Q2 2025 Becton Dickinson & Co Earnings Call and Business Update
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Speaker Change: Hello, and welcome to Bd's second fiscal quarter 2025 earnings call at the request of BD. Today's call is being recorded and will be available for replay on Bd's Investor Relations website investors that BD dot com or by phone at 800 839 to 385.
Speaker Change: For domestic calls and area code plus 14022207203 or 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 Greg will Davis, Senior Vice President Treasurer, and head of Investor Relations.
Speaker Change: Good morning, and welcome the BDC earnings call.
Speaker Change: I'm, Greg rigid as senior Vice President Treasurer, and head of Investor Relations. Thank you for joining US. This call is being made available via audio webcast at BD dotcom earlier.
Speaker Change: Earlier. This morning, PD released its results for the second quarter of fiscal 2025, the press release and presentation can be accessed on the IR website at investors diabetes dotcom.
Speaker Change: Leading today's call are Tom Polen, Bd's, Chairman, and Chief Executive Officer, and President and Crystal Orifice, Executive Vice President and Chief Financial Officer.
Speaker Change: Following this morning's prepared remarks, Tom and Chris will be joined for Q&A by our segment presidents.
Speaker Change: Mike Garrison President of the medical segment, Mike <unk> President of the Life Sciences segment, and Rick <unk> President of the Interventional segment.
Speaker Change: Before we get started I want to remind you that we'll be making forward looking statements you can read the disclaimer in our earnings release and the disclosures in our SEC filings available on the Investor Relations website.
Speaker Change: Unless otherwise specified all comparisons will be made on a year over year basis versus the relevant fiscal period.
Speaker Change: Revenue percentage changes are on an FX neutral basis, unless otherwise noted.
Speaker Change: Tariff commentary is based on tariff policies as of April 30th and does not include any of the tariffs that have been announced by currently are delayed or threatened and we know that international trade policies trade restrictions and tires are rapidly evolving and there can be no assurance as to how the landscape may change.
Speaker Change: And what the ultimate impact on our guidance and results of operations would be.
Speaker Change: Reconciliations between GAAP and non-GAAP measures are included in the appendices of the earnings release and presentation with that I am pleased to turn it over to Tom.
Tom Polen: Thank you, Greg and good morning, everyone.
Tom Polen: My comments. This morning will focus on our Q2 results and the strategic actions, we are taking to not only navigate the near term environment with agility, but to ensure BD is best positioned to deliver long term value stock.
Tom Polen: Starting with our Q2 results revenues came in below our expectations growing 6% or 0.9% organic.
Tom Polen: This performance was largely attributable to market dynamics concentrated in life Sciences, which reflects the change in research funding policy versus what was initially anticipated as well as a slower return to normal levels of blood culture testing in our diagnostics business.
Tom Polen: We are not satisfied with this quarter's top line growth and is not reflective of the mid single digit growth, we have been consistently delivering over the last several years.
Tom Polen: I'll share more on the decisive actions, we are taking including specific investments to reaccelerate organic sales growth in this dynamic market.
Importantly, we were able to offset these challenges to exceed our adjusted EPS growth expectations as we continue to consistently execute and deliver strong performance down the P&L.
Tom Polen: Specifically, we delivered adjusted gross margins of 54, 9%, which increased year over year by 190 basis points.
Tom Polen: Our strong margin performance is being fueled by momentum in BD excellence with now four consecutive quarters of strong gross margin expansion.
Tom Polen: We continue to scale BD excellence across the organization, including nearly tripling the number of Kaiser and year on year with over 600 completed year to date.
Tom Polen: As planned we are now beginning to embed this system in our R&D and commercial operations and just held our first ever BD Excellence leadership summit three weeks ago.
Tom Polen: We continue to see BD excellence as a key catalyst to drive gross margin expansion over the next five years and support increasing growth investments in commercial programs and R&D.
Tom Polen: Chris will take you through our results in greater detail, however, I'd like to provide some additional color on our Q2 revenue performance.
Tom Polen: First bioscience performance was impacted by further reduction in global research funding.
Tom Polen: At the start of the year, our forecast assumed a depressed but stable environment with modest improvement throughout the year.
Tom Polen: Q1 was directly aligned with those assumptions. However has given changes in government policy, including the cuts to U S Research grants announced in February it's become clear that pressure on research spending increased in Q2 and will likely persist through FY 'twenty five.
Tom Polen: This is largely impacted research instrument sales.
Tom Polen: However, we're instrument funding is available our win rate has been strong driven by high interest in our innovative facts portfolio.
And we are pleased that effective in April we received our first export license to resume selling our high parameter flow cytometer as to China. Following the U S government ban imposed in early January.
Tom Polen: Finally on the reagent side, we're seeing continued growth, which we see as a good signal that customers are continuing to advance. The research. We believe this business remains well positioned for growth as the market begins to stabilize.
Tom Polen: The other key area, where we experienced challenges with diagnostics with softness in our backpack blood culture business.
Tom Polen: If you recall, we experienced supplier challenges late last year.
Tom Polen: Our team has done a great job working with the supplier to get back to full production and we have returned to historical inventory levels.
Tom Polen: However, customers, who had been operating under allocation last year took conservation actions within the standard of care guidelines and have been slower than expected to move back to prior testing levels.
Tom Polen: We are partnering with our customers to accelerate this re adoption.
