Becton, Dickinson and Company

Hello and welcome to the BD's fourth quarter and full year fiscal 2021 earnings call. At the request of BD, today's call is being recorded. It will be available for replay through November 11th, 2021 on the investors page of the BD.com website or by phone at 800-839-1246 for domestic calls. and area code plus 1-402-220-0464 for international calls. The replay bridges are now dedicated. You no longer need a conference ID to hear the replay. I would like to inform all parties that your lines have been placed in a listen-only mode until the question and answer segment. Beginning today's call is Ms. Nadia Goncalves, Senior Director of Investor Relations. Ms. Goncalves, please, you may begin.

Good morning, and thank you for joining us today. This call is being made available via webcast at bd.com. This morning, BD released its results for the fourth quarter and full year of fiscal 2021. You can find the press release along with an accompanying presentation on the investor relations website, investors.bd.com. Leading today's call are Tom Poland, BD's chairman, chief executive officer, and president, and Chris DeLorfis, Executive Vice President and Chief Financial Officer. Following the prepared remarks, Tom and Chris will be joined for Q&A by our segment presidents, Alberto Mas, President of the Medical Segment, Simon Campion, President of the Interventional Segment, and Dave Hickey, President of the Life Sciences Segment. During the call, we will be making forward-looking statements, and it is possible actual results could differ from our expectations. Risks, uncertainties, and other factors that could cause such differences can be found in our earnings release and in our latest SEC filings, including our Form 10-K and 10-Qs. We will also be discussing non-GAAP financial measures regarding our performance. Reconciliations to GAAP measures, including the details of purchase accounting and other adjustments, can be found in our earnings release and financial schedules and the appendix to our investor presentation. Unless otherwise specified, all comparisons will be on a year-over-year basis versus the relevant period. Revenue percent changes are on an FX-neutral basis unless otherwise noted. When we refer to any given period, we are referring to the fiscal period unless we specifically note it as a calendar period. I would also call your attention to the basis of presentation slide, which defines terms you will hear today, such as base revenues, base margins, NUCO, and marine manco. With that, I'm very pleased to turn it over to Tom.

