Becton, Dickinson and Company

Stand by, your program is about to begin. Should you need audio assistance during today's program, please press star zero. Hello and welcome to BD's earning call for the second quarter of fiscal 2022.

At the request of BD, today's call is being recorded and will be available for replay through May 12, 2022 on BD's investor relation website, at bd.com or by phone at 866-342-8591 for domestic calls and the area code plus 1-203-518-9713 for international calls. The replay bridges are now dedicated so you no longer need a conference ID to hear the replay. For today's call, all parties have been placed in a listen-only mode until the question and answer session. I will now turn the call over to BD.

Good morning, and welcome to BD's earnings call. I'm Francesca DiMartino, Senior Vice President and Head of Investor Relations. On behalf of the BD team, thank you for joining us. This call is being made available via audio webcast at BD.com. Earlier this morning, BD released its results for the second quarter of fiscal 2022. We also posted an earnings presentation that provides additional details on our performance. The press release and presentation can be accessed on the IR website at investors.bd.com. Leading today's call are Tom Follin, BD's Chairman, Chief Executive Officer, and President, and Chris Del Orifice, Executive Vice President and Chief Financial Officer. Tom will provide highlights of our performance in the continued execution of our BD 2025 strategy, Chris will then provide a financial review and our updated outlook for fiscal 2022. The Q2 results we will be discussing today include the results of our former diabetes care business as the spin of Empecta was completed on April 1st, subsequent to quarter end. On April 14th, an 8K was filed to provide recasted historical financial information reflecting the results of operations of our former diabetes care business is discontinued operations for the 2019, 2020, and 2021 fiscal years and the first quarter of fiscal 2022. On today's call, we will give an updated outlook for fiscal 22 for both Legacy BD, which includes our former diabetes care business, and BD Remain Co. We anticipate recasted financial information for the second quarter of FY22 will be available by the end of May. In the meantime, to assist you with FY22 Remain Co-Models, we are providing estimated impacts of excluding our former diabetes care business from our Q2 results. We don't expect the Q2 recasted financial information to differ materially from the estimated impacts nor affect the updated outlook for FY22 that we are providing today. We also do not plan to comment on diabetes care after this quarter. In addition to our prepared remarks, you can find this information on our earnings presentation that is posted on our IR website. 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. Before we get started, I want to remind you that we will be making forward-looking statements today. I encourage you to read the disclaimer in our earnings presentation slides and the disclosures in our SEC filings, which are both available on the Investor Relations website. Unless otherwise specified, all comparisons will be on a year-over-year basis versus the relevant period. Revenue percentage changes are on an FX neutral basis unless otherwise noted. When we refer to any given period, we are referring to the fiscal period unless we specifically noted 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 and base margins, which refer to a result excluding estimated COVID-only testing. With that, I am very pleased to turn it over to Tom.

