comments, where Q1 organic to be a couple of hundred basis points below the annual guide and I'm looking at the annual guidance. Prior annual guide of $4 75, which included the product exits. So I think the street was looking at sub 3% and you came in at 3% slightly better but the debate.

This year was increased by 50 basis points. It looks like underlying business momentum is accelerating so maybe just talk about what's giving you confidence I think you mentioned some new products. So what's driving this confidence on organic.

Gateways.

Good morning, Vijay and thanks for the Great question, I'll turn that over to Chris.

Yeah. Thanks.

Thanks P. J, thanks to everyone for joining the call.

Maybe a couple of macro comments one I just think this represents another quarter of strong execution consistent with what we shared overall when.

When you think of our kind of forward looking view from our updated guidance.

A few key things note that we highlighted.

And then I'll address your question, maybe with where we see some pockets of strength, but one we did increase to your point 50 basis points of growth on our base business.

That strength was pretty broad based when you think of it I'll come back to that and Thats. Despite the fact that you have the restrictions in it.

Impacts in China as well, so so we've more than absorbed that.

We also absorbed the cobot only testing revenue, which given the testing dynamics in the marketplace are not surprisingly down when you think of Covid only.

Relative to our position in the market, that's a higher margin offering.

And we absorbed that as well.

I think importantly, we continue to execute against our margin and we committed to our 100 at least 100 basis points of margin improvement and then we incorporated FX, yes, so to your point.

When we were entering the year I mean, one Q1 is still under indexed relative to our full year guide right. So that still holds together. We are doing there was about 100 basis points of headwind associated with the licensing revenue impact in our life Sciences business that you saw in our results. We had estimated there is may be about another 100 basis points of other dynamics.

Comp related issues, mostly attributed to Covid.

Also had some difficult comps in the quarter in certain areas like Pharm systems. For example grew 18% Q1 last year and we still delivered north of 10% growth in this quarter. So I think that continues to be a source of strength for us I think the flu season, there theres, probably a timing demand dynamic there it peaked a bit earlier than we thought it was a <unk>.

Higher spike.

As we go through this call Dave can certainly amplify that but it's played out like it's played out in other areas with a quick season, it's going to abate. So I think you have a timing dynamic there as well.

Theres various items, such as that but largely speaking I think things are very consistent we feel really good about the first quarter of the year and it gave us confidence to increase our guidance.

Understood and then just one follow up for me.

Chris perhaps Tom you can chime.

China and one on.

Did you have.

A few questions here on combo in flu revenue contribution I think on the prior call you had said.

You expect some somewhere around the 150 <unk> for the year.

Estimate change.

It was the China impact here in the quarter and Chris did I hear you correctly on gross margins.

Should they be up sequentially here into <unk> or should gross margins be flattish or down.

Real quick on gross margin, maybe you Didnt give specific guidance on gross margin we more.

Just to give you a kind of an anchor how to expect Q2 to play out we said it would be in line roughly with how we ended our full year fiscal year 'twenty, two which when you think of.

The inflationary environment, we are in the first half of the year I know you talked about peak inflation rolling through in Q1, and Q2, we had a 350 basis point impact of inflationary pressure in Q1.

And so our Q2 margins similar to how we exited the year is what we're thinking we did not specifically highlight.

Gross margin.

Vijay on the other two questions that you asked on China, specifically, so China declined slightly in the quarter, obviously due to the Covid impact we did see that.

At the end of this month actually last month January .

Starting to see some some recovery there. So we're optimistic for the year, we still as you know we delivered double digit growth in China last year, We said high singles or near double or about that this year and that is unchanged. We think we'll be able to recover in the back portion of this year, we still have our four pronged strategy.

That we have in China, we remain very confident in we've got a very strong team there thats been navigating that challenging environment again, we delivered 10% plus growth in 'twenty, two and we expect another strong 23 and that strategy that focuses on bringing our global pipeline to China, continuing to drive China tailored R&D and you heard us talk about <unk>.

New launch there in the midline of our product developed in China for China, We continue to move into expand our market coverage into lower tier settings continue to manage through the OBP where it exists.

It's in our run rate and we continue to strengthen our local presence in China.

Both our manufacturing presence as well as.