Thank you, Nadia, and good morning, everyone, and thank you for joining us. Before I get started, I would like to officially welcome Chris DeLorfis, BD's recently appointed chief financial officer. Chris brings deep healthcare and med tech experience to BD across both operations and corporate finance. Many of you already know Chris from his most recent role as head of investor relations at J&J. We are thrilled to have Chris join the team And while he's only been with us for two months, he's already immersing himself and making a very positive impact. I look forward to Chris sharing his perspective with you both today and at our Investor Day next week. I would also like to welcome Dr. Carrie Byington, who was recently appointed to the BD Board of Directors. Dr. Byington is Executive Vice President and Head of University of California Health, where she leads the nation's largest academic health system. Dr. Byington brings deep and highly relevant experience to BD as we work to advance our BD 2025 strategy and accelerate innovation in smart, connected care, enabling the transition to new care settings and improving chronic disease outcomes. On today's call, I will provide highlights of our performance and the continued progress we have made on our BD 2025 strategy. I'll then turn it over to Chris for the financial review and outlook for fiscal 2022. After our prepared remarks, Chris and I will open the call up for Q&A. Now let's jump into our results and key highlights for the year on slide seven. We were very pleased with the strong close to fiscal 2021, which drove full-year revenues, EPS, and cash flows ahead of our expectations, despite a volatile environment. This reflects our continued laser focus on execution and the strength and expansiveness of our diversified business and geographic model. Revenues grew over 15% to more than $20 billion in fiscal 21, with $2 billion in COVID testing revenues and strong 8.1% growth in our base business. Our adjusted EPS increased 28% to $13.08. And through continued execution of cash flow initiatives we instituted in fiscal 20, we further improved our operating cash flow by over $1.1 billion compared to the prior year. Overall performance reflects strong momentum in our base business with a return to more normalized growth rates across all three segments versus pre-pandemic revenue levels. As hospitals have been able to return to serving both COVID and non-COVID patients and the overall healthcare utilization levels increased, we saw strong demand for our broad portfolio of products that were essential to patient care, including new products delivered across our innovation pipeline. At the same time, We are proud to have supported our customers and the patients they serve by bringing to market and scaling a broad range of innovations to help the world diagnose, treat, and prevent COVID. Turning to slide eight. At the highest level, our strategy has been deeply rooted in helping healthcare systems balance four key priorities, and those are improving outcomes, driving efficiencies, expanding access to care, and more important than ever, improving the clinician experience. BD is uniquely positioned to help our customers deliver against these three key priorities across discovery and diagnosis, medication delivery, and interventional treatment. And through our innovation-driven growth strategy, we're investing in our broad foundational durable core portfolio while also shifting a larger portion of our business into higher growth, higher impact areas. And those three higher growth, higher impact areas that we're focused on that you've heard me talk about before are smart connected care, enabling the transition of treatment to new care settings, and improving chronic disease outcomes. In addition, by simplifying our product portfolio, we're driving growth through increased efficiency and margin expansion. Turning to slide nine. Importantly, we've significantly advanced our strategy this past fiscal year. taking bold steps to position BD for the long term, beginning with the actions we took to strengthen our balance sheet and enhance our working capital and cash flows. These actions have positioned our cash and net leverage well, giving us the capacity to increase investments in R&D and tuck in M&A, accelerating our innovation pipeline, and advancing our strategy to drive growth in fiscal 22 and beyond. In FY21, we invested over $1.2 billion in R&D, 21% more than last year, with increased funding for key projects through our new growth and innovation fund. We also continued our increased pace of tuck-in acquisitions, completing seven acquisitions in fiscal 21, as well as a number of additional early phase investments, as we also began to build our long-term inorganic funnel. In addition, we reinvested over $200 million in profits from COVID testing to drive our growth strategy. through investments in our commercial organization and accelerate our simplification strategy by investing to speed up our recode portfolio and architecture program. And today, these investments are meaningfully advancing our strategy to expand in higher growth spaces across smart connected care, new care settings, and chronic disease outcomes. And just a few recent accomplishments that I can share here underscore our growing momentum. We're looking forward to sharing a lot more of those accomplishments next week at Amnesty. These include new manufacturing lines that are now operational and will support demand for vaccination devices globally. And this investment is in addition to our $1.2 billion commitment to expand capacity for our pre-fillable syringe and advanced drug delivery systems, which represent high growth opportunities in our durable core. Emergency use authorization for BD Veritor at home, which is the first at-home COVID antigen test to use a smartphone to interpret and report results. This platform is a great example of how we're applying digital capabilities to bring new first-world innovations to market and expanding care to new settings. We also received 510K clearance of expanded indications for Rotarex, atherectomy system, to include treatment of instant restenosis, which is a first-of-its-kind label expansion, and it's a great example of how we expand optionality for physicians and customers in the treatment of chronic disease. We also received US FDA approval of our new high-throughput molecular system, BD-Core. In today's challenging labor environment, BD-Core's advanced robotics and software algorithms provide customers a way to do more testing with less available staff. while providing important new clinical insights for cervical cancer screening and management through our BD on Clarity HPV assay. Now, beyond BD Core, as you know, we have a portfolio and pipeline of unique automated solutions that help our customers perform in a tight labor market, from helping nursing staff and pharmacists be more efficient with medication management to increasing efficiency in diagnostic testing for labs experiencing staffing shortages. We're engaging with customers in these markets and are seeing great interest in our solutions. At our Investor Day, we'll share more about how we are well-positioned, not only capitalized on this opportunity, but how we've been very actively optimizing our investment mix to both expand our durable core platforms and simultaneously add technology and platform innovation in higher impact and higher growth spaces that we expect to enhance our long-term growth profile. Through our disciplined capital allocation framework, we are balancing these investments and future growth with the return of capital to shareholders through our competitive dividend, while also resuming our share repurchasing program, having repurchased $1.75 billion in fiscal 21. We also just announced our 50th consecutive year of dividend increases, and we're very proud to be one of only 16 companies across all industries to achieve that milestone. Turning to slide 10, we will remain disciplined in our approach to portfolio management as we systematically advance and deliver against our strategy. And earlier this year, we announced the decision to spin off our diabetes care business. The proposed spin represents a value creation opportunity for all stakeholders and is intended to enable growth acceleration for both BD RemainCo and NuCo with more efficient business processes and allocation of resources and capital. NUCO will be able to invest its capital in growth opportunities, including high growth geographies, markets, and next generation products. We continue to make good progress, and the spinoff remains on track for the first half of calendar 2022. Regarding our BD Alaris pump, we recently received CE Mark and Health Canada approval for the updated BD Alaris system. We also achieved a significant milestone earlier this year with the filing of our BD Alaris 510K submission. We have dedicated resources supporting this and continue to make progress. Alaris is an important tool for clinicians and there continues to be strong demand for our platform during the pandemic. Turning to slide 11, I'd like to share some details about our enhanced ESG strategy, Together We Advance. BD has been a long-standing leader as a case study for sustainable business models and innovating for shared value. Our strategy serves as a framework through which BD addresses the most relevant ESG issues for the company and its stakeholders and aims to further our leadership role and build on our commitment to improve and advance individual and public health at a global scale. The health of our company, our planet, our communities, and the people we serve are directly connected, And when we successfully address the health of one, we often solve for challenges of another. And under our strategy, we announced a suite of goals for 2030 and beyond, with commitments in five areas that are most important to BD and our stakeholders, and where we have opportunities to create meaningful measured change over the next decade. And those specifically are climate change, product impacts, responsible supply chains, healthy workforce and communities, and transparency. And we're acting on these commitments, and for example, we recently signed onto the United Nations Race for Zero campaign. We look forward to sharing more about the advances and impact we're having in each of these areas. Before I turn it over to Chris, as we look ahead, we expect the greater resiliency exhibited by healthcare systems during Delta will continue, along with continued recovery and patient demand post-Delta. While there are inflationary pressures occurring across most every industry, we have been very active in addressing these challenges. We have put specific, defined, actionable plans in place to help mitigate these pressures, which are coordinated through an inflation task force that we've established with work streams across procurement, shipping, cost structure, and continuous improvements in our plans. And in this environment, it's also required to initiate pricing actions, which we have begun. Looking ahead, while we believe there will be longer-term macro solutions like expanded shipping and resin capacity, we're not waiting for those to occur. Our aim is to be best in class in navigating the current environment, and we believe we have a clear path to accelerating margin recovery. We are proud of the progress we are making advancing our BD 2025 and ESG strategies. We have excellent momentum in our base business heading into fiscal 22, a stronger balance sheet, and steadily increasing cash flows despite inflationary pressures, all positioning us well for the future. With that, let me turn it over to Chris to review our financials and outlook. And again, Chris, welcome.