Thanks, Francesca. Good morning, everyone, and thank you for joining us. We are very pleased with our strong performance in Q2, with revenues of $5 billion and base revenue growth of over 10%. These results reflect the continued focused execution of our BD 2025 strategy and another quarter of consistent, strong growth in our base business. We exceeded our revenue, margin, and earnings goals while advancing our innovation pipeline and our tuck-in M&A strategy. And year-to-date, we generated $1.1 billion in operating cash flow. In addition, we successfully executed the spin of our diabetes care business on April 1st, which is now a standalone and publicly traded company named Impecta. It trades on NASDAQ under the ticker EMBC. I'm very pleased with how our strategy is progressing and coming to life. Through our efforts to grow, simplify, and empower our company, we are creating an agile and resilient organization that is well positioned to deliver strong performance. Our durable core reflects our leadership position in areas of healthcare that remain in high demand. These are the products and solutions that form the backbone of healthcare around the world, and create a very stable business that weather storms and uncertainty. Through the performance of our durable core and our cash flow initiatives, we are fueling our growth strategy with investments in organic innovation and tuck-in M&A. The investments we are making are targeted toward higher growth spaces aligned to the irreversible forces that are transforming the future of global healthcare across smart connected care, the shift to alternative care settings, and improving chronic disease outcomes. you're beginning to see the impacts of that shift in our growth. Through the simplified pillar of our BD 2025 strategy, we're reducing complexity and driving excellence across supply chain operations, which delivers efficiencies and enhances our margin profile while improving customer satisfaction. And we're doing this by improving asset utilization and labor productivity while also enhancing our supply chain resilience, responsiveness, and sustainability all of which are more critical than ever in today's environment. Our focused execution of our strategy is creating momentum and gives us confidence in our outlook despite the challenging macro environment, which has evolved dramatically since our last earnings call. The conflict in Ukraine, increased supply chain challenges, energy price escalation, increased inflation and COVID-driven shutdowns in China are impacting nearly every company in the world, And while BD is not immune to these challenges, we believe the actions we've taken to drive our growth and simplification initiatives and empower our talented organization of over 75,000 associates uniquely position us to lead in this environment and give me continued confidence in our ability to execute during these times. I'd like to take a few minutes to share some additional thoughts on the evolving macroeconomic environment, starting with supply chain and inflation. Like most organizations across healthcare, BD has faced increased inflationary pressure and supply chain constraints. However, our simplification strategy is driving our ability to largely offset these pressures and enabling our associates to respond to these rising challenges. An example is every year as part of our enterprise risk management process, we invest to systematically validate alternative suppliers for our most critical products. This isn't something we started this year. We've been doing this for a decade, and it's showing benefits in this environment. More recently, we were able to, we've invested in additional inventory to secure access to scarce raw materials and electronic components, such as semiconductor chips, and we've directly contracted for alternative transportation methods to ensure the continuity of supply for our customers. In addition, We're investing in capacity expansion and regional sourcing to create an agile supply chain that will be more responsive to events around the world. A key piece of our simplify strategy is our recode effort, which includes a focus on portfolio simplification, including SKU rationalization. Our strong growth profile has enabled us to accelerate the elimination of lower margin SKUs and optimize our mix, which enables plant efficiency and for us to produce more of the products that are most critical to our customers. All of these strategic actions have helped us to move with speed and efficiency to mitigate the challenges of this environment, and we believe we are unique in our response. Now regarding COVID. The global healthcare system continues to be more agile and better prepared amid the emergence of new variants and spikes in COVID cases. And thus, while COVID-19 isn't behind us, Healthcare utilization levels, deferable procedure volumes, and lab activities are consistently returning to pre-COVID levels in much of the world. However, the medical industry continues to be impacted when new variants develop and waves of COVID emerge. As you know, this is currently happening in China as the government takes meaningful steps to prevent the spread of new variants. These efforts have had an unexpected impact on healthcare procedures, lab testing, and the supply chain, as reflected in our second quarter China results. And while this is continuing into the third quarter, we expect to mitigate most of the impact over the balance of the year, assuming there isn't any additional extended waves that require more significant COVID prevention actions. We continue to monitor the situation very closely. Despite the above complexities, the need for critical healthcare products and services has never proven to be more important. And our portfolio is well positioned to support clinicians and patients around the world. Moving on, I'll now provide more detail on the progress we're making on organic innovation, which is a key enabler to our growth strategy. As we shared at the November Investor Day, we've been focused on enhancing our R&D productivity, and it's having an impact. We significantly improved our on-time milestones and on-time launch metrics, which are both over 90% year-to-date. In addition to enhanced productivity, our increased investments in organic innovation are contributing to our performance. Some recent examples of how we're progressing our pipeline to drive future growth include BD Evolve, which is a fillet time-of-use, time-delayed drug delivery system and was released for clinical trials in January. Multiple clinical trials are now underway by our pharmaceutical customers, and we see significant commercial interest with several signed development agreements. We also launched new-to-world BD reagent technology in April, which was developed with novel dye technology and AI guidance. The new BD Horizon Real Yellow 586 flow cytometry reagents are the first in a series, and they have the potential to accelerate discovery and drug development by enabling greater insights from biological samples. And we received 510K clearance of our TREC bone biopsy device that was submitted to the FDA last quarter. with launch expected later this fiscal year. This device allows for faster sampling and is available in a broad range of sizes to accommodate a variety of procedural needs. Beyond these achievements, we also hit several key milestones across our pipeline this quarter. Consistent with our strategy to bring new transformative solutions to our portfolio that improve chronic disease outcomes, we released BD Libertas, a pre-filled wearable injector that enables simple self-administration of larger volume doses for chronic disease. We've completed five clinical trials with our 5-ml product and are accelerating development of our 10-ml product with clinical release targeted in late FY23, early 24. The BD-Core MX module and the CTGC-TB2 assay on BD-Core are now under FDA review. Already CE-marked outside of the U.S., clearance in the U.S. will give BD access to the high-volume sexually transmitted infections testing market on a fully automated and integrated platform. This assay, already cleared on BDMAX, is the only FDA-cleared triplex assay for the three most prevalent non-viral STIs. The Asperax Mechanical Aspiration Thrombectomy System is also currently under FDA review and is expected to launch this fiscal year. Already CE marked outside the U.S., the system is uniquely designed with a three-in-one method of action that removes fresh thrombus and or thromboembolic material in peripheral vasculature. Also expanding our venous portfolio is the recent FDA approval of the Venovo venous stent. The relaunch of Venovo reflects strong execution by the team with shipments to customers already occurring this month. In addition to organic innovation, our strong cash flows are also enabling execution of our tuck-in M&A strategy. Fiscal year to date, we've committed approximately $500 million to the completion of four acquisitions. In addition to three acquisitions in the prior quarter, in Q2, we closed Cytognos, whose differentiated flow cytometry assays for the detection of minimal residual disease and cancer brings an important addition to our biosciences business and accelerates our strategy to support chronic disease management. We believe that the current environment, coupled with our strong cash flow and robust M&A funnel, positions us well to create value through our tuck-in M&A strategy while remaining disciplined. Beyond our investments in R&D and M&A, our disciplined capital allocation framework gives us the flexibility to also return capital to shareholders through a competitive dividend and share repurchases when appropriate. I'm excited by the significant progress we continue to make advancing our BD 2025 innovation-driven growth strategy to deliver even more significant impact toward improving outcomes for patients and providers. And in that spirit, we also recently announced the inaugural members of our External Scientific Advisory Board. The SAB is comprised of top medical key opinion leaders, science and technology experts, and experienced innovation leaders. The SAB is a new governance mechanism for BD, which will meet to review and advise on BD's technology capabilities, our innovation pipeline, Tuck M&A opportunities, and early-stage investments. Finally, I'd like to comment on the strong progress we're making advancing our ESG strategy and goals. One of the actions we announced this quarter that I'm particularly pleased with is the formation of our Sustainable Medical Technology Institutes. This is another step forward as we advance our 2030 ESG commitments, and BD's focus on ensuring our portfolio leads the way on reducing the environmental impacts of medical products. We are proud to receive continued external recognitions for our ESG efforts, including recently being named to Newsweek's inaugural list of America's most trusted companies, and to Forbes' 2022 list of best employers for diversity, as well as ranking number one in the healthcare equipment and services industry informs America's best large employers list. In summary, I'm very pleased with the progress that we're making advancing our BD 2025 strategy and our strong execution navigating a challenging environment, which is reflected in our strong Q2 performance. This performance gives us confidence in our updated guidance, which raises the midpoint of our revenue and EPS ranges. We remain well positioned to deliver consistent and sustainable growth and create value for all of our stakeholders. With that, let me turn it over to Chris to review our financials and outlook.