Tom Polen: Given these dynamics, we are adjusting our full year revenue guidance and now expect to deliver three to three 5% organic growth.
Tom Polen: We don't take this change lately and are acting decisively to address items within our control and drive upside in areas of momentum to accelerate growth.
Tom Polen: Specifically as planned Pharm systems returned to growth in Q2, giving us confidence in second half growth, where we expect performance to keep building driven by biologics and increased orders for G. L. P ones.
Tom Polen: We're investing behind the lyricist strong momentum and eight P. M continues to be a key growth catalyst, which will contribute to organic growth as we anniversary the acquisition in Q4.
Tom Polen: We believe our interventional business is well positioned to deliver strong growth in the second half fueled by continued momentum in additional commercial investments in pure WIC and physics, and our recent launch of physics umbilical.
Tom Polen: Our innovation funnel is robust and we have several new product launches planned in the back half, including facts discover a eight and central vena, one a rapid insertion central catheter.
Tom Polen: Turning to earnings for the balance of the year.
Tom Polen: Before considering the impacts of tariffs strength down the P&L, including strong margin performance is enabling us to offset our updated revenue expectations.
Tom Polen: Chris will go into greater detail on our updated guidance, including our tariff assumptions.
I'd like to provide some context for how we're navigating the current environment.
Tom Polen: First we have a strong track record of effectively navigating macro challenges, including Covid and our supply chain and inflation headwinds that followed.
Tom Polen: Driven by our advanced supply chain capabilities, regionalized manufacturing footprint and scaled leadership positions.
Tom Polen: We are applying the same strengths in operating approach to proactively navigate tariffs set.
Tom Polen: Second BD has the largest U S manufacturer in Med Tech with a U S network of 28 plants that produce over 10 billion devices each year.
Tom Polen: This puts BD in a strong position with nearly 80% of our U S. Revenue currently sourced from our U S manufacturing network or tariff exempt sources.
Tom Polen: To further strengthen our position and commitment to ensure a resilient U S health care system today, we announced our intent to invest $2 $5 billion in U S manufacturing over the next five years.
Tom Polen: Looking at imports less than 1% of U S revenue is sourced from China.
Tom Polen: Given this structure and current tariff policies are most significant tariff exposure comes from China tariffs placed on products manufactured in the U S and exported to China.
Tom Polen: We are committed to leading through this challenge and are proactively driving mitigation actions that have already significantly reduced near term tariff risk.
Tom Polen: As a result, we assume $90 million of tariff expense in FY 'twenty five.
Tom Polen: Third we have identified and begun to act on additional steps to further mitigate the impact of tariffs beyond FY 'twenty five.
Tom Polen: These actions include shifting supply flows optimizing supplier locations and leveraging dual sourcing options across our network.
Tom Polen: For example, we ship certain products, such as vacuum painters and flush from the U S to China that can also instead shipped from our European plants to China, or we can accelerate transition to our China flushed plant.
Tom Polen: As a global Med Tech leader, we remain committed to serving China's health care system, and patients and to preserving our relationships and business.
Tom Polen: Finally related to tariffs, we immediately put G&A focused cost containment measures in place and are taking a balanced approach on pricing that recognizes the current cost pressures while closely partnering with our customers. During this time of uncertainty.
Tom Polen: BD Excellence is also a differentiated capability in this environment as it enables us to protect margins and preserve investment to support innovation and growth.
Tom Polen: Turning to other key strategic initiatives.
Tom Polen: The separation process for our Biosciences, and diagnostics business is advancing well and on schedule as.
Tom Polen: As we have shared previously we believe this is a unique opportunity to create value and interest has only increased since we announced the separation in February.
Tom Polen: We remain committed to maximizing shareholder value and we'll share more details on the specific form of the transaction. This summer.
Tom Polen: We continue to make meaningful pipeline advances across several of our higher growth markets.
Tom Polen: In BD interventional, we continued to expand into new advanced tissue regeneration applications with the launch of physics S. T umbilical the first and only fully absorbable hernia solution designed specifically for umbilical hernias.
Tom Polen: One of the most common abdominal wall hernia procedures.
Tom Polen: The launch is off to a strong start.
Speaker Change: In BD medical we continue to advance our connected care strategy and last week received the next five 10-K clearance for BD hilarious enhancements, including cyber security updates and clearance of the E. T C O two module.
Speaker Change: We also recently launched BD Nexis, our next generation infusion pump designed for the EMEA region.
Speaker Change: Finally in life Sciences, we are on track to launch the first BD facts discover analyzer. The a eight in just a few weeks.
Speaker Change: Bringing our spectral and real time imaging technology to an even wider range of scientists and applications.
Speaker Change: The feedback from pilot customers has been extremely positive.
Speaker Change: In closing were acutely focused on managing our company to navigate the near term environment and deliver improved growth levels in the back half of the year.
Speaker Change: The separation of our Biosciences and diagnostics business remains on track and we believe we will be well positioned as a pure play med Tech leader.
Speaker Change: Focused on attractive categories shaping the future of health care.
Speaker Change: BD excellence has good momentum a long runway of opportunity and has the potential to drive strong margin accretion and fuel investments in R&D and commercial.
Speaker Change: We believe this will enable BD to deliver sustainable consistent profitable growth.
Chris: With that I'll turn it over to Chris.
Chris: Thanks, Tom starting with some further insight into our Q2 revenue performance revenue grew 6% or <unk>, 9% organic.