Great. Thanks, Tom. Appreciate it. Before I jump in, let me first say I couldn't be more excited about joining BD. BD is a purpose-driven company that has both a deep and broad portfolio that includes leadership positions in many important areas in healthcare. Combined with our innovative pipeline of products and solutions, we have a tremendous opportunity to shape the delivery of healthcare and make a meaningful impact on healthcare outcomes around the world. I look forward to engaging with the investment community next week during our investor day and sharing more specifics around our strategy and the actions we are taking to support our growth agenda and deliver long-term value. So with that, let's get into our results. Echoing Tom's comments, we delivered on our commitments in 2021, have strong momentum as we enter 2022, and we are well positioned for the future. Slide 13 summarizes our high-level revenue performance. Fourth quarter revenues of $5.1 billion increased 7.3% on a reported basis and 5.9% on an FX neutral basis, and we're ahead of our expectations. Our base business revenues increased 9.8% driven by strong performance across all three segments. In Q4, we saw continued improvement in overall healthcare utilization levels and routine testing and lab activity and higher acuity. The breadth and diversification of the total BD portfolio, including COVID diagnostic testing, provides insulation against COVID-driven procedure fluctuations. For the full fiscal year, our revenues grew 15.6%, or 8.1% excluding COVID testing, which demonstrates the strength of our business and the momentum of our strategy across our segments, with base growth of 6.8% in the medical segment, 8.4% in life sciences, and 10.7% in the interventional segment. Base business growth is also strong regionally, particularly in the US, China, and Latin America. Compared to fiscal 19, base business revenues grew 4.5%, or about 7% when adjusting for the Allaire ship hold. Turning to slide 14, our medical segment delivered $2.5 billion in revenues in the fourth quarter, growing 7.7%, led by our medication delivery solutions and pharmaceutical systems businesses. MDS revenues increased 11.3% and reflect strong demand for our core products, driven by higher acuity, and increased utilization in the U.S. and Europe in competitive gains in catheters and vascular care devices. In MMS, Q4 revenues were comparable to the prior year, despite the high number of infusion pump placements in Europe last year to support hospital needs. We continue to see solid growth in our dispensing platform and a high number of committed contracts, with Q4 being one of our strongest quarters to date for committed contracts. Revenue growth of 5.4% in diabetes care benefited from the timing associated with certain sales and slightly better than expected market demand. On a normalized basis, we see diabetes growth about flat. Farm systems growth of 12.3% reflects continued strong growth driven by demand for our pre-filled devices and enabled by capacity expansion. Demand for pre-filled devices is being aided by the fast-paced vial to pre-filled device conversion for biologics, vaccines, and other injectable drugs. Turning to slide 15, BD Life Sciences revenues totaled $1.5 billion in the fourth quarter, increasing 1.5%. However, excluding COVID testing, Life Sciences grew 15.8%. Performance reflects strong double-digit growth in our base business in both integrated diagnostic solutions and biosciences, partially offset by a decline in COVID testing revenues. In IDS, 16.2% growth in the base business was driven by specimen management and microbiology as lab utilization improved and demand increased for both core products and products used during the care of COVID patients. We're also seeing strong growth in sales of BD Max IVD assays, which were up about 20% year over year. IDS base revenues also included sales of our combination flu COVID assays for both Veritor and BD Max that began shipping in Q4. Early demand is robust and we believe the combination test will become the standard of care for symptomatic testing across laboratory and point of care testing as we enter the flu season. Despite increased demand driven by the Delta variant and shipping our highest quarterly volume of over 30 million tests, COVID testing revenues declined in Q4 from 452 million to $316 million due to lower pricing in the market. Biosciences revenues increased 14.6% driven by research solutions as lab utilization is returning to normal levels. We continue to see solid demand for research reagents globally. Our recently launched e-commerce site is a new vehicle for growth and has been well-received with strong traffic. Turning to slide 16, BD interventional revenues totaled nearly $1.1 billion in the fourth quarter, growing 8.3%. As we previously communicated, we began to see an impact from the Delta variant on elective procedures in certain US states in July and August. While we contemplated some continuation of that impact, it was slightly greater than anticipated in our surgery and peripheral intervention businesses as hospitals reduced access and restricted elective procedures. Our surgery business grew 16.8% reflecting the year-over-year recovery in elective procedures. with double-digit growth in infection prevention and biosurgery, and strengthened hernia despite some impacts from the Delta variant. Growth in infection prevention also reflects continued market adoption of our sterile chloroprep product. Revenues in peripheral intervention increased 5.5%. We saw continued strong performance in atherectomy as we have leveraged the capabilities of our PI sales force and in oncology as more people completed cancer screenings. PI also continues to be impacted by a product recall which impacted growth by about 300 basis points. Neurology and critical care revenues grew 3.8% driven by continued strong demand for PureWIC as well as continued adoption of the recently launched Arctic Sun with our targeted temperature management platform. Partially offsetting this growth was a temporary supply disruption with an acute neurology that is now remedied. We expect shipments to be caught up within the first quarter of FY22. For the full fiscal year in 2021, UCC grew 7.6%. Turning to slide 17 and our Q4 and full year adjusted P&L. For the quarter, we delivered adjusted net income and EPS above our expectations with net income of $770 million and diluted EPS of $2.59. On a currency-neutral basis, net income declined 7.8% primarily by lower COVID testing pricing and testing-related one-time costs and reinvestment into business, as well as higher shipping costs due to inflation and increased R&D levels. EPS declined slightly less, or 6.5%, reflecting a lower share count due to share repurchases. Our full-year adjusted net income in EPS were $3.9 billion, and $13.08 respectively, with growth of 31% and 28%, driven by strong revenue growth and operating margin expansion of over 100 basis points on an FX neutral basis. We delivered Q4 and full year operating margins in line with the expectations we previously communicated for the company and for the base business. Turning to slide 18. Cash flows from operations totaled $4.6 billion in fiscal 21, an increase of over 30% versus fiscal 20. This improvement in our cash flows allowed us to advance our balanced capital allocation framework and support our BD 2025 growth strategy through investments in capital, R&D, and M&A. During fiscal 21, we invested in capital expenditures to support high growth opportunities, including the new manufacturing lines Tom previously mentioned. In addition to investing in R&D at over 6 percent of sales to advance our pipeline of innovative programs, we also invested $500 million in tuck-in M&A across our businesses that will support our strong growth profile in 2022 and beyond. Beyond our investments in growth, we returned capital to shareholders through $1 billion in dividends and $1.7 billion in share repurchases. We ended the fiscal year with $2.3 billion in cash, and an adjusted net leverage ratio of 2.6 times. Our current cash and leverage position gives us flexibility to create value through multiple levers, and I look forward to sharing more with you about our capital allocation strategy during our upcoming investor day. Now turning to our fiscal 22 guidance on slide 20. First, some macro assumptions that support our guidance range. While we recognize there will continue to be some variability We assume there will be continued easing of COVID-19 restrictions as vaccination rates continue to increase and, thus, expect to see continued stabilization of procedures and are not assuming significant disruptions to procedure volumes. Additionally, while we do not expect conditions to return to normal levels, we do not anticipate worsening macro supply chain constraints or inflationary pressures. Finally, we have not assumed any impact of legislation changes that would impact the broader market. Given the significant sales and income generated from testing in fiscal 21, we previously provided a preliminary guidance floor that excluded testing. To help you model our underlying base business performance, we will continue to provide our revenue guidance split between base and COVID-only testing through this year, along with context regarding testing margins relative to our base business. So a few specific comments on testing assumptions. Our base business revenue assumptions include sales of our combination flu COVID assays at a level comparable to a normal flu season, which you should think of as $75 to $100 million. For COVID-only testing, which is in addition to our base business combo test revenues, we assume the demand would be significantly less in fiscal 22. Given the variability in the COVID environment driven by uncertainty around the length and intensity of outbreaks, Our current assumptions are largely based on confirmed orders. We are assuming about 200 million of COVID-only testing revenue. If testing revenues were to be substantially higher, we first would compensate for any resulting procedure softness impacting our base revenue and income, which positions us well to manage through this period of uncertainty. Any further upside would be used to create value through either reinvestment or allowing incremental profits to flow through. Regarding Alaris, as Tom noted, we are confident in the progress we are making and the resources that we have invested behind this program. As we previously shared, infusion pump clearances are inherently complex, particularly our filing, and thus it would not be prudent to predict timelines. Consistent with what we shared previously, we do not expect and our guidance does not include a 510 clearance in fiscal 2022. Additionally, it is difficult to predict how things will play out as shipments are only being made under the medical necessity process. But at this time, we've assumed that our LARIS capital revenues will be generally in line with fiscal year 2021. Let me now share some perspective on what is underlying our base guidance. We are well positioned for strong growth across our three segments with a balanced and robust innovation pipeline resulting from investments and increased productivity in R&D. Growth will be further enabled by the strategic acquisitions we have added to our portfolio that are positioned