Thanks, Tom. So echoing Tom's comments, our Q2 results demonstrate the strength of our business and the momentum of our strategy. Additionally, we remain committed to supporting our customers and their patients and have made investments in many areas, including inventory, transportation, portfolio simplification, and innovation, so that we can continue to do our best to ensure continuity of delivering critical healthcare offerings. We are delivering strong performance while simultaneously managing the increasing macroeconomic pressures through our simplification and mitigation programs. This balanced approach is helping us make strong progress against both our short and longer-term commitments. Turning to our revenue performance, we delivered $5 billion in revenue in the second quarter, comprised of $4.8 billion in base business revenues, which had strong growth of 10.2% or 9.6% organic, which excludes the impact of acquisitions. Our revenue performance is supported by our durable core portfolio and an increasing contribution from the transformative solutions we are bringing to the market through our innovation pipeline and tuck-in acquisitions. Price contributed 180 basis points to growth in Q2. While this is well below inflationary levels, it is one of many factors that is enabling our investments to ensure we can continue to deliver our healthcare offerings to our customers. COVID-only testing revenues were $214 million which is expected to climb from $474 million last year. BD's unique ability to continue to deliver strong performance during these uncertain times is reflected in the performance across our segments, with medical growing 6.4%, life sciences base revenues growing 17.1%, and interventional growing 11.2%. Total company base business growth was also strong regionally, with double-digit growth in the US and Europe, along with mid-single-digit growth in Latin America, which helped to offset lower-than-normal mid-single-digit growth in China, which was impacted by restrictions implemented to mitigate the spread of COVID late in the quarter. Let me now provide some further insight into each segment's performance. Our medical segment delivered $2.4 billion in revenues in the second quarter, growing 6.4%. Strong performance across our pharmaceutical systems, medication management solutions, and medication delivery solutions businesses was partially offset by an expected decline in diabetes care. Excluding diabetes care, BD medical revenues grew 7.5%. MDS revenues increased 5.3%, reflecting continued strong demand for our durable core products. Performance in MDS reflects execution of our comprehensive vascular access management strategy, including early momentum of our one-stick hospital set, which is driving competitive gains in catheters and vascular care devices, particularly in the U.S. Performance also reflects a tough comparison due to a decline in syringe utilization for vaccinations. MMS revenues grew 7.8%. In our dispensing business, high single digit revenue growth was driven by continued strong worldwide demand for connected medication management solutions in both acute and non-acute care settings. Within our infusion business, revenue growth reflects strong performance in infusion sets driven by increased pump placements outside the U.S. during the course of the COVID pandemic. Farm systems revenue grew 12.2%. driven by continued strong demand for pre-fillable devices supported by our differentiated and expanding supply capacity. Demand for these devices continues to be aided by the fast-paced vial to pre-filled device conversion for biologics, vaccines, and other injectable drugs. Growth was also aided by the expansion of services provided to small and mid-sized pharma customers through the recent acquisition of ZebraSci. BD Life Sciences revenue totaled $1.5 billion in the second quarter. The decline of 4.2% year-over-year is solely due to the lower COVID-only testing revenues previously discussed. Excluding COVID-only testing, Life Sciences base revenues grew 17.1%. IDS revenues declined 6.8%, which reflects the decline in COVID-only testing, partially offset by strong base business revenue growth of 21.8%. Performance in our IDS-based business includes sales of our new combination flu COVID assays for BD Veritor and BD Max that were ahead of our expectations. It also reflects the soft comparison to the prior year where the flu season was limited. Demand for combination assays was driven by strong adoption of a broader respiratory panel and timing of dealer stocking. IDS base revenues were also driven by strong demand for specimen management products and strong performance in our molecular diagnostics portfolio driven by growth in both BD-Core and BD-Max reagents with increased utilization across our larger install base. Biosciences revenues increased 5.6% driven by continued strong demand for research reagents as a result of lab utilization having returned to more normal pre-COVID levels and increasing adoption of our e-commerce platform. Instrument production in the quarter was limited by supply challenges for electronic components, and as a result, we ended the quarter with a record backlog. We expect to fulfill those orders over the balance of the year. ED interventional revenues totaled $1.1 billion in the second quarter, growing 11.2%. This reflects strong performance across the segment with double-digit growth in the U.S. and China. Our strong global performance is driving our ability to offset the impact of planned product line discontinuations, particularly in PI and UCC, of lower margin and non-strategic products as part of our portfolio simplification strategy. The segment's results also reflect the easier prior year comparison resulting from the Delta variant. Revenues in surgery grew 17.5%. Again, as a reminder, Q2 reflects a soft comparison to the prior year when revenues declined 7.7%. Excluding the soft comparison, revenues grew in the high single digits driven by hernia, biosurgery, and infection prevention, including the recent acquisitions of TIFA and TissueMed. Revenues in peripheral intervention grew 8.5%. Performance was driven by double-digit growth in the U.S. with strength across our peripheral vascular disease, end-stage kidney disease, and oncology platforms. We continue to expand our peripheral vascular innovations and are driving strong growth through share gains from our recent acquisition of Strob and Venclose. Urology and critical care revenues grew 8.8%. driven