Chris: As a reminder, organic growth includes a previously disclosed headwind of about 150 basis points from the outsized prior year licensing comparison, and beady eye with the largest impact in UCC followed by P. I.
Chris: As Tom discussed performance in life Sciences was the main driver of lower than expected Q2 organic growth and resulted from lower biosciences instrument demand.
Chris: Given changes in government policy focus and a slower recovery in our backpack blood culture business.
Chris: Outside of diagnostics and Biosciences.
Chris: Organic growth in our Med Tech business was one 9%, which includes a headwind of approximately 170 basis points from the prior year of licensing compare.
Chris: <unk> performance remains strong and we are pleased with the recent new clearance.
Chris: We realised strength across many other key platforms. This includes double digit growth in biologics, primarily G. L. P ones, which led to Pharm systems returned to growth this quarter, which is trending in line with our expectations for the full year.
Chris: In UCC pure where it delivered another quarter of strong double digit growth with continued adoption of the male and female portfolios.
Chris: Direct mail had its strongest quarter post launch.
Chris: Pure with Flex also continued its strong trajectory in the acute and direct to consumer at home channel.
Chris: In surgery, our hernia transformation strategy to move the standard of care from synthetic mesh to our physics bio resorbable mesh continue with strong market adoption and double digit growth.
Chris: Lastly, underlying growth was strong across all platforms in the U S, partially offset by volume based procurement in China.
Chris: Regionally total company organic growth was led by performance in the U S Greater Asia outside of China, and Latin America. It was partially offset by a decline in EMEA in double digit decrease in China as expected.
Chris: Turning to our P&L results.
Chris: We executed down the P&L, delivering well leveraged earnings growth and exceeding both our adjusted margin and earnings commitments with Q2, adjusted diluted EPS of $3 35.
Chris: Growing five 7%.
Chris: We delivered strong adjusted gross margin of 54, 9% and adjusted operating margin of 24, 9%, which increased by 190 and 60 basis points year over year, respectively.
Chris: Margin expansion continued to be fueled by momentum in BD excellence, driven by manufacturing productivity supported by improved OE waste and network optimization.
Chris: This enabled growth investments across SG&A and R&D.
Chris: Regarding cash and capital allocation year to date free cash flows were approximately $625 million.
Chris: This reflects the timing of planned one time cash payments.
Chris: BD excellence continues to drive productivity gains, allowing us to leverage capital expenditures we've.
Chris: We've made strategic investments in inventory in the quarter to optimize the impact of tariffs within the year.
Chris: As a reminder, our cash generation is weighted to the second half given the timing of tax and other payments and while we expect tariffs to have a modest impact on cash in the second half. We expect continued progress against our deleveraging commitments. We ended the quarter with net leverage of two nine times, which was in line with our expectation.
Chris: We also continue to see share repurchases as a value creating deployment of capital given our view of the intrinsic value of BD and remain committed to deploying $1 billion towards share repurchases by the end of the calendar year with 750 million repurchased year to date.
Chris: Moving to our updated fiscal 'twenty five guidance as we look ahead to the balance of the year, we remain focused on driving areas of momentum, while reflecting the latest macro dynamics.
Chris: We now expect currency neutral total revenue growth of seven 8% to eight 3% and organic revenue growth of 3% to three 5%.
Tom Polen: As we think about the quarterly split we expect year over year organic growth to improve sequentially in Q3 to nearly 3% and further in Q4 due to the benefits of the key growth drivers Tom referenced earlier in his remarks as well as easing comps.
Tom Polen: Regarding foreign currency based on current spot rates for illustrative purposes, we expect a headwind to revenue from translational currency of approximately $20 million for the full fiscal year, which is an improvement of approximately $230 million from our prior guidance view.
Tom Polen: As a result, we now expect fiscal 2025 total revenues to be in a range of 21 eight to $21 9 billion.
Tom Polen: For tax we now expect our adjusted effective tax rate to be between 14% and 14, 5%.
Tom Polen: Before considering the impact associated with tariffs, we are maintaining our adjusted EPS of $14 30.
Tom Polen: To $14 60.
Tom Polen: Which represents 10% growth at the midpoint inclusive of absorbing an FX headwind of about five or.
Tom Polen: We're 40 basis points for the full year.
Our strength down the P&L largely driven by gross margin improvement is fully offsetting the earnings impact associated with our revised organic sales growth.
Tom Polen: There continues to be a high degree of uncertainty on the future of the tariff environment we.
Tom Polen: We are focused on executing our strategy. While also taking every action to mitigate tariffs and have made significant progress to date.
Tom Polen: Incorporating the mitigating actions, we have taken and continue to execute.
Tom Polen: We estimate remaining tariff expense of about $90 million this fiscal year or 'twenty five.
Tom Polen: Predominantly weighted to Q4 as.
Tom Polen: As a result, we now expect adjusted diluted EPS.
To be in the range of $14 six.
Tom Polen: To $14 34.
Tom Polen: Which reflects growth of about 8% at the midpoint, including a tariff impact of about 2%.
Tom Polen: Finally, as you think of Q3 margins. We expect continued strong adjusted gross margin levels were about flat year over year.
Tom Polen: Given our planned increases in selling and R&D investments, while maintaining G&A cost discipline Q3, adjusted operating margin is expected to be about 24, 5%.