in high growth categories. While we aren't providing segment-specific guidance relative to total company-based growth, we do expect our medical segment growth to be slightly below life sciences growth to be in line and interventional to be slightly above total company-based growth. In the medical segment, we are continuing to extend our leadership position with competitive gains in significant categories, such as peripheral catheters and pre-filled devices, while investing in solutions transforming healthcare through smart, connected care and new care settings. Life Sciences holds leadership positions in attractive and growing categories and is investing in higher growth spaces by enabling smart, automated laboratory workflows with solutions such as BD Core. improving chronic disease treatment with clinically differentiated assays, research tools, and companion diagnostics where we expect continued above-market growth in research reagents, and migrating point-of-care diagnostics to alternative care settings. Interventional is continuing its strategy of evolving from product to category leadership in chronic disease treatment while continuing to invest in accretive high-growth spaces. These investments include increased product offerings, both organic and inorganic, expanded labeling and investments in the non-acute care space. Our PureWeck product line and acquisition of Straub Medical are good examples of how we are driving growth through our BDI strategy. Turning to slide 21 and our guidance for fiscal 22, we expect base revenues to grow 5 to 6% on an FX neutral basis. compared to $18.3 billion in fiscal 21. For COVID-only testing, we are assuming $200 million in revenue. Based on current spot rates for illustrative purposes, currency would be a headwind of approximately 50 basis points or about $100 million to total company revenues. All in base plus COVID-only testing and the illustrative currency, we expect reported revenues in the range of $19.3 to $19.5 billion in fiscal 22. We expect operating margins in our base business to improve approximately 200 basis points over fiscal 21 base operating margin of 21.7%. Due to the current COVID test pricing levels, we expect operating margin on COVID-only testing to be modestly above our base business margins. A few additional items for your models. We expect up to $50 million in improvement in interest to other given debt refinancing activities we completed in the fourth quarter of fiscal 21. As you're aware, interest to other can fluctuate due to deferred compensation, which is offset in SSG&A. We plan for an increasing effective tax rate of 12.5% to 13.5% given discrete tax items in 2021 will not repeat. And in terms of share count, while our priority remains tuck in M&A, we expect share repurchases to also be a consistent part of value creation. In addition to the year-over-year benefit from share repurchases completed in fiscal 21, where our ending shares outstanding were $288 million, our guidance assumes share repurchases that at minimum offset any dilution from share-based compensation. All in, we expect adjusted EPS to be between $12.30 and $12.50, with EPS excluding COVID-only testing being well above the $12 floor we provided in August on our third quarter earnings call. Turning to slide 22, regarding margins, let me first take a minute to reground everyone on where we are today. There are a few key considerations that have resulted in some margin pressure, some of which will be naturally restored and others that will be addressed by existing margin improvement programs with further improvements through new initiatives we are pursuing. Our total operating margin of 23.9% for the full year did improve versus 2020. In 2021, our total margin profile benefited by over 200 basis points from the COVID-19 testing margin net of investments we made to accelerate growth and other value-creating programs. So it's best to look at our base operating margins, excluding COVID-19 testing of 21.7%, which also improved on an FX neutral basis versus 2020. However, they do lag pre-pandemic levels as our base operating margin was primarily impacted by four key factors. The Alera ship hold, negative COVID-19 related volume utilization, above normal inflation in COGS and shipping, along with currency headwinds. Each of these items negatively impacted margin by under 100 basis points and averaged about 80 basis points each. They collectively accounted for about 90% of the erosion from pre-pandemic levels. The remaining impact was small and driven by a few items, including a decision to strategically increase R&D investments to more competitive levels at about 6% of sales to support long-term growth. As I shared, we anticipate improving base operating margins by around 200 basis points in fiscal 22, driven by the following. First, like all companies, we experience short-term impacts from COVID-19, such as underutilization in our plants. These impacts carried into fiscal 21, but will be more than fully restored in fiscal 22, given our strong base sales momentum and associated increased volumes, and will drive about 100 basis points improvement in operating margin versus 2021. Second, given our global manufacturing and distribution footprint, we face the impact of currency fluctuations in our P&L. Along with normal FX translation, the timing of inventory movements throughout our network can also impact our margins. Based on current spot rates and our inventory outlook, we expect to recapture about 50 basis points of the currency headwind to operating margin we reported in 2021. Lastly, we realized unprecedented inflationary pressures in fiscal 21, driven by increased resin, inbound and outbound transportation, and labor costs. These inflationary pressures will carry into fiscal 22, and we intend to be best in class in how we navigate this environment. We are expanding our existing simplification efforts, such as project recode, and intend to drive additional margin improvements through new spend optimization initiatives. These include actions across procurement and shipping, such as reduced air freight and supplier cost control. In addition, we have actions in place to invest behind continuous improvement in our plants. And inevitably, in this environment, we know we need to offset these pressures through pricing actions, which are already being implemented. We also are focused on leveraging our SSG&A investments while maintaining competitive investments in R&D. In 2022, we are forecasting additional impact to operating margin from inflation above normal levels from 2021. However, with the significant progress we've made to date on margin initiatives that are already underway, we anticipate being able to more than mitigate the incremental inflationary pressures this year to drive an additional 50 basis points of operating margin improvement. Increased utilization, reversing FX pressure, and initiatives to offset inflationary pressure will also play a key part in restoring our base gross margin to pre-pandemic levels. Combined, we expect these to drive around 100 basis points improvement. We are committed to delivering against these goals, and thus, margin improvement will be a key measurement for performance in this year's compensation plan across the company. Our fiscal 22 operating margin improvement will be a significant step towards recovery of pre-pandemic margin levels We look forward to sharing more about our longer-term margin recovery initiatives next week at our Investor Day, which includes exceeding pre-pandemic levels in fiscal 24. Turning to slide 23, our fiscal 22 adjusted EPS guidance reflects the year-over-year decline in COVID-only testing profit net of reinvestment. In our base business, as we just discussed, we expect strong operational growth driven by revenue growth and margin improvements. with EPS well above the $12 floor provided on our August call. Now turning to slide 24, our fiscal 22 guidance also includes our diabetes business. We continue to believe the spinoff is a significant value-creating opportunity for our shareholders, and both RemainCo and NUCO are well positioned for success. Let me take a moment to reinforce some key items that make this compelling to all stakeholders. NUCO will be one of the largest pure-plague diabetes companies in existence today. with an ability to focus on its strategic goals, drive strong cash flow, and allocate its capital more efficiently and effectively to drive higher growth. The proposed spin enhances RemainCo's revenue and EPS growth profile as Diabetes Care's revenue growth is slower than the corporate average and its margins are declining. CarVal Financials will be available with the Form 10. RemainCo is expected to receive a cash distribution equivalent to multiple years of cash generated by the diabetes care unit. We plan to provide more details related to the proceeds and intended use at a later date. The SPIN is intended to be tax-free for U.S. federal income tax purposes, and as is normal course for SPINs, we plan to restate our financials after the SPIN's effective date to classify the diabetes business as a discontinued operation. Given the higher margin profile of the diabetes care business, one should expect RemainCo's margins to be lower as a percent of sales after they are restated, but with a higher rate of growth. We are establishing transition services agreement that will offset stranded costs. We remain excited for what's ahead for NewCo in making this a successful and value-creating opportunity for all. Now turning to slide 25. Finally, I wanted to take a moment to share some phasing considerations for your models. First, we expect revenue growth to be normalized across the quarters with the exception of Q2, where we expect higher growth due to the easier comp resulting from the COVID resurgence in Q2 FY21, primarily in interventional. In addition, we expect COVID testing revenue to be weighted towards the first half of the year. Second, we expect gross margin to be lower in the first half, given that increased inflation began earlier in fiscal 21 and the benefit of cost improvement initiatives we have initiated will be on a lag as they flow through inventory. We expect the inflation flow through to inventory to be most prominent in Q2 and approve across the balance of the year. Third, as we move past COVID variability, we expect SSG&A and R&D expense dollars to be fairly rateable by quarter. Fourth, for FY22, we anticipate our effective tax rate to be in the range of 12.5% to 13.5%. This rate includes assumptions around our jurisdictional mix of income and certain potential discrete items. Of course, the timing of realization of discrete items could result in variability in our rate quarter to quarter, including a potentially lower Q1 rate. In summary, fiscal 21 was a year marked by significant strategic progress and execution against our key priorities. As we look forward and as reflected in our 2022 guidance, we are well positioned for growth, with excellent momentum in our base business, increased investments in our innovation pipeline, tuck-in M&A momentum, strong progress executing our balance sheet and cash flow initiatives, and clear visibility to meaningful margin improvement. We are excited to share a long-term outlook with you at our Investor Day. Let me now turn it back to Nadia to lead the Q&A.