Clinical expertise as we continue to train thousands and thousands of clinicians each year that formula has worked very well for us in the past and we continue to double down on that I think as we think about the combo test I'll turn that over to Dave to speak a little bit about what we're seeing there. Thanks, Tom Hey, VJ good to hear thanks.

Thanks for the question, yes, so just on Covid on combo as I think about both of those I mean as you saw in the quarter, we posted COVID-19 only revenues of $32 million.

And as we said on the call. We now expect Covid only to the full year to be between 50 and 100.

I think Chris commented right. We are seeing obviously stabilization in the market. We are seeing a decline in testing for Covid only I would say is that testing shifts to these combination tests, so and actually for us in Q1, our performance in that area did actually help offset that COVID-19 only.

Decline, we had anticipated that.

The way that was going to become the standard of care.

I'm actually very proud of the team in terms of the way the sort of anticipated in Riyadh and build these combination test supplies to support the Q1 performance.

I think if you think about the installed base that we've grown on BD Max. The fact that we've released these combination assays on both BD Max BD varietal BD Cor actually now in Europe is CE, Mark I think that dynamic and we can talk about it later at the dynamic of what that looks like for the full year on the respiratory testing.

Obviously continues to play out.

But yet COVID-19 only we definitely see a decline.

I'm sorry did that prior guidance on that I think you had mentioned 158 for the year.

What changed.

Yes, so for the year.

Covid only now will be in the range of $50 million to $100 million.

Sorry on the combo test I think fluke. So yes, no. So we have never really yes. So.

So if I think about that the way to.

If you think about what we've said from a let's say a flu season pre pandemic. We had said that was always in the $75 to about $100 million range on the antigen testing and so on and so forth.

There's obviously a lot of unknowns right now in terms of how the full year is going to play out obviously quarter. One we saw the season start early if you trace.

Those CDC graphs, we saw the season started early peaked.

We were able to respond to that if we were looking at it no and for all of the assumptions. We have we would think it would be about one five times.

Let's say a normal season, so 75 to 100, we would say one five times.

And that's really enabled and driven by the installed base.

<unk> that we have and the fact that we have developed to launch these combination paths across those platforms.

Kim we'll take our next question from Matt Taylor with Jefferies. Please go ahead.

Hi, Thanks for taking the question sorry for the labor.

So.

Congrats on the quarter.

Even though.

Usually a congrats on a good quarter guy but.

Very nice.

So I appreciate that Matt. Thank you of course.

I had a question a follow up on Chris's comments on.

Just the operating margin expansion improvement being more back half weighted I was hoping you could just talk a little bit more.

That and maybe unpack that and talk about.

The sources of it just because there's been so many moving parts and it's an important part of the story.

Yes, no problem. Thanks, Matt I appreciate the question.

Yes things are pretty consistent with what we shared when we started the year and it seems to be playing out as such some of the key factors to contemplate first of all we talked about from a full year standpoint, inflationary headwinds being another 200 plus basis points. This was on the back of.

Two other years with last year also being over 200 basis points. So we've been navigating an extremely challenging macro environment right. When you think of that on a cumulative basis.

Well, we did say around the inflationary pressures that would be significantly weighted towards the first half of the year will be highlighted in Q1 that you saw flow through because a lot of this was inventory that was built last year that sold through.

350 basis points of outsized inflation, that's on top of think of normal inflation merit increases that everyone takes that would happen in any kind of environment more of those.

3% level, so youre really talking about call. It 400 basis points plus of cost that you have to contend with within your P&L.

So then when you think of the mitigation offset to that so but by the way. So when you think of our Q1 performance and margin on the back of a 350 pesos basis point inflationary pressure in the quarter. We're very pleased with how we started the year because we knew the the front half was going to be kind of the more challenging times as we progress.

Through the back half Theres, a few things that will play out one it starts with our internal focused on cost improvement initiatives simplify whether it be project re code.

<unk> outsized cost improvement through our plants.

Facilities.

We are very focused on portfolio, whether it be driving mix. We took this bold strategic action around portfolio product exits that contributed within the quarter and so you don't do this was one thing the strong growth rate of course gives you a natural leverage.

And then as we go through the back half of the year, while we'll still be in an elevated inflationary environment.

The cost of materials will subside youre seeing some of that subside in certain pockets of raw materials as an example.

All other areas like labor is continuing to persist, but you should see it trend down from about 350 basis points to get to our average of over 200 basis points that we talked about.