by continued strong demand for our PureWIC chronic female incontinence platform in both acute and non-acute care settings as we continue to expand our addressable market and deliver transformative solutions for alternate care settings. Also contributing to growth was continued backwater recovery in acute urology and continued solid performance in targeted temperature management with our smart connected care enabled Arctic Sun platform. Now moving to our P&L. In Q2, we delivered adjusted net income and EPS above our expectations with adjusted net income of $937 million and adjusted diluted EPS of $3.18. We delivered base gross margin of 55.2% and base operating margin of 24% in Q2. Key drivers of gross margin include a benefit from our strategic portfolio initiatives, including mix optimization, and increased volume utilization given our strong base revenue growth. And while inflation was broadly in line with our expectations, we did realize an escalating impact during the quarter that was largely offset by our simplification and inflation mitigation initiatives. In addition, as expected, we had favorable FX that was recorded in inventory in 2021 that benefited our GP this quarter as it flowed through sales. We leveraged our base SSG&A as a percent of sales by over 200 basis points, driven by our focus on leveraging our base G&A expenses, partially offset by inflationary impacts, primarily in customer shipping. R&D of 6.4 percent of sales reflects some accelerated phasing of investments and planned increases year-over-year consistent with our strategy to support our long-term growth outlook. Our tax rating Q2 was higher than anticipated due to the geographic mix of sales. Regarding our cash and capital allocation, cash flows from operations totaled approximately $1.1 billion year-to-date. Q2 cash flow from operations reflects a higher than normal inventory balance as we made strategic investments to increase stocking of raw materials, such as electronic components, as part of our actions to optimize product delivery to meet customer demand in this uncertain environment. We ended Q2 with a strong cash balance of $3.1 billion and a net leverage ratio of 2.8 times. Our cash balance includes the receipt of a cash distribution from Empecta at the end of Q2. In accordance with the tax-free nature of the spin and consistent with our capital allocation priorities, including our net leverage goals, we intend to utilize $1 billion of the impacted distribution over the coming quarters for debt pay down. The remaining $400 million of the distribution provides additional flexibility and will likely be deployed early in fiscal 23 with a bias toward share repurchases subject to market conditions and other strategic considerations. With the spin of Empecta now complete, we've achieved our targeted dividend payout ratio of about 30% as we've maintained our dividend. Our current cash and leverage position and continued focus on strong cash flows provide us the flexibility to advance our balanced capital allocation framework and support our BD 2025 growth strategy through investments in R&D, capital, and M&A. As Francesca mentioned, to assist you with your FY22 models, we provided our best estimates of the impact of the spin on certain line items for Q2 in today's slide presentation. We estimate a $260 million impact to revenue, 100 basis points to adjusted gross margin, and 160 basis points to adjusted operating margin, and 45 cents to adjusted EPS. Turning to our fiscal 22 guidance assumptions. First, some macro considerations that support our guidance. While we still expect some global COVID-driven variability, our guidance assumes the continued easing of COVID-19 restrictions and no significant or lasting disruptions to deferrable procedure volumes. Regarding China specifically, we expect to mitigate the impact from the current lockdowns over the balance of the fiscal year as we are assuming the restrictions will ease in May with recovery ramping up through fiscal Q3. In addition, our guidance assumes that the port congestion does begin to ease and will not have a lasting impact on our China business and other markets. While there could be additional lockdowns in China and other markets, our guidance assumes countries continue to be more efficient in managing safety protocols and the containment of new COVID variants to allow continuity of care for patients. Additionally, we anticipate continued inflationary and supply chain pressure over the balance of the year and into next fiscal year. But we are not planning for significant escalation of macro headwinds. While these pressures are meaningful, we believe we are on track with our margin recovery initiatives and will continue to proactively manage this. We expect to be able to largely offset these incremental inflationary impacts given our strong performance in Q2 and increased focus in the back half of our fiscal year to execute our company-wide mitigation initiatives. As our first half results include diabetes care, we are providing guidance today on a legacy BD basis that includes diabetes care, so you have a like-for-like comparison versus our February guidance. Then we are also providing remain code guidance for the full fiscal year which excludes diabetes care in all four quarters, along with the spin impact for each guidance metric. This is also laid out on the FY22 guidance summary slide in the guidance section in our earnings presentation. As a reminder, going forward, our first half diabetes care results will be reflected as discontinued operations, and we will only be discussing remain code performance. Now, moving to our updated guidance for fiscal 22. We are well positioned for strong growth across our three segments, given our performance and momentum in our base business. And thus, on a legacy BD basis, before adjusting for the diabetes care spin, we are increasing our base revenue guidance. We now expect legacy BD base revenues to grow 6.75% to 7.75% on an FX neutral basis from $18.3 billion in fiscal 21. This is an increase of 100 basis points from our previous guidance of 5.75% to 6.75% growth. On a RemainCo basis, we expect base revenues to grow 7.25% to 8.25% on an FX neutral basis. This is an acceleration of approximately 50 basis points over BD legacy growth as our diabetes care business was a negative contributor to growth rates. The spin impact also includes a small contribution of revenues BD will earn in connection with agreements with Embeca. For