Thanks, Chris. Ashley, we're now ready to open it up for Q&A.

The floor is now open for your questions. At this time, if you have a question or comment, please press star 1 on your touch-tone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. In order to allow for broad participation, please limit yourself to one question and one follow-up. We ask that you please pose your question while you pick up your handset to allow optimal and, excuse me, to provide optimal and sound quality. We'll take our first question from Vijay Kumar with Evercore ISI. Please go ahead.

Hey, guys. Congrats on a good print this morning and thanks for taking my question. And Chris, welcome to BDE. I guess to start with on the fiscal 22 guidance here, maybe a little bit more clarity on the What is being assumed for a vaccine contribution? And I think you mentioned there's pump sales in line with fiscal 21. Maybe clarify what those numbers are. And on the combo test, what sort of assumption should we have on the ASP for the combo test? Because I was curious on your pricing comment for COVID in fiscal Q4.

Yeah. Hey, Vijay. Good morning. This is Tom. Thanks for the good questions here and make sure I address all of them. So Alaris, as we said, we expect that to be essentially flat to 21. Think about that as about $100 million contribution in 22 and 21. Put in perspective, that's, as Chris mentioned, that's about 20 was closer to 300 million. So even in our, as we think about the 8.1% growth this past year, that absorbs about a point of Alaris coming down from the, when we were getting very large numbers of additional medical necessity orders as people were adding to their fleets. So that's the assumption on Alaris. On vaccines, we still are towards the high end of that $100 to $150 million range that we had expected for vaccination campaigns. And so we expect that's just kind of part of the MDS business now. I don't know if we're going to call that out as a guide in that growth, but we don't see it as a notable headwind. in the growth rate of that business in 22. We still have solid demand for those products. And as we said, we now have visibility to 2 billion units of syringes specifically for COVID vaccines, which we're obviously proud of being able to help deliver 2 billion COVID vaccines around the world. And I think we've shipped about a billion two or a billion three of those so far. So that gives you a little bit of color in terms of how much we left to ship in 22. On the combo assay, great question. We've got Dave Hickey here, obviously the president of our life sciences businesses, and so let me turn that question over to him.

Thank you, Tom. Vijay, thanks for the question. So, yeah, just to reiterate on the combo, just to reiterate what Chris had said, right, so if you think about what's gone back into the base business for 22, we do expect that as we get into the flu season, the respiratory season, for both BD Veritor and for BD Max, that these combination tests will be the sort of the go-to test, but particularly for people who might be symptomatic and for people who are sort of saying, you know, do I have flu or do I have COVID? So we do expect that to be the combo test. The installed base is out there to support that testing, and we've put into the range for next year an estimate of around 75 to 100 million back into the base business. From a pricing perspective, we do expect it to be a premium price, you know, over the traditional test, as we'd indicated. We're just not sharing specific pricing at this time.