So then when you think of kind of the dynamics within the P&L between GP and operating margin and where it will play out.

We said would be largely in line to just a slight improvement for the full year.

And again that goes back to the fact that we're absorbing the significant inflationary pressures so you're doing a lot of work to.

To kind of stay.

Stay safe flat to slightly above and then the majority of it will end up showing up in operating margin as you think of leveraging your cost base. There is some cost improvement actions were also taking in Opex and we also continue to.

Normalize our R&D spend.

In the second half if you saw in Q1 than we expected in Q2 to have more outsized R&D above 6%. So the back half will be below 6% to normalize to our 6% rate. So I think those are the biggest puts and takes as you think of the year, but we're very pleased again with Q1, how we started how focused.

We've been on the margin profile.

I mean that was there.

Comprehensive exactly what I was looking for thank you so much.

Thanks, Matt.

So we will take our next question from Larry <unk> with Wells Fargo. Please go ahead.

Good morning, Larry.

Hey, good morning, Tom Good morning, Chris Thanks for taking the question and ill reiterate my congratulations on the nice quarter here.

Chris just one follow up to Matt's question.

How much visibility do you have the.

Second half margin ramp is.

Strong.

Visibility do you have on that end.

I'm trying to calculate the numbers here quickly, but it implies I think pretty low opex growth.

If I'm not mistaken just color on that please.

Yes, Thanks, Larry.

There's a few things that obviously I would call. It naturally will kind of like for example, we had.

Reinvestment of the higher Covid only margin from the first half and reinvestment was in the back half.

That will stop we've talked about timing differences of the R&D spend.

When you get out of a 50 basis point swing just timing there from first half to second half is as an example, I had also indicated on the call some of the SG&A that we had.

<unk> incurred in Q1 that there is timing elements, there so theres timing elements.

And probably R&D SG&A you have the lack of reinvestment that you just stop that those were onetime in nature.

The other dynamic that you have in GP that I mentioned is the trend of some abatement, while still elevated but it's all on a relative basis of the raw material cost in the second half in GP.

If something significant changing we have pretty strong line of sight to those dynamics and then from there. It's really just continuing the rhythm of our cost improvement initiatives. So I think to your point.

Obviously, the macro environment is.

Fluctuating so we keep monitoring that but I think given where we are we feel pretty confident.

And we're certainly well on track to deliver at least 100 basis points of improvement for the year.

That's helpful and just one quick follow up Tom It looks like Perata is doing really well I mean, the $86 million.

Inorganic.

Contribution in medical it looks like there was one other acquisition there, but I assume most of it's perata. So any color on how broad is doing it looks like it's doing better than the initial expectations. Thanks.

Larry Youre right were at or actually a bit ahead of the deal model. There we couldn't be more pleased with carotid and we've got Mike here in the room. So let me turn it over to Mike to talk about what the other acquisition is that in those numbers in a bit more about product.

The other acquisition is the acquisition of Med keeper.

Pharmacy automation software that helps automate the processes that our pharmacy tech would use to prepare IV medications in the pharmacy Hood.

So that contributed a small amount into that into that acquisition number.

From a product perspective, I think what we're seeing there and we are really pleased with it is the combination of the energy and the product that product provides and the energy that the people from Perata are providing.

Along with the sort of discipline and coaching that BD and the scale that we provide.

To access new markets access.

The acute care settings, and help drive the transformation of the pharmacy for acute care. So peratis continuing to grow very strong in the alternate site in the retail area and then we're starting to open up the discussions with the idms that are looking to transform their pharmacy operations. So I think I think that bodes really well for the future.

We're very very pleased with it.

We hope to continue to see the same type of response from our customers I think we fare to say, Larry we don't see any change in the trajectory around the macro factors that are driving demand for that right.

<unk> shortage is the need to repurpose pharmacists to do more things in the retail setting like wellness checks and.

Vaccines and address patients all of that drives.

Drives the demand for automation and robotics, and it's really a great example of our smart connected care strategy one of the three transformational areas that we're focused on it's a great example of us bringing that to life. So really good momentum in the medical segment there.

Yeah.

We will take our next question from Robbie Marcus with Jpmorgan. Please go ahead.

Hey, good morning.

Good morning, and congrats on a nice quarter.

Chris maybe to dig into some of the points you made already.

Covid testing is a high margin business going down how much of the base business upside in guidance is coming from the combo Covid tests and then.