Tom Polen: In closing we are focused on navigating the current environment to deliver our revenue.
Tom Polen: With compelling adjusted EPS growth inclusive of tariffs, while positioning BD with continued momentum beyond 2025.
Tom Polen: With that let's start the Q&A session.
Tom Polen: Operator can you please assemble our queue.
Perfect at this time, if you have a question. Please press star one if at any point. Your question is answered you may remove yourself from the queue by pressing star too in order to allow for broad participation. Please limit yourself to only one question lastly to provide optimal sound quality. Please pick up your handset while you ask your <unk>.
Larry: Thank you and our first question is from Larry <unk> with Wells Fargo. Please go ahead.
Speaker Change: Hi, good morning, Thanks for taking the question, Chris Let's get the tariff question out of the way here.
Speaker Change: The 25 cents is that net or gross in other words net after mitigation you talked about it starting in Q4.
Speaker Change: Q4, so obviously people are going to try to annualize that is that the right way to think about it in fiscal 2006 or is there going to be obviously youll have some mitigation.
Speaker Change: I assume so what's the right way to think about it for fiscal 'twenty, six and I had one follow up.
Speaker Change: Yes sure. Thanks, Larry I appreciate the question certainly a top of mind topic look one big shot out to the the BD team to your point. This is a net number after.
Speaker Change: <unk>.
Speaker Change: Significant work to mitigate tariffs on multiple fronts, both short term long term.
Speaker Change: As you can imagine we've been navigating our advanced capabilities and supply chain.
Speaker Change: Getting proactive with inventory movements looking at sourcing alternatives across our broad network.
Speaker Change: And so there's been a lot of significant progress.
Speaker Change: Across multiple groups to mitigate this in 2025, obviously the situation remains extremely fluid.
Speaker Change: We will see how the next few months played out play out as it relates to <unk>.
Speaker Change: Further tariff rates et cetera that are on the horizon Youre exactly right.
Speaker Change: While on one hand.
Speaker Change: You can't do simple math and just annualize. It is fair to say, though that we only have about three months on average of tariffs and our guide there is a little bit in Q.
Speaker Change: Q3, but when you think of kind of our fiscal year, and where we are in our cap and roll period.
Speaker Change: So at a minimum you need to do some sort of annualized <unk> factor would be fair and then from there I think what we'll do is we'll look and see where rates come in and then we're not done in terms of efforts to mitigate take action et cetera, I think the last comment I would just make and we can get more into this as well.
Speaker Change: Through the call.
Speaker Change: I think despite that.
Speaker Change: And everything the Bd's navigating in the macro environment, you're really seeing the power of BD through BD excellence with margin progression in our ability to still deliver and compound strong EPS growth at 8% at the midpoint. Thanks for the question.
Speaker Change: That's super helpful. Just one follow up for Chris or Tom just maybe put.
Speaker Change: Just flesh out a little bit more how the second half organic growth improves I think it was 0.9% in Q2.
Speaker Change: 3% you said for Q3, Chris I think give it a little bit higher in Q4, a little bit give us a little.
Speaker Change: A little bit more.
Speaker Change: Meat on the bone there on kind of what gets better in the second half of the year and your level of confidence there. Thank you.
Speaker Change: Okay.
Speaker Change: Speakers are you able to hear us.
Larry: I can hear you. This is Larry I just wanted to ask the question.
Tom Polen: Yes, Thank you Larry to our speakers Mr Polin.
Larry: Mr. <unk> are you able to hear us.
Speaker Change: You may be on mute.
Speaker Change: Paris.
Speaker Change: Chris It's Larry.
Speaker Change: Okay. Thanks can you guys hear me now just confirm LER.
Speaker Change: Hi, Ken did you hear the question Chris.
Ken: Yes, I heard the question perfect. Thanks, Larry for the question so.
Ken: Obviously in this guide you saw us reflect our best thinking on the macro landscape, which it evolved pretty quickly and dynamically as we're into Q2. If you remember Q1, we were we were well on track actually ahead of plan.
Ken: As you think of the full year. So first half ex licensing were about 3% growth.
Ken: As you step into the second half our implied guide is about 4%, so a 1% step up.
Ken: What we did share on the call is we expect Q3 to be similar to the first half so right around three.
Ken: <unk>, 3% what that implies is just over 5% in Q4, there's really four key items in Q4, it's actually pretty straightforward.
Ken: Think of that acceleration.
Ken: And Theyre all about equally weighted first thing as we start cycling over APM, which now becomes our organic.
Ken: Growth contributor actually off of an easy comp as well.
Ken: So you have that dynamic you have pharm systems, which has actually been playing out as planned through the year you saw a step up in growth. There continued momentum in biologics. So you'll see a stronger Q4, there again also off of the easier comp.
Ken: Hi.
Ken: We've always talked about that profile being a six plus plus grow we expect high single digit growth in VDI, partially driven by an easy comp in surgery. It's also an area, where we've actually added investment to our plan and in the spirit of driving taking action and driving areas of momentum.
Ken: And then lastly, actually in BBB again, we cycle through easiest comp last year at the end of the year is when market dynamics started affecting us and we.
Ken: We have an exciting launch with facts discover so those four items.
Ken: Explain the sequential step up from Q3 to Q4, we feel really good about that.
Ken: Alright, thanks, so much.
Speaker Change: Thank you. Our next question comes from Robbie Marcus with Jpmorgan. Please go ahead.