And, Tom, I think I heard Chris mention the goal is exiting fiscal 24, operating margins to be above pre-pandemic levels. Your fiscal 2019 operating margins were 25.3. So when you say about pre-pandemic, is that the target? Is exiting fiscal 24, are you expecting to be about 25.3 or is that the annual goal, fiscal 24 overall margins to be about 25.3? And maybe just give us some broad strokes on what gets us there. Is that Alaris coming back and then base business execution or something else that's being built in?

I'll turn that to Chris. Good question. And I think the exact term he used was above.

Yeah, that's right. Yep. And thanks for the welcome as well, Vijay. Yes, just to clarify. So you're right, the pre-pandemic level was just over 25%. Fiscal year 24 is our target to get above that level. We'll certainly share more next week in terms of specific initiatives. I think the way to think of it is we already had a lot of simplification efforts underway with Project Recode. Those can contribute about $300 million. That's one bucket. In addition to that, I articulated on the call, even as it relates to actions we're taking and demonstrated at the end of 21 and heading into 22, We're increasing our initiatives, pricing, mix, portfolio optimization, and new initiatives on spend optimization as well. And then certainly, lastly, the Alera ship hold, that was an 80 basis point drag on the business going back to then. So while we're not being committal as it relates to timing, as you think through kind of the longer term time frame that we'll share next week, you would expect that to have a benefit over time.

Thanks for the fun guys. Thank you. Thank you. Thank you.

We'll take our next question from Bob Hopkins with Bank of America. Please go ahead. Your line is open.

Oh, thank you. And good morning. And thanks for taking the questions and, and Chris, welcome. I won. I really only have one question or one topic I wanted to cover. And Chris, this is probably for you because it seems like a, you know, a key part of this call is your assumptions on the improvement in base business operating margins from 2021 to 2022. So a couple of things I'd love you to comment on, Chris, if okay. One is I'm struggling a little bit with how to think about the starting point because Q4 base business operating margins are obviously a lot lower than full year 2021. So maybe help me understand what's the right starting point. And then secondly, I'd love you to talk a little bit about, you know, how much of that 200 basis point improvement in base business you're assuming for the full year is gross margin or And just what are your assumptions on pricing embedded in that? So it's a lot in there. That's my one question, but, uh, would love you to address those things and thank you very much.

Yeah. Thanks, Bob. I appreciate the question. Um, uh, great question. So look, I think going forward, we're going to continue to provide transparency as it relates to kind of the base performance of the business. Um, I understand your question as it relates to kind of jump off points as it relates to quarter. Keep in mind, there were a lot of quarterly fluctuations as we navigated 2020 through COVID. and 2021 with inflationary dynamics. I think it's simplest to kind of normalize and just look at things on a full year basis. So as you think of our operating margins from 2021 of 21.7% on the base business, there's really a few key drivers. One is we had talked about through this about having our utilization levels impacted due to pandemic. Our strong growth profile through 21 and 22, we now anticipate being well above and driving almost 100 basis points of utilization upside 21 to 22, full year to full year. In addition to that, last year we had the impact of currency. There was a headwind on earnings that got trapped in inventory. And as that bleeds through, we actually have about a 50 basis point improvement heading from 21 to 22 that goes through to operating margin. Lastly, where we're investing a lot of our time, of course, is navigating the inflationary dynamics. And we talked about a net 50 basis point improvement in terms of outsized inflation, which we would anticipate being north of 200 basis points in full year 22. Offsetting that will be a series of initiatives. There's not one thing. It's actually a very well-balanced plan. We talked about on the call, we're continuing to drive cost improvement in our plants. We're taking actions on the procurement side of the business as well in terms of spend. We're looking at things from an SSG&A standpoint as well and leveraging that. And then, yeah, there's going to be a strong focus on pricing, portfolio mix, driving growth through higher GP areas. And the net of all of those, we actually expect a 50 basis point improvement Maybe lastly, just to give you some color on kind of where we are, because I think this is important, we've entered the year with specific action plans against those goals. So we have risk-adjusted plans, very detailed targeted actions to deliver the improvement we need to mitigate against deflation. If you go a step further and look where we are from kind of an execution standpoint, 80% to 90% of those have been fully identified and the plans are moving. And some of them are just more timing dynamics in terms of when we may take price or when we'll evolve our portfolio. And of that number, almost half of that is actually already banked coming into years, flowing through our inventory and P&L now. That's quite a testament to the work that we did in the back half of 21 and already have strong progress. So we look forward to sharing more as the year progresses, but we feel good about the plan and the progress that we'll achieve through the year.

Helpful detail. Thank you.

We'll take our next question from Robin Marcus with J.P. Morgan. Please go ahead. Your line is open.

Oh, great. Nice quarter, and thanks for taking the questions. Appreciate it. Maybe just on the diabetes spin, you talked about higher than company margins. Is there any color you could add to how much, and will we have the Form 10 by the Analyst Day next week? Go ahead.

Hey, Robbie. How are you doing? That's Chris. Yeah, as we said, the Form 10 will be later this year. We don't anticipate that being out by next week. Look, it's a good question. It's premature to share. We have to wait until the Form 10 is out. There will be much more detail there. But I really think the more important dynamic here is, right, this is actually just a portfolio transaction, and there's going to be sort of a reset of margin. And by definition, we had shared that it is accretive. there will be a reset of margin. But more importantly, it's been dilutive to both growth and margin growth, top line growth and margin growth. So it can be an acceleration from that. And as we get into Investor Day, we can certainly share more as it relates to kind of the longer term impact as it relates to margin and what I just shared in terms of our longer term margin improvement goals. We still feel really good about where we're going to position margin over time and all these efforts going against that. And lastly, I think just the value creation opportunity this creates. I talked about the cash infusion of multiple years we get. That gives us additional flexibility to think through how to reinvest and utilize that cash infusion. We can talk more about that as well over time.

Great. Appreciate it. And then maybe just one other. You talked about doing seven acquisitions this year, $500 million total. How do we think about the contribution of those to revenues in 2021 and 2022? And where do you put M&A in terms of capital allocation priority? How do you view the... market right now in terms of asset availability and valuations. It would be great to get your take on that. Thanks.