A lot of competitors are outperforming on COVID-19 testing and potentially raising numbers for the year I guess, how are you thinking about just becton Dickinson and the framework of Covid testing and your assumptions underlying how testing will be used for the balance of the year. Thanks, yes. Good.

Question, Robbie so I'll start with the Covid and Dave can add in here, but I would say a few things one is so our COVID-19 testing as you know is primarily in professional settings and when we talk about.

In molecular.

To a degree has as well too we don't have a.

Strong presence in at home, we do have an at home test, but it's not.

It is not nearly as big of a presence as in our professional setting so I think perhaps where you see the most outsized.

Performance there is in company is from companies.

With a large at home presence, where you've just seen a lot of the COVID-19 testing migrate to at home versus in professional settings into its still easy to do and people can do that without going into explanation. So I think thats one factor probably influencing some of the delta for US as you know we do have a combo test and development for at home and will share once we get.

Uh huh.

Hopefully that EUA and enable them to launch that David any other comments to add there on COVID-19.

No I mean, I think told me captured it well I think when we did our at home Covid test.

We made a very deliberate decision to pursue a digital strategy.

You saw the acquisition that we made of Scone, well, we were very much aligned to the test treat and trace reporting dynamics and we intentionally targeted digital ecosystem with a higher price higher margin.

Rather than the visually red home tests, we still think on a go forward basis.

As the as the sort of let's say.

The government contracts in <unk> and <unk>.

Things abate.

Testing, perhaps becomes more regulated at home 500, 10-K environments and so on a digital ecosystem again plays into this smart connected care of BD.

It will be will be important.

But I think for US we just look at it all was.

We've seen the softening in the Covid decline, we firmly believe that.

The standard of care.

Forward will be these.

And an endemic type of approach. These combination tests and we've built a portfolio across BD, Max BD call very tool and potentially very total home.

Across all of these combination portfolios.

Good thing Ravi that we would look at it adds is that.

Yes.

We're really getting more to a durable revenue number in that right at that so I think as we look at 'twenty three.

It's a number that it could be very much in line with how we thinking about it playing out in future years as well at that level, where there is not still significantly high numbers that would drop in the future that we're really at a kind of a durable level of performance in those categories, Chris I'd, rather just the way you started your question Robbie So if you think of us absorbing the.

Covid, only and increasing our base revenue guidance by 50 basis points. It wasn't like a swap out into combination testing.

It was actually broadly based across the business as David mentioned earlier, we still see the combo part of our portfolio of that one five times and we'll continue to watch how it plays out.

There was a little bit of strength there, but it was it wasn't outsized relative to the other areas. We also had strength. So yeah just to add we typically wouldn't raise unless it was a highly unusual situation.

Try to to predict expectations on a full year basis.

On fluor or smooth combo test just because it can drop off so quickly and in fact, we are seeing right that that's happening. If you look at the CDC charts, those charts showing significant drop off like what happened in Australia rapid early peak and then a rapid drop unclear if there could be second or third peaks in the future.

Thats not something we can easily predict so typically in a Q1 that we tried to be conservative around that those outlooks in that specific product category more after Q2, we get a sense of where the full year plays out.

Great.

I'll leave it there thanks a lot thanks.

Well go next time that mixing with Barclays. Please go ahead.

Hey, thanks.

Wanted to follow up with a couple of questions one on <unk>.

The margin side, and then just a couple of <unk>.

Verifications on the revenue side.

And just just to.

Sort of maybe summarize.

Make sure.

We've got a clear understanding as the sort of dynamics this year.

I mean, you have these significance.

Restructuring efforts underway that you've talked about.

That sounds like.

On a full year basis, you're expecting those to kind of offset.

Sheri outsized inflationary cost at that at the Cogs line at the at the gross margin line.

Your.

Im guessing youre, probably not fully offsetting those here in the first half, but as you pointed out that 350 basis points of inflationary hedge or inflationary pressure sort of ease in the back half. So full year, you sort of manage that just sort of neutral.

And then the benefits that you're getting here.

To get you to that 100 basis points really happen.

Low the below the gross profit line in the form of leverage in the form of timing as you pointed out is that is that the right way to think about.

The overall margin picture front half back half just to summarize in nature.

Got it anyway.

Couple of quick revenue follow ups.