COVID-only testing, we continue to assume approximately $450 million in revenue. As expected, testing demand has slowed and our full-year COVID-only revenue expectations are weighted to the first half of the year. Based on current spot rates, for illustrative purposes, currency is now estimated to be a headwind of approximately 200 basis points or about $400 million to total company revenues on both a BD legacy and remain co-basis on a full-year basis. This is an incremental impact of 75 basis points or $150 million compared to our prior guidance and is driven by the strengthening of the U.S. dollar. So all in, we are increasing our legacy BD total reported revenue guidance by $50 million to a range of $19.6 to $19.8 billion. On a RemainCo basis, we expect total revenues of $18.5 to $18.7 billion. On a legacy BD basis, we still expect base operating margins to improve by approximately 200 basis points over 21.7% in fiscal 21. Despite a more challenging macro environment anticipated over the back half of the year, our focused execution on driving profitable revenue growth combined with our simplified programs gives us the confidence that we will be able to offset the incremental inflationary pressures. On a Remainco basis, the Impectus spin enhances our anticipated base margin expansion by approximately 50 basis points. And as a result, we expect base operating margins to improve by approximately 250 basis points in comparison to 19.6% in FY21 as recasted. We also still expect operating margin on COVID-only testing to be modestly above our base business margins. A few additional items for your models. On a Remainco basis, we expect $60 to $75 million in year-over-year improvement in interest other, which reflects a minimal benefit from the use of imbecta proceeds compared to our legacy BD expectation of $50 to $75 million. On a legacy BD basis, we now expect an effective tax rate of 13 to 14% for the full year compared to 12.5% to 13.5% previously due to geographic mix as reflected in our revised guidance. For Remainco, we anticipate an effective tax rate of 13.5% to 14.5%, which reflects the tax rate excluding our diabetes care business. Our updated guidance still assumes share repurchases that at a minimum offset any dilution from share-based compensation and thus does not assume material change in shares outstanding. All in, on a legacy BD basis, we expect adjusted EPS to be between $12.85 and $13, compared to $12.80 to $13 previously, which reflects an increase of 2.5 cents at the midpoint. The core drivers of the increase include Twelve and a half cents driven by the momentum and strength in our base business with a series of strategic mitigation actions we discussed earlier expected to largely offset increased inflationary pressures. And a five cent headwind from a higher effective tax rate. So operationally, this is an increase of 7.5 cents. We expect an estimated incremental negative impact from currency of about five cents. resulting in a two and a half cent increase to our adjusted reported earnings guidance at the midpoint. On a remainco basis, we anticipate adjusted EPS of $11.15 to $11.30. This reflects an adjustment from the impact of spin of about $1.70. This accounts for a half year of TSA income of about $35 million that will be realized in the second half of the fiscal year and recorded in other operating income on an adjusted basis. And it includes the contribution from supply agreements with IMBECTA and the benefit from financing, which are both expected to be minimal. As you think about the TSA income next year for your models, it would not be accurate to double the half year of TSA income as the services provided and income received will decline over time. As a reminder, BD shareholders received Imbecta shares upon completion of the spin. As you think of the commitments we made during our investor day, on a BD Remainco basis, our long-term targeted growth profile has been enhanced and increases our confidence in our ability to deliver our 5.5% plus base revenue growth targets. Additionally, we are now targeting more than 400 basis points of base operating margin expansion through fiscal year 25 against the recasted fiscal year 21 margin. And notably, based on what we know today, all things being equal, we think BD Remain Co. can deliver the absolute pre-pandemic operating margin level of legacy BD, which was about 25% by the end of that same time period. As we previously shared, this will lend itself nicely to double-digit EPS growth and a strong value proposition. As you think about phasing for the balance of the year, the following are a few key considerations as you think of your RemainCo base revenue and earnings. We continue to expect base revenue growth to be fairly rateable in the back half of the year. Regarding our margins and P&L, first, on a year-over-year basis for Q3, we expect significant improvement in base operating margin compared to the recasted 17.7% in the prior year. Additionally, we expect the Q3 year-over-year improvement to be larger than what we delivered in Q2. Sequentially, from Q2 to Q3, we expect a modest step-down due to a stronger Q2, primarily driven by product mix, most notably our flu-COVID combo test. and increased inflationary pressures in the second half. As a result, Q3 is now projected to be the low-water mark for the year. In Q4, we expect the impact of increased inflation on our business to continue. However, we see a larger benefit from our offsetting initiatives flowing through. In addition, we continue to see our SSG&A and R&D dollars relatively evenly spread over the remainder of the year which will drive strong operating leverage on Q4's higher revenue dollars. At the midpoint of our full year guidance range, our average tax rate for the balance of the year is about 14.5%, which is best to apply for the subsequent quarters. So in summary, we are advancing our BD 2025 strategic objectives. Our underlying business is strong as evidenced by our strong base revenue and earnings performance. We remain focused on execution and are confident in delivering against our performance goals despite navigating a complex macro environment as evidenced by our updated guidance, which increases the midpoint of both our reported revenue and adjusted EPS. Further, we are well positioned to deliver consistent and sustainable value with our long-term commitments enhancing with the completion of the spin. I'll now turn the call back to the operator to open the line for Q&A.