Yeah, Robbie, this is Tom, and good morning. So we'll try not to share too much of the thunder from next week, but it's a good, good question, and we'll get more into this. But, you know, we've spent about $500 this year. If you look at the acquisitions that we made last year, think about over the last 20 months or so, we've invested about $900 million in That drives about $100 this year and $200 million next year, roughly, from those tuck-in M&As. If you do the math, that's about a little under five times what we're paying in terms of revenue that we're getting from those acquisitions next year. As you know, that's good value that we're getting. We're obviously performing above our cost of capital on those acquisitions. We're clearly at those levels of multiples that we're being able to get those assets for. We're not buying growth. We're absolutely growing what we buy, leveraging our channels, our global position, our manufacturing capabilities, et cetera, to scale these assets in ways that we're uniquely positioned to do so. We'll also share with you next week the mix of how those break out into the amount of spend and acquisitions that are going towards kind of that durable core base portfolio that we have versus Those more transformative solution areas that I've talked about, those three categories that we discussed, and you'll see the weighting of those. They're highly weighted in high-growth markets. That revenue that I described is growing north of double digits as we go forward. We continue to see opportunities as we look ahead. We have a robust funnel. You can expect us to continue to drive that strategy forward. Obviously, it's been an important part of why we focus so heavily on cash flow and Actually, if you look at our cash flow over the last two years since 19, it's grown at 18% CAGR. That's not by accident. We've had very focused programs driving that. That's something we're very proud of, and it positions us, as Chris mentioned, to drive a balanced strategy between the tuck-in M&A strategy to drive our growth as well as continue to return value to shareholders as you've seen us doing. So thank you for the question, Robbie, and looking forward to more discussion next week.

Great. And maybe just to clarify, is there any revenues associated with the deals we should be thinking about in the model for next year?

Obviously, it's built into our guidance. Chris, any other comments?

No, I think Tom shared the direction all right. These were about $100 million in the current year, 21, and we talked about essentially doubling that. So on an incremental basis, you can think of, about another $100 million. So, you know, it's a contributor to growth of 30 to 40 bps. It gives us a lot of confidence in our growth profile and then the capacity to do more of that over time. We'll certainly talk more about next year.

Great. Thanks, Rob. Thanks a lot.

And we'll take our next question from Matthew Michan with KeyBank. Please go ahead. Your line is open.

Hey, good morning, guys, and thank you for taking the questions. First, how should we be thinking about the return on the $200 million of investments you guys made from the ballast of COVID testing and when you would expect to see something like that? And then just were those really one-time costs or successful programs maybe just folding into more traditional R&D at this point? Matthew, this is Tom. Good morning.

So that spend is done, right? So that's not recurring spend, as we've always communicated. That got cut off last year in Q4, so that is out of our P&L going forward. And we'll share more details, actually, about exactly where that money was spent, and you'll see throughout the discussions next week at our Investor Day each of the different businesses highlighting the programs that they've invested in, and you'll see how that's help to accelerate our growth outlook as we go forward over the long term. It is mixed across both innovation as well as accelerating our simplification strategy as well, and we'll share more details on that next week. But it is balanced across both of those categories. And when we say the growth agenda, how it's balanced on that side, It is majority of the growth money that we're spending is in R&D, but there is money that we've spent on expanding channels, so specifically telesales in Europe, non-acute sales channels in the U.S., and you'll hear more about those specific investments from our leaders in the U.S. region and from our European leaders next week as well, and we're excited to be able to share that. I know we've been busy over this last year. We're really proud of the progress that we've made on our strategy, and we're really looking forward to having our leaders share share with you those details of that progress next week.

Thanks for the question. Just on the pharma systems business, I think you've announced, and that's been a very successful business for you, I think you've announced some capacity additions. When do those capacity additions start to really benefit that area?

Yeah, obviously it's a great business already. I think we're three or four years of consecutive acceleration in that business. We have Alberto Mas on the line. Maybe, Alberto, if you could just comment on when do we start seeing some of that capacity benefit the business and kind of where that stands?

Yes. Hello. Good morning. We're going to see it along the way. So it's not lumpy. It's because what we're going to see in Capacity 22, In this business, you need about two to three years of, you know, advanced planning on these things. So we're going to see it along the way. It's not going to be lumpy. So you're going to see that in the next three to four years.

But it starts, is it fair to say, Alberto, there is a little bit of a benefit of some of that business continues to come online. The early phase does come online in the back half of next year. Or throughout next year.

That's what I'm trying to say. Think of it as a smooth over the next three or four years. It's going to be coming online quarter by quarter.

And, Matthew, we see that helping to continue to fuel what is that high single-digit, double-digit growth profile of that business.

Perfect. That's the exact answer I was looking for. Thank you.

We'll take our next question from Larry Beagleson with Wells Fargo. Please go ahead.

Larry Beagleson Good morning. Thanks for taking the question. Welcome, Kris. So one question for Kris, one question for Tom. I'll ask them both now. Kris, maybe I'll ask Bob's question a different way. Can you talk a little bit about the margin in EPS cadence in fiscal 22? How much below the base operating margin of about 23.7. Do you expect Q1 to be 100 basis points, the right way to think about it? And consensus is, I think, 284 for EPS right now. I'd love to get your reaction to that, just to calibrate us correctly to start the year. And Tom, you guys are doing really well in China. There are a lot of investor concerns about you know, multinational companies' ability to continue to grow there, given the value-based purchasing and the recent document 551. How are you feeling about, you know, your ability to continue to grow, you know, strongly in China and any reaction to some of those initiatives? Thanks for taking the questions, guys.

Let's start with Chris. Yeah. Thanks, Larry. Appreciate the question. Yeah, I'll try to amplify some of the color that I provided earlier. So as we think of the year, as the year progresses, first from a top line, just to reiterate, we do actually expect relatively normalized growth with the exception of Q2, like I had shared, because of the comparables. And then there's the dynamic of COVID-only testing, which you'd expect to be more first half. So I would consider that dynamic. From a margin standpoint, Certainly first half we anticipate to be lower. This is simply a matter of the inflationary dynamics that started in 2021 rolling through inventory and the peak of when that rolls through and those costs actually hit is more like Q2. So kind of first half definitely less favorable margins versus the second half and Q2 in particular being kind of the high mark of that low, so to speak. And then obviously is the initiative that we've already taken. Again, there's a lot of that banked, right? If you recall, I had shared about 50% of it's already happening. But again, you get the dynamic of it flowing through inventory. So you end up with kind of a second half dynamic in the margin improvement throughout the back half. So the last item was just more the discretionary tax item I alluded to that could actually end up with some favorability in Q1, but those are very difficult to predict. So hopefully that helps some.