I think that I mean, there is there is other puts and takes within there, but generally speaking that's how we see the year playing out.

Great.

And then on the revenue side, just some other folks who have had some Chinese pressure in the quarter as you did obviously manage through that.

To deliver to deliver the beat here, but if you could maybe.

Quantify that.

One clarification.

Get a sense of what the growth might have been.

<unk> 50 basis point overall hit to.

To growth.

On the <unk>.

Clarification on the combo testing Covid testing changes that you've made in terms of your expectation of Covid only testing it sounds like that's that's.

Maybe not so much of our expectation that Colby.

Covid testing in total is coming down, but it sounds like it's more of a mix.

Shift that's just youre seeing.

Getting COVID-19 testing in the form of that combo testing, so not directionally and consistent it seems with what other folks are.

Are talking about they just they just don't have that competition exposure.

And then al al.

I'll leave it there just with those two clarifying points it would be super helpful. Thanks.

Yes, I think just real quick on China. Thanks, Matt for the questions. So I mean last year is an interesting proxy right. We went through restrictions in our fiscal Q3. Despite that we navigated we had an impact in the quarter, we actually still grew in that quarter last year and posted around double digit growth in fiscal year 'twenty. Two this quarter we saw.

A modest decline 1%.

And.

In China specifically.

And normally if you think of it as a double digit growth business with that said Q1 last year was a strong comp for us in China, We had a very strong.

Quarter for various dynamics.

Including some some new products that were introduced et cetera, So we would say.

The impact is probably just south of 50 basis points. If you want to think about a plus or minus in the quarter headwind just to give you some direction.

We did highlight we still feel greatest Tom mentioned earlier with the core strategy with that business.

Short of like further disruptions occurring this year and he's being a more kind of acute.

We should see again around double digit growth for the year is what we had shared so we did see some trends recent trends like we're watching it. So we're watching it closely but it looks like you are starting to kind of see some.

Turnaround in that market. It's still early so we'll look at it we will update of course in the.

Q2, but I think longer term our strategy and performance in China is really strong I think just to add in there we'd seen even versus the first half of January to the back half of January we started seeing.

Yes.

Good recovery towards the back half of January as as the Covid outbreak began to subside.

Think COVID-19 I can let Dave and Tom jump in here too.

Kind of.

<unk> accurate I think in your depiction.

There is significant market dynamics on call. It COVID-19 only testing in the marketplace. This year. If you think of last year, there was a lot of.

Government intervention in school requirements businesses.

A lot of that has subsided. So there's a portion of the reduced testing thats just market dynamics playing out in terms of total volume and Thats not just shifting the combination testing with that said, we still feel good about our combo assay and having that because we do see that as the assay of choices folks have are symptomatic going in and wanted to get tested for.

For flu so we saw strength in our platform, but as Dave articulated the flu season did kind of spike early so we'll have to kind of continue to watch that as we navigate through Q2. So it certainly wasn't a one for one shift by any means not even really close to that.

Yes, and I think the only things that I would talk about.

Just in terms of the market dynamics.

We track things like better occupancy and so on really closely.

If you look at a lot of the data.

Sort of.

First quarter sort.

Sort of beds that were occupied by Covid only patients with.

Maximum peak of one, 6%, which is way down.

Sort of north of 22% in prior periods, so that COVID-19 only dynamics is definitely softening.

Just reinforce what I said earlier on around these combination assays.

Where the unmet need is if somebody presented symptomatically.

You want to know, particularly in the respiratory season do I have Colby drive fluids will have RSV, we think that that is going to be the norm on a go forward basis.

And I think we talked earlier on that we have those on Max outside the U S.

On Brazil, two things I would also highlight that.

As for the combination I'll say here in the U S. We are under EUA review.

With the FDA right now and actually just laid Max BD Max Yep late last month, we actually did file EUA for the.

And at home combination assay.

There are also two <unk> that are under review right now as I said right now the season is extremely quiet, but this is also about planning and preparing for whatever the respiratory season may be towards the end of this calendar year.

Thanks, Dave Good question.

Thanks, Matt.

Okay. We will take our next question from Rick Wise with Stifel. Please go ahead.

Rick Hi, good morning to you.

Let me start off with the new products that Tom I was looking for the last couple of quarters handouts here.

I don't recall, but it feels like.

Starting off with innovation.

In our handouts.