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If at any point your question is 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 related follow-up. Lastly, to provide optimal sound quality, please pick up your handset while you ask your question. We will take our first question from Vijay Kumar with Evercore ISI. Your line is now active.

Hey, guys. Congrats, and good friends here, and thanks for taking my question. My first one, maybe on the updated guidance here, we did close to a 9% organic for first half, and I'm looking at the legacy BD rate, the midpoint of 7.25%, which implies mid-single, 5.5-ish for the back half. And I just want to make sure this has accomplished you, or is there any timing impact, first half versus second half, any change in first half versus second half organic cadence on an underlying basis?

I appreciate the question. It's Chris. Hope you're well. No, your math is correct. So, again, our first half growth, extremely strong here at about 9% on a year-to-date basis. Um, obviously we, we had benefited from some, some one-time items, but we also overcome some, some headwinds in that period too. I think when we talked last quarter and we would frame this quarter is, you know, probably from, uh, call it underlying adjusting for some of those puts and takes around seven ish percent growth. Um, the back half you're right. Five and a half percent growth. Um, I think there's a couple of things to contemplate there. Of course, China, there will be a pretty significant impact in Q3 as, as they recover. We expect that recovery, the recovery started in May. We expect that to ramp through June and we expect to make the majority of that up in the back half. Additionally, we do have some comps as you think of the back half of the year, in particular our life sciences business. We did have our triplex launch there. So if you look at Q4, that was a peak performance period for that business. So there's a couple kind of comps along with the China situation that will cycle through Q3 into Q4 to consider there in the back half. But 5.5% growth is consistent with our long-term outlook of 5.5+, on top of a front half of 9%. So all in a really strong year. I think the other thing I would point to, if you look at the quarter performance from a top-line standpoint, we actually increased our organic guide more than the beat on the base business in Q2. So it actually implies stronger second-half performance. So we actually did strengthen our second-half outlook despite some of those headwinds that I noted. So hopefully that helps.

That was helpful, Chris. And maybe one on the longer-term LRP guidance that you laid out with the analyst. I appreciate all the details in the earnings deck in making comparison easier for The longer-term 5.5% on COP, 400-plus in margins and double-digit earnings, are there any cadence issues when we think, Chris, for fiscal 23? And I'm not asking for a specific 23 guidance. I know it's early for that. But just thinking about any moving pieces here. I think FX, you know, COVID diagnostic testing drop-off comes to my mind. So when you think about the base of 1115 to 1130 in fiscal 22, should we still expect that LRP to be intact for fiscal 23 over that base?

Yeah, it's a great question. Obviously, to your point, there's a lot of moving parts. And one, if you remember our investor day guide, we actually stripped out testing. We see testing as something that'll move more to kind of an endemic opportunity here that gets more embedded in the base. So we need to see how that plays out this year. Obviously, I think an important caveat just to see how COVID dynamics, the macroinflationary environment plays out as well. So I think some big considerations. But what I would point you to over the long-term horizon, definitely over the long-term horizon, obviously there can be fluctuations year to year. But you're seeing it play out this year. One, definitely the enhanced growth profile, the 5.5 plus. We're well north of that this year, given our strong focus on innovation and R&D, the benefit we're getting from tuck-in acquisitions. As a matter of fact, just as a reminder, you'll see that we did provide the one-time lift associated with the tuck-in acquisitions, which was roughly 60 basis points. That was never part of our five five plus. What was part of our five five plus was taking those acquisitions and growing them. These are profitable double digit growth opportunities. They're actually enhancing our growth profile on a year to date basis by about 30 basis points above that 60 basis points. So true organic growth once we've cycled over the anniversary. So I think we're going to continue to focus on our growth strategy. We remain confident in the five five plus. The spin of diabetes certainly enhances that confidence. You did see a 50 basis point lift here just in this year alone as a result of that. As we've talked about, that was a drag on growth. As you think of operating margin, I shared a couple of key things. One, this was a very important year for us because when we had committed to 400 basis points, we were going to deliver half of that in one year. So doing that in the face of the inflationary environment we're in with inflation, normal inflation being 2%, we're talking about 8%, 4X inflation happening is quite a testament to cost improvement. I don't know if you picked up in the talk track, but we did commit that we are going to do better than 400 basis points over that timeframe. Not only that, we think that by 2025, we can get back to the legacy operating margin of about 25%. And if you ask how are we going to do that, if you think of all the structural change we've made this year to compensate for the inflation, we've actually done more cost improvement and enhancement through our simplification programs that are actually creating more underlying value that we expect to carry over the long term. So definitely we feel really good about our long-term investor day outlook, of course, assuming This environment that we're in at some point kind of settles back to more normal here, hopefully as we exit this year into next year. There may be a little bit of typical choppiness from year to year within that, but we certainly can expect to deliver continued strong growth in each year and strong margin improvement each year.

That's helpful, Chris, and thanks for taking my questions.

We will take our next question from Travis Steed with Bank of America. Your line is now open.

Hi, thanks for taking the question and congrats on a great quarter. Chris, I'd just love to get a little bit more color on some of the operating margin bridge. I see you have 19.6% as the base for FY21, 250 basis points On top of that, gets you to kind of the low 22% range. When I'm thinking about 23, it sounds like you're comfortable in somewhere around 50 to 75 basis points of property margin expansion in 23. Just love to see if that's how we should be thinking about it, which gets me to like a low $12 range for earnings next year, if you have any early comments to that.

Yeah, no, thanks. I appreciate the question. Look, again, I think as it relates to 23, it's a little premature to give specifics at this stage. I think certainly, though, with, you know, call it my 200 basis points delivered this year, 250 if you adjust for IMPECTA, and to get to what I said by the end of 2025 to get back to the 25% operating margin legacy, you're going to expect kind of, you know, a relatively ratable increase call it glide path to get there. The only thing I would point out is I do think 23 will be a transition period because you're still going to have the structural impact of inflation that's been ongoing that'll carry over into 23. So I do view that a little bit as a transition year and you'll get more lift as the environment normalizes over that time is how I would probably think of a ramp curve, if that makes sense.

Yeah, it does. Thank you for that. I appreciate the extra color. And then when you look at some of the incremental inflation impacts that you're offsetting, pretty much essentially all the way offsetting, we'll have to get a little bit more color on some of the pressures that you've seen. And also, when you think about pricing, it was 1.1% last quarter, 1.8% this quarter. Is that how we should be thinking about it going forward, kind of the high 1% to 2% range into 2023 as well?