And Larry, this is Tom. Thanks for the question, and good morning. It was great to connect. For China, you're going to hear from James Deng, our president of China, actually next week, and so I know he's looking forward to sharing the progress there. As you said, we had a very good year in China this year, and we think we're kind of back to a strong growth rate Looking forward, 551 for us, we don't see specific impact in our categories. It's something that we've spent a lot of time talking about. Obviously, we have four plants in China. They're focused almost exclusively in China for China and particularly focused in some of the categories that there is more local competition in, like catheters, vacutainer tubes, pen needles, et cetera. But we make those businesses local. those products mostly in China for China as well so we can compete as a local organization in those. The other thing is we have a record number of new product launches coming out in China over the next three years. You'll hear from Simon and team and China. We're really pleased that we ended 21 having doubled the size of the BARD business in China since acquisition. That was a big focus of ours on revenue synergies, and there continues to be – The impact of those registrations that we've been making over the last several years, the impact of those will be continuing to roll out with new launches as we look forward. I know, again, Simon will talk next week, maybe even share a couple comments now on some of the launches that you're having in China that are occurring. So we feel good about the outlook for China. As all, we're watching the situation very cautiously, being prudent in our investments there. But we've got a great team. We saw strong performance this year, and we do have a strong outlook in China for next year as well.

Yeah, thanks, Tom. So just some color. Over the next three years, the interventional segment expects to commercialize further 22 to 25 new products in China. And just an example of how we've been successful there, in addition to what Tom said about doubling our business, we recently just got approval or clearance for our targeted temperature management technology in China. We've actually just got our first two purchase orders this month from it at margins that are accretive to BDI, to BDX. And the sustained and, I would say, prolific growth of our business in China, we expect to continue over the next period of time. Thank you.

And we'll take our next question from Josh Jennings with Cohen. Please go ahead. Your line is open.

Hi, good morning. Thanks for taking the questions. And I just have one, sorry to keep focusing on the margin progression here, but I wanted to better understand the impact in fiscal 21 and then how to think about the impact in fiscal 22 of China value-based pricing. I I felt like that was a bucket that was called out on the third quarter call as a big headwind for margin in this year. I just wanted to understand better the impact this year and whether that, with all the positive momentum you're experiencing, whether that turns into a margin tailwind in fiscal 22. Thanks for taking the question.

Hey, Josh. Maybe just let me comment on value-based procurement. I'll turn it over to Chris for other items. You know, we saw the bigger impact of VBP kind of is behind us. There is still some impact going forward, but the business and the market is – China is challenged with restructuring their cost base to manage through any of that. And so – and that's exactly what they've been doing is restructuring cost base as we think about that going forward to offset those headwinds. So – Chris, any other comments?

And Josh, I would just add that, yes, it was an impact that was previously discussed. It was smaller relative to the main drivers that I framed as it relates to the progression from 2019 to 21. And we always are doing continuous cost improvement initiatives that offset some of these things that happen. As Tom noted, China's well-positioned, and we're thinking of that market There's strong double-digit growth in 2021, actually at over 20%. And so when you think of it from a total portfolio standpoint, we feel nicely positioned as it relates to both a growth profile and then have nice actually margin enhancement as a result of that as we go forward. So thanks, Josh.

That's helpful. Thank you.

Our final question will come from Matthew Taylor with UBS. Please go ahead. Your line is open.

Hi, Mac. Good morning. Go ahead. Hey, good morning, Tom. How you doing? Good. Good, good. And Chris, welcome. Congrats on your new role at BD. I just wanted to ask two questions that are kind of related. Just conceptually, when you gave us the update in the $12 floor a few months ago, Could you just talk about what's changed to give you the confidence to now put out the guidance in the mid-$12 range and how things have developed here over the last couple months?

Okay, sure. I'll turn that to Chris.

Yeah, thanks, Matt. Appreciate the question. Look, I think it really starts with our focus on growth. I think a strong base growth profile that we guided on Coupled with, if you look at the cash flow that we shared through 21, it gives us a lot of flexibility on tuck-in M&A, right? So we have strong organic growth profile, the enhancement we're making to our R&D portfolio, and then that coupled with the tuck-in M&A capability that we will now be able to have on an ongoing basis. Tom earlier talked about the acceleration of deals that we've done recently. Those alone can contribute about 40 basis points to growth. So one, I think I think there's just a very strong growth profile there. Two is just the discipline focus on margin improvement. We knew that was something to focus on in addition to the cash management approach we've taken over time that's enhanced growth. And so those are the two main drivers. As a matter of fact, we're actually cycling over a headwind on tax. That's been offset by some of the capital deployment we've been able to put at work with share repurchases. You'll see us be more disciplined there with other value-creating levers, too, due to the strong cash flow that we have.

Maybe also we're finishing the year a little stronger, right, than what we thought at the time. So we had a really strong Q4. We're seeing that strong demand in our base business. So we're going in. The beat that we're seeing here is a combination of not only stronger COVID diagnostics but stronger performance in our base business as we wrap up the year. So I think that's an important point to – and contributor to that as well. Okay.

Thanks. Thanks for that comprehensive answer.

Okay. Well, operators, there's no more. I'm sorry. Go ahead.

No, I apologize. I just was going to turn the floor back over to Tom Poland for any closing remarks.

I just thanks everyone for the good discussion today. We obviously are really looking forward to discussing all the great work that the team's been doing here over the last, uh, 20-plus months as we've been advancing our BD 2025 strategy. I personally am really excited for next week's event. We're going to be able to share with you where we've been investing, how we've been refining, and making significant changes in our portfolio to optimize growth and margins. And you'll hear from a wide range of leaders on how they're executing and bringing to life our 2025 strategy to create value for our customers and shareholders. next week. So everyone stay well, and we'll look forward to continued great dialogue next week. Thank you.

Thank you, and that concludes today's teleconference. Please disconnect your line at this time, and have a wonderful day.