The passion with which you review everything is telling.

Tells us all something very important about the direction you are heading and I was just curious.

From two angles.

Which do you see which would you want us to view.

As the most impactful.

Gross margins in to these to the franchises, which are you most focused on and separate but related maybe you know that as Chris highlighted the balance sheets.

Getting back in such excellent shape.

What are your priorities clearly tuck in but is there any sort of franchise or technology or area, we should be thinking about thank you.

Great questions, Rick and thank you so on the innovation side, obviously I appreciate the comments there we're really pleased with the momentum that we have and as I've said many times. We think we have the most exciting pipeline in the company's history.

If you look at last year in FY 'twenty, two we had 25, new product launches and things like our health site diversion management moving into the operating room or the new Pyxis Es platform or a series of new dies and.

The first of their kind in BBB are our core high throughput platform as bricks in the U S or a peer with mail are all great. Examples of products that we launched last year that are going to help drive growth. This year as we think about and we highlighted quite a few this quarter as well as we look ahead.

As you know Theres no you cant say for BD, Hey, Theres. These three or four products that are going to drive our performance and then if they go really well or don't go as well that that is going to change our outlook and our thesis.

That's one of the strengths of BD, we've got a lot of singles or doubles got triples here and there, but we've got a deep bench.

What's.

I'd point you to is we have been systematically moving our portfolio into higher growth markets and shifting our wham grew up we talked a lot about that at Jpmorgan. This year, we gave updates specifically on our progress versus the Lambda goals that we set at analyst day, two years ago and we're very.

Much on track to those we're really pleased with how our portfolio is progressing we're really pleased with how we're executing R&D we've shared before we <unk>.

FY 'twenty two with our best performance ever 87% on time launch is 84% milestone delivery, that's up significantly versus where we've been in the past until we're pleased with how our R&D teams performing.

We highlighted quite a few of the many.

Citing launches that we have coming up this year or submissions that we have certainly if you think about life sciences facts discover as a breakthrough new platform anytime youre on the cover of Science magazine will consider that as an exciting technology and we're launching that later this year a lot of exciting.

Interest from our customers as well as the new guys that are associated with that that take advantage of their spectrum technology and tax discover yoda around capillary blood collection, enabling blood collection by non full bottlenecks non vena puncture.

Really highly preferred by patients.

75 out of 100 will prefer or more.

<unk> being drawn with that device, then Athena puncture and we see that is starting to enable.

Sure.

More routine care in places like retail when you look at the majority of clinical decisions being driven by diagnostic data, it's hard for a carrier to move into new settings, if youre not getting that diagnostic data available. There you still got to go into the old system at your blood drawn working to change that and that's something that we're going to be excited about as we go forward in BD medical.

Obviously, we've got.

Products in Pharm systems that we've talked about in the past, including liver tests as well as the new vaccine deliver.

Delivery solutions that we've launched recently in <unk>.

PDI, we've talked about quite a few we highlighted peer with in the past positive flush in.

In Mds list goes on again at JP Morgan went through those pretty deeply and I highlighted a few here on the call today I think as we think about tuck in M&A, we're going to remain extremely disciplined I've shared in the past.

Of course, many times, we're still focused on tuck in M&A exclusively we're very focused on maintaining that strong.

Balance sheet that we have and we are going to continue to increase the amount of cash that we generate and we were.

We feel really good about how that looks over the next several years we have.

Very focused priorities, we don't disclose specific market categories that we're focused on there, but we've obviously implemented very specifically the three areas of focus around smart connected care around technologies that enabled the shift to new care settings and around technologies that help us improve chronic disease outcomes in the crime because these spaces that we're focused in.

Collagen peripheral vascular disease et cetera, and so over the last three years 90 per cent plus.

M&A dollars that we spent have been focused in those three categories and we would certainly expect that continue.

Going forward that level of focus.

Thanks for the question.

And there are no further questions at this time I will turn the call back over to Tom Polen for closing remarks.

I just want to thank everyone for your time today, Great series of questions, obviously, where we feel really good about the performance as we started this year and.

And we look forward to providing updates in the future. Thank you.

Thank you and this does conclude today's audio webcast as a reminder, a replay of this call will be available on the <unk> Investor Relations website. Please disconnect. Your lines at this time and have a wonderful day.

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Q1 2023 Becton Dickinson and Co Earnings Call

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