Robbie Marcus: Good morning, and thanks for taking my questions.
Robbie Marcus: I just wanted to follow up on that last one just maybe.
Robbie Marcus: Angle of the question.
Robbie Marcus: You brought.
Robbie Marcus: Organic sales growth down for the year about 100, Bips 50 bps of that you highlighted was from some of.
Robbie Marcus: The known headwinds like China.
Robbie Marcus: Pharm systems, Destocking and <unk>.
Speaker Change: Biosciences, and then 50 bps from it looks like the rest of the business, Chris maybe you could help us understand sort of where it's coming in a little <unk>.
Speaker Change: Soft and the remaining part of the business and then of that.
Speaker Change: <unk> hundred 25 to $1 75.
Speaker Change: Headwind, what's kind of doing better than what's what's may be doing worse.
Speaker Change: Yes. Thanks Ravi this is a great question as well so the 175 basis.
Speaker Change: Basis points it was around its actually slightly over that think of it a little bit higher here's the easy way to break it down there's really three key drivers that were adjusting for in the guide.
Speaker Change: Two of which are very much market, driven so about 80% of the impact and.
Speaker Change: And I would say 60% of that 80 is both BBB in China. If you remember China. We originally said would be a mid single digit decline.
Speaker Change: We're now, saying, it's going to be a high single digit decline.
Speaker Change: Some of that is just trying to make sure we're thoughtful about the environment because China is actually tracking relatively in line in the first half but.
Speaker Change: But we did start seeing some incremental volume based procurement in areas in particular, PDI, which we can touch on and as you can imagine that the research spend in that area. So there's a little bit of overlap with BBB.
Speaker Change: BBB is the other one again thats fully market driven.
Speaker Change: There were a lot of changes that happen mid to late quarter in Q2, including how you saw Europe react as it relates to standing up defense fund some of that coming at the expense of research as an example, obviously in the U S and.
Speaker Change: NIH there was a specific reduction they are taking place. So we've reflected that in the other big areas in the DS business predominantly backed tech. So we describe that on the call.
Speaker Change: Last year, we had a third party supplier create a supply challenge we're fully back on supply team has done a great job there inventory in the channel, but as you can imagine the health care system puts conservation efforts in place to ensure that they are appropriately following protocols taken care of their most critical patients has taken them longer to ramp.
Speaker Change: Back to normal utilization level. So we're partnering with our customers to get that back give them confidence that supplies, there which is there those are the big areas. There are some smaller puts and takes everywhere else, but thats the way I would think of it.
Speaker Change: Great. Thanks, a lot.
Speaker Change: Thank you. Our next question comes from Matt Taylor with Jefferies. Please go ahead.
Speaker Change: Yes.
Speaker Change: Hi, Thank you for taking the question.
Speaker Change: So just following on the discussion about tariff mitigation actions I was hoping you could delve into some of the different levers that you can pull and when you might look to pull them.
Speaker Change: A lot of companies have been talking about pricing collectively and then using global footprint and looking at different sourcing.
Speaker Change: So maybe you can talk about any actions you could take in the short term and then when the dust settles and we know more about how the landscape will look next year, what could you do in different scenarios next year and beyond.
Tom Polen: Hey, Thanks, Matt for the question this is Tom.
Speaker Change: So.
Speaker Change: As we shared in the prepared remarks. This team has a very strong track record of being highly proactive and effective in navigating macro challenges, we did that during COVID-19 supply chain and inflation headwinds that followed and certainly tariffs represent a dynamic external factor that we jumped all over to <unk>.
Speaker Change: Very proactively manage that situation as well and so a couple of the levers that we pulled early on and then I can talk about some of the ones that we're continuing to pull right off the bat, we actively started positioning inventory in the right geographies to get ahead of the tariff.
Speaker Change: And create a buffer against near term cost impact. So that was an area. For example, we've gotten quite a bit of inventory on <unk> to get ahead of that and have enough inventory for the balance of the year.
Speaker Change: The one product that we import from China as an example, less than 1% of U S revenue, but that is the one product that we import from China, and we were able to get ahead of that.
Speaker Change: For inventory for the rest of this year.
Speaker Change: We continuously look at our global sourcing footprint as I shared we have the largest.
Speaker Change: We are the largest U S manufacturer in med Tech and Thats, a significant strength to US. We also have a very dynamic global footprint as well and so we do have particularly on our high volume consumables. It's very often that we have multiple sourcing options and we shared some examples in the prepared remarks as an example sn.
Speaker Change: Essentially all the Vacutainer that we sell in China.
Speaker Change: Historically and today is sourced from our Sumter, South Carolina plant, we make the exact same product in Plymouth, England and are in the process of pivoting the sourcing from China for their same thing on flush historically all of the flush, which we sell in China, which is a meaningful category for us there.
Speaker Change: Has been sourced from our Columbus, Nebraska site in the face of tariffs. We actually just recently opened up a brand new flush facility in China and are now of course focused on accelerating sourcing and getting that plant ramped up even ahead of what our original expectations were to avoid tariffs going forward. There's other options that we have.
Speaker Change: To that and in other categories and those are levers that we have begun pulling and we will continue to pull as we head in towards 26 of course sourcing as we think about raw materials are key areas that we're focused on we did that in the first.
Speaker Change: The first administration set of tariffs, we were able to to move product around our supplier base.