Hey, Travis, this is Tom, and good morning. I'll start and then turn it over to Chris. I think in terms of what we're seeing on the inflation side, we saw earlier on, quite sometime early last year, we recognized obviously the impacts of inflation as well as supply chain challenges, and we made a very clear statement that while there is going to be no company that was going to avoid inflation, and supply chain challenges that we were very committed to looking to be the best in our industry at navigating those. And that's been the mindset that our entire team has approached this environment over the last two years. And I think you can see the commitment and actions of our team coming through and our performance from that as well. And so I've got our team empowered and focused on executing our strategy. And as part of that, they're navigating this complex environment. And we're pulling a number of levers to overcome what are shipping challenges chips, resin, just general raw material and inflation points that we see. And those levers that the teams are pulling range from continuous improvement being notably increased in our plants in this environment. We're taking additional cost containment actions across all areas of the business. We're driving up an acceleration of our portfolio optimization and product mix. That's always been part of our recode simplification initiative. We saw this as an opportunity, particularly with the strong revenue growth that we're seeing, to accelerate exiting lower margin products and products that are adding complexity in our plants, that when we move those out, we can actually run our plants more efficiently and get out more of the products that our customers need most, which is really important in this environment. you know, where we looked at as a last resort, we are taking pricing actions as well. And as you can see, we're able to get those, which are just a portion of the overall inflationary costs that people are seeing in this environment. So all of that, you know, being done to ensure that we're positioned to best serve our customers and our patients and really proud of the team's work there. Chris, any additional comments?

I think the only build is just to reinforce, I think, the strong underlying growth profile of is really creating opportunities to drive some of that simplification. For example, the strategic skew rationalization efforts, right? We're absorbing that within our growth rate. It unlocks value in the form of margin, drives enhanced mix. New product innovation launches as a way that will more look to create value in the marketplace and get value back for that versus thinking of things. just as price. It's really a bigger picture. The price is actually extremely modest relative to the level of inflation. But thanks.

Thanks, Tom. Thank you.

We will take our next question from Robbie Marcus with JP Morgan. Your line is open.

Oh, great. Thanks for taking the question. Congrats on a nice quarter. Sorry to kind of follow up here, but maybe if I focus in on the second half implied guide here, it looks like there's something like $0.30 benefit from FX. And I was wondering if we're going to start to see – it sounds like you're adding more into inventories. I would imagine it's at a slightly higher cost than previously. If we're going to start to see the impact of that flow through in fiscal – second half or if that's more a 23 impact. I'm just really trying to get to, you know, sort of the normalized earnings power going forward. Thanks.

Yes. You want to go ahead? I would just say maybe I'll make a comment. Robbie, this is Tom. Good morning. On the inventory situation, that's a very strategic investment that we're making to increase inventory on what I would describe as scarce raw materials. So think about raw materials like semiconductors and chips or other components that are difficult to get. You can see companies across the industry running into challenges on those. We have a very systematic approach to secure those assets, and we'll take the higher impact in our inventory to be able to best serve our customers. And that's a commitment that we make. I don't think that we'll end up taking that down as situations stabilize over time. So we don't see that as a long-term. We've been very, very focused on our cash flow, as you know, moving that from 75% free cash flow conversion to 90% as an ongoing, 90% plus as an ongoing target for us. We're not changing that at all, and we continue to have a very strong focus on inventory. We just see this as a transient and strategic investment that's paying off for us, and it's paying off for our customers.

Yeah. Yeah, thanks, Robbie, for the question. Let me just anchor on kind of the full year, and then I'll provide you some second half context. And of course, as always, we can engage further in the discussion. But in terms of the guide adjustment, the best way to think of it is sort of the 100 basis points of organic growth. We actually increased our top line by about 180 million at the midpoint. If you look at the EPS walk that we had provided, we're dropping about just under 13 cents through, which is basically at a BD margin drop through with that raise. So nothing's changed. We've actually reconfirmed our margin profile as a result. We've taken the guide up for the stronger growth profile above actually what was delivered in Q2. So from a full year standpoint, everything remains intact. There's no currency really just drops through at a margin rate. The margin obviously fluctuates based on currency mix dynamics and or margin mix in those respective markets. I don't think there's anything unexpected there. As a matter of fact, the currency that we talked about that was a carryover benefit into the year has played out as expected. So, I don't think there's anything there to contemplate. And then I think as you think of second half margins, what you can expect to see, there will be a small sequential decline on op margin from Q2 to Q3. This is really primarily driven by the fact that last year, Q2 to Q3, you had nearly a 250 basis point decline from Q2 to Q3, and it was our low watermark. And we're actually going to be increasing the improvement in operating margin in the quarter year over year versus what we did this quarter. We did 180 basis points this quarter. We will have a step increase there. So you'll see it relatively stable, but a small drop down accounting for that low point base that we're jumping off of from last year. And then we'll continue to increase from there as sort of the glide, as you think of the Second half, but again, so if I tie this into your question about going forward, I think the important way to think about this is on track for the 200 basis point of margin improvement for the full year, 250 basis points adjusted when you do the pro forma for Imbecta, which was half of what we said as part of our full year investor day commitment. quite a big progression in one year, especially in face of the inflationary pressures, which should set us up nicely over the long term.

Great. And maybe just sneak in two very quick questions here. One, what was the size of the combo flu COVID-19 testing revenues in the quarter? And should we assume going forward that there's no revenue from the cannula agreement with Impecta, or was this more just a timing issue. Thanks.