Speaker Change: And avoid tariffs and in a very productive way and were doing that same playbook here again and then finally.
Speaker Change: Maybe before I get the pricing <unk> excellence of course is a very valuable asset in this environment, allowing us to protect margins and ensure we continue to invest in innovation and growth.
Speaker Change: We're.
Speaker Change: Driving our offset of tariffs just in terms of pricing.
Speaker Change: Look if tariffs continue to stay in place youre dealing with an inflationary environment and we obviously have a proven track record in navigating inflationary environments. We first focused on mitigating the tariffs.
Speaker Change: Partially overcoming that with BD excellence and the third leg of the stool.
Speaker Change: It certainly is sharing some of that increase through pricing and we do have that ability and thats something that we will look to take action on as the tariffs persist as part of a multi pronged approach that we have thank.
Matt: Thank you for the question Matt.
Speaker Change: Thanks, Tom.
Speaker Change: Our next question comes from Travis Steed with Bank of America.
Speaker Change: Hey, Thanks for taking my question I guess, Chris I wanted to ask kind of a higher level bigger picture question.
Speaker Change: And I think we came into the year thinking that we were going to set up more conservative guidance and then just trying to think about the philosophy here I think there is an acceleration on the back half of the year again, I'm just trying to get confidence in the guide again I'm trying to understand like.
Speaker Change: As the business the macro just changing so much it's hard to.
Speaker Change: Capture or is it just the tough business model I'm, just trying to take a bigger picture.
Speaker Change: Do we how do we kind of improve the execution here.
Speaker Change: Going forward.
Speaker Change: Hey, Travis this is Tom let me start on that and then I'll turn it to Chris.
Chris: Certainly we're not pleased with the obviously the change in our revenue and we take that very seriously and very focused on the actions to accelerate in the back half of the year as you mentioned and as we called out earlier.
Chris: And we've shared that we shared in the back half of last year. We shared again earlier this year that we've been monitoring the market dynamics, particularly in research spending and <unk>.
Chris: Biopharma in China, Biopharma, we're seeing recover to our initial expectations and that's a positive.
Chris: Obviously.
Chris: Research funding had a meaningful change that.
Chris: That happened within Q2, which was the the environment did become more volatile than anticipated, particularly with the government changes that were announced in February.
Chris: Around NIH grant funding when that grant funding change happened, we saw basically a freeze on capital.
Chris: Purchases.
Chris: For research use in many cases as we shared in our prepared remarks continue to see growth in reagents, but we did see a freeze on that we've also seen yes.
Chris: Even in Europe, as Chris mentioned.
Chris: There is some uncertainty on where government spending was going we saw for example in NHS.
Chris: Others that we had in hand get put on pause as they were looking at how they were going to be allocating their government spending in the face of an evolving environment, including increasing defense spending et cetera. So I think what we wanted to do is be it.
Chris: Make sure that we represent that and we what we're assuming is that continued pressure and dynamic change through FY <unk> through the balance of FY 'twenty five right, which is a step down from what we saw not only coming into the year, but it's a step down from what we saw in Q1 as well and that was you can see very clearly aligned with activities that decisions that were announced in new admin.
Chris: <unk> that happened within the quarter.
Chris: On China, where get wanted to really get ahead of what we are.
Chris: Beginning to see in the macro environment there.
Chris: As Chris mentioned year to date through Q2, and we're essentially on what our original expectations were for China with that said, we've been monitoring the environment research spending pressure continues to be in existence in China and of course, the <unk> environment is something we watch very closely and so we want it what we built.
Chris: Into our outlook is is some incremental dynamics in China and adjusted that from mid single digit decline to high single digit decline in our forward outlook.
Chris: And so those are the main the main factors maybe just.
Chris: So that addresses topline maybe just just one other comment there because.
Chris: Again, the market dynamics there are they are isolated right, China, and then significant dynamics playing out.
Chris: In life Sciences, and BBB in particular, that's not different from others that are in that space. When you look at kind of med tech or thinking of the new BD. Our full year guide is solidly in mid single digits still ex licensing so theres a lot of strength in the business. It certainly.
Chris: Getting lost in that and by the way that includes that that comment includes the China headwind in that number. So then just the last comment on growth I think one of the other just more important things that I touched on briefly is thinking.
Chris: Think of the strong consistent execution on earnings we feed every single quarter on earnings.
Chris: There was one that was there was a match.
Speaker Change: Youre seeing 8% earnings growth.
Speaker Change: So we're basically holding our guide ex tariffs rate tariff was clearly a new event for everyone. We did a really nice job of managing that in 'twenty. Five generally came in better than I think folks were thinking externally and.
Speaker Change: The power of our supply chain and capabilities.
Speaker Change: And our track record there in terms of Covid and how we navigated macro should give a lot of confidence around how we're driving our P&L.
Speaker Change: We're we're absorbing.
Speaker Change: 5% EPS growth headwinds, 2% tier, 3% on the revenue and we're still delivering 8%.
Speaker Change: Earnings growth I think it's the highest quality highest leverage P&L and with the BD excellence momentum going forward. It should give confidence that we're able to deliver strong results even in an environment like that and compound earnings.
Speaker Change: Great. Thank you I wanted to ask about the lifecycle of the separation.
Speaker Change: No you heard that it was on track, but there's been a lot of change in the macro environment.
Speaker Change: On valuation so just kind of wanted to double click on the on track on that and see it.
Speaker Change: There is anything else you can say on the process.
Speaker Change: Yes. This is Tom Travis good question.
Speaker Change: As we shared nothing's changed the planned separation process remains on schedule and there continues to be very strong interest in the assets.
Speaker Change: As we progress we're going to continue to be thoroughly evaluating all the transaction options net of tax.
Speaker Change: To make sure that we get the best outcomes for shareholders that remains our priority maximizing shareholder value through this process and we continue to expect and announce to announce the transaction. This summer.
Speaker Change: We remain very focused on that.
Jeff: Great. Thank you thanks for the question Jeff.
Speaker Change: And our next question comes from Patrick Wood with Morgan Stanley. Please go ahead.
Patrick Wood: Perfect. Thank you for taking my question I'll keep it to one.
Speaker Change: We've talked about a lot on this call, but obviously you guys have done very very well and the efficiency.
Speaker Change: Over the years, there's been a lot of exercises I'm sure Tom made that have gone through to land us to where we are now I guess my question is kind of two.
Speaker Change: To what extent, you build muscle tissue and that skill set and timely with employees, but it's also it's a lot of work right. It's kind of exhausting in its own way. So I guess, what's the interplay here between the capacity for people to keep doing these exercises.
Speaker Change: Remain happy.
Speaker Change: Versus the skill set and the muscle tissue that you guys have built up in that arena and how do you make sure that you don't end up because there's obviously everyone was limited time theres a bit of an interplay between market and product development and efficiencies that everyone has some thoughts on how you sort of balance those things internally I know, it's a very vague question, but I'm just curious.
Speaker Change: Thanks.
Speaker Change: Yes, Thanks, Patrick good question.
Speaker Change: Let me start on that and then maybe I'll ask Mike failed to also weigh in who is taking a broader role in the company leading BD excellence.
Speaker Change: One is is I go to a lot of our a fair number of <unk> I just was actually in Singapore, a couple of weeks ago hosting the annual CEO kaizen that I host every year, which is where I mean the plan for the full week with the team we had eight <unk> going on concurrently that week some amazing achievements.
Speaker Change: They are the most inspirational engaging activities that I ever see period.
Speaker Change: Like the energy of our sales meeting you find when we do guidance, it's unbelievable because of what of course, what's happening is it's the teams that are doing the work on a daily basis are given time to step outside of running the line.
Speaker Change: And stepping back in and working to improve and transform what they do to make it better to make it safer to make it better quality to make it lower cost to make it more efficient.
Speaker Change: For them for the company for our customers.
Speaker Change: And it's it's unbelievable what they achieve and of course, when we're doing those they have the full support of the organization. We typically have for example.
Speaker Change: Leadership to do things that they may say, how am I going to get that done that normally takes a month and it happens within.
Two hours.
Speaker Change: <unk> is at and and again, it's inspiring and it's showing what can be done and it's.
Speaker Change: That momentum builds upon itself and so we are still in early innings right. We're only.
Speaker Change: We started it in the back half of 'twenty three it will again triple the number of <unk> that we do this year and it has still been largely focused within our ISC or operations and warehousing organization, where you can see the impacts directly in our gross margin again still early stages, even on the <unk>.
Speaker Change: Gross margin side, what we've begun this year is beginning to expand those into and expand BD excellence into R&D and into the commercial space. So as an example, we just did a kaizen last week on one of our key clinical trials the outcome of that was accelerating the clinical trial for months.
Speaker Change: The team really excited inspired.
Speaker Change: By what they were able to achieve in that in those plants and inspires others. We do a lot of storytelling in the organization to share those best practices.
Speaker Change: Inspire others in the organization of what teams are doing and give them exposure to that so I actually see it as a it's a huge positive from our culture.
Speaker Change: It builds momentum in and of itself.
Speaker Change: By sharing those stories and what people are achieving and maybe Mike anything to add to that yeah. Thanks, Tom and I couldnt be more excited Patrick about the journey, we're on and as Tom mentioned, we're in the early stages of this.
Speaker Change: I think one of the maybe misconceptions is as we put in lean and continuous improvement processes and standard work is actually frees up time. It allows our associates to spend less time on some of the more mundane tasks and spend more time on the things around creativity strategy problem solving to really drive results.
Tom Polen: So as we extend these philosophies into our operating mechanisms our commercial footprint R&D as Tom mentioned I expect excitement to continue to grow as well as even more time to spend on the things that are popping up like tariffs to really resolve those to the most efficient manner. Thanks for the question.
Patrick Wood: Thanks, Chris for the question Patrick.
Speaker Change: Our next question comes from David Roman with Goldman Sachs. Please go ahead.
Speaker Change: Thank you and good morning, everyone I'll limit myself also to two to one.
Speaker Change: One here.
Speaker Change: I guess I would think about the evolution of organic growth here the past several quarters a lot of the dynamics that have impacted your business.
Have stemmed from end market dynamics. So if you kind of take that as context can you talk us through the process by which you gather market and competitive intelligence do you have a central team to validate business assumption.
Speaker Change: Thank you have the right people in place to get the best Intel on what's happening in your business and markets.
Speaker Change: Yes, David This is Tom I'll take that obviously the teams that are most close to those markets are the teams in the businesses.
Speaker Change: And we do have a central group that does has essential strategy group and we are continuing and we use outside perspectives as as well too as we form those those views I think what <unk> seen is that the two areas most notably Reese.
Speaker Change: The research spending.
Speaker Change: And the pharma.
Speaker Change: Space you saw I think everyone in those spaces have to make adjustments. Obviously, we're unique within med tech to have those within our portfolio. There is not really others players within med Tech who have those dynamics that they have exposure to those spaces, but the pure plays.
Speaker Change: <unk> bin.
Speaker Change: Have had to make those adjustments from that perspective. So that's an area. We certainly always continue to challenge ourselves to see how we get ahead of those David.
Speaker Change: Obviously the policy change here in the U S that we saw in the change on research spending we had adjusted research spending down going into the year. It then step down further with obviously the new administration's policy changes.
Speaker Change: And I think if you look year in years. Prior we were one of the first to identify <unk> as an example in the years back and we were talking about that ahead of the curve I think we were out ahead of the curve on inflation.
Speaker Change: Yes.
Speaker Change: First one would be calling that out and addressing it from a pricing perspective right. After COVID-19 I think the same thing on the supply chain dynamics, what we able to see ahead at around the corner there and so on many of those I think the discussion on these calls where how we are getting and seeing around the corner on those and so.
Speaker Change: It's an area that we do well in a number of spots. Obviously, we always look to hold ourselves to a higher bar and continue to do better in some of these most recent spaces of life Sciences and pharma.
David Roman: Thank you David.
Speaker Change: And our last question comes from Mike, Matt Mcclintock from Barclays. Please go ahead.
Matt Mcclintock: Hi can you hear me okay.
Speaker Change: Yes, but unclear.
Speaker Change: Thanks, So much for getting me in so just a combination question here, but has to do with I think.
Speaker Change: One of the questions, we get often is how.
Speaker Change: Going back to the period of hyperinflation your.
I think the only company in the universe.
Speaker Change: Coverage universe.
Speaker Change: Really getting so deep into these cost optimization programs that you were able to kind of raise margins hyper.
Speaker Change: Growth hyperinflation period.
Speaker Change: The question is.
Speaker Change: Sort of a follow up on Ryans question, how much more is there.
Speaker Change: Lean into there.
Speaker Change: And then the combination.
Speaker Change: Applies here Tom is what if anything have you been doing can you do internal optimization around AI.
Speaker Change: To your point about getting away from Dan less productive less value added.
Speaker Change: Towards more value creation.
Speaker Change: Yes, great Great question.
Speaker Change: So I appreciate and we appreciate the acknowledgment of the work that we did and navigate the hyperinflationary environment that existed post post COVID-19. We're proud of that work and are applying a lot of the same lessons and experience to the tariff environment as well so.
Speaker Change: Look as we think about maybe the last part of the question AI.
Speaker Change: We're taking.
Speaker Change: And approach on both innovation as well as as our internal systems.
Speaker Change: And taking one where we are investing in a moderate level seeking to learn confirm that we get value and then proceed which we think is a prudent approach to demonstrate.
Speaker Change: Value creation.
Speaker Change: Yes that comes with any investment.
Speaker Change: And so obviously, we've talked a lot about we just launched a new AI based platform and in APM that we're really excited about.
Speaker Change: Got the new AI platform that will launch with the Pyxis Pro later this fiscal year and in MMS and obviously, we have the use of AI already in areas like key stress and diversion analytics that we continue to have quite a few other programs in AI within our pipeline. We also funded an AI incubator within our R&D organization put a leader.
Speaker Change: In place of that.
Speaker Change: A nimble agile team, who is doing prototyping and pilots in new spaces that we can apply AI to but we're keeping it small nimble and.
Speaker Change: Again rapid prototyping apply understand the business models for those and then.
Speaker Change: We will fund those as business models are confirmed as we think about an internal.
Speaker Change: And Chris can speak to this perhaps a bit further again, we are using and applying AI on things from back office processes like expense reviews, We just announced managers don't review expenses anymore.
Speaker Change: Taking that off of People's place, because we have AI doing that as an example.
Speaker Change: We're using it in our manufacturing area to optimize.
Speaker Change: Scheduling on the lines I knew what products and what order do you make to be able to minimize changeover and maximize OE on line throughput.
Speaker Change: Other areas like inventory management, we use AI in and so we're using it in very focused spaces again, where we know that there is clear tangible value that we can get out of out of the technology.
Speaker Change: Just maybe tying Patrick's question in years, a little bit just all of these initiatives as you talk about the energy in the organization. These all actually enhance the work experience across the board and importantly in this profile for earnings growth like we're adding investment in key areas selling R&D youll see that in the back half of the year and so.
Speaker Change: These all create a lot of energy and momentum and feel really good about that.
Speaker Change: Alright. Thanks, Thank you for the question.
Speaker Change: Thank you and that will conclude today's question and answer session. At this time I would like to turn the floor back over to Tom Polen for any additional or closing remarks.
Tom Polen: Okay. Thanks to everyone for joining today and for your support of BD. We are acutely focused on navigating the near term environment and believe we are well positioned to accelerate growth as markets recover.
Speaker Change: We look forward to updating you on our progress on our next earnings call.
Tom Polen: All of you for your time today.
Speaker Change: Thank you. This does conclude the audio webcast on behalf of BD. Thank you for joining today. Please disconnect. Your lines at this time and have a wonderful day.
Tom Polen: Okay.
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