Yeah, I can take the second one maybe holistically. I mean, there will be, as noted in some of the public documents, there will be various third-party agreements between IMBECTA and BD. There will be a small contribution to Topline, which would contemplate more supply agreements. We highlighted that as part of the 50 basis points lift. There was a small contribution there. There'll be a full-year benefit next year, obviously, but again, it was not substantive. We had the TSA. We said it was worth $35 million this year. It won't quite double next year because what's typical in the spin, really the spirit of the TSA is to support Empecta standing up as a standalone public company, and it gives us an opportunity to support them. We leverage our stranded costs to do that, Um, so basically it keeps us whole from a supporting and back to a stranded cost standpoint. And then we, we shed those down as the TSA goes down in parallel. So there's no impact on a net basis from an income. So you should expect the 35 to lift next year, but not quite double.

Maybe just, uh, we could turn it over to Dave to answer, not just the COVID combo test question, but they just give some overall color on what was a strong momentum. in life sciences across both IDS and significant demand we're seeing in BDB as well. So, Dave.

Thank you, Tom. Robbie, thanks for the question. I mean, just pulling back a little bit, I mean, just want to recognize the life science segment colleagues around the world for just a tremendous quarter, and that's two successive quarters now, 17% growth excluding testing. If I talk about the test, just the overall testing dynamics at the highest level, So, you know, you remember that we have the COVID testing piece, which is like the single antigen and molecular tests. And as you heard Chris talk about, you know, that was 214 million for us in the quarter, 400 million year to date. I think you'll recall that we'd also said that, you know, we were biasing our sort of overall COVID performance to the first half of the year, you know, because we are seeing some moderation in testing. We expect that moderation to continue. through the balance of the year. So that overall testing dynamics are playing out with what we said. I mean, we're very close to 90% of the full-year testing expectation. For the combo, this is obviously the flu and COVID assay, both on our MACs and our Veritor platforms. We've not given that number specifically, because that's in a mix of a lot of puts and takes in the overall base business. You know, there was growth there, but as Chris had said, you know, if you think about that as compared to the same period prior year, that's where we saw some of the growth come from. We do expect from a strategy perspective going forward, you know, we do see value in the overall COVID combo portfolio as we think COVID will move to more of an endemic situation. it's just too early to call out as to what that number would be for the, you know, for the full year, even getting into early Q1, 23, when nobody knows what the dynamics of the flu are going to be right now.

Yeah. Thanks, Dave. And Robbie, maybe just a couple other small things to just give you a little color in terms of what would have comprised the revenue there. You know, obviously there was almost no flu season last year. So you kind of got back to flu season. Additionally, obviously the combo has a, slightly higher value proposition, you benefited from that. Additionally, there was a little bit of stocking, giving it was new. And you did have a lot of testing demand in that period where it was hard to get access to tests. So those were sort of the factors that played into where we were. But again, adjusting for that, really strong underlying, especially in the back of, you know, still having backwater in certain areas, both in life sciences and total beauty.

And, Robby, this is Tom. As Dave said, I think we've said from the moment we launched the test that the combo test will be the go-to kind of replacement for the base flu test. And so we do think flu testing, which was, as Chris mentioned, was completely absent last year, that this year we did see flu back you know, as something that was causing infections. We expect that that would continue going forward. Of course, the rate at which that and the size of that market every year varies each year, but we do believe that that combo test now back in our revenue will continue to be, you know, persistent as the go-to product for flu testing.

Robert, just one, just on the strategy piece, just one more piece there would be, you know, we're very committed to just looking at what are the unmet needs for you know, patients around the world on a go-forward basis. So we are committed to, you know, developing more combo tests. I know we talked at the analyst day around the potential for an at-home combo test, you know, using the ScanWell platform that we acquired in December. So the innovation piece of the strategy still continues, you know, and obviously as timelines firm up on that, we'll communicate as it gets better, though.

Thank you, Robbie.

Great.

Thanks, Robbie. Appreciate it.

Once again, if you have a question, please press star 1, and we'll take our next question from Larry Beaglestein with Wells Fargo.

Good morning, guys. Thanks for taking the question, and congrats on a nice quarter here. Tom, on Alaris, any update on the timing? Is fiscal 2023 a reasonable assumption for when that's back in the U.S.? At the Investor Day last year, you talked about a new pump. launching outside the U.S. in fiscal 2022, I believe. Sorry if I'm wrong on the date. I can't remember if it was 22 or 3. But any update on that? Thank you.

Thank you, Larry, for the question. As you know, we've mentioned on several occasions that getting Alaris back on the market is our number one priority. And while we're not providing any updates on timing, as we had shared before, We are confident in the resources that we're investing in our submission and the team and the leadership that's tasked to make that happen. And so we still think it's not prudent to predict the timeline, given just how inherently complex these submissions are. And particularly that certainly applies to our filing. So as we had said, we don't expect clearance in 22. Therefore, any of our guidance doesn't factor that into our numbers for 22 beyond what's in medical necessity. And we'll continue to provide an update as that progresses, but we continue to remain focused on making sure that the FDA has the proper information for us to get clearance on that, and that will remain our focus. In terms of the new pump for Europe, no, we remain very excited on that product, and it is launching later this year. So, absolutely, yes.

And then, thank you for that. Just quickly, the supply constraint in biosciences. Can you quantify that? And were there other supply constraints that hurt you this quarter? Thanks for taking the questions.

Larry, let me make maybe a comment overall on supply constraints and then ask Dave to comment on biosciences. We certainly saw record backlogs across the company. So demand was even much higher than what you saw us post in our revenue. And that's across every one of the segments we saw demand increase. in a number of categories, outstrip our ability to supply, even though we were producing at record levels. And that's part of what gives us confidence as we look ahead. We are working each and every day to get more out of our plants. We certainly see shortages in longer transit times for raw materials. We see shortages from certain suppliers. We work very aggressively with suppliers to help them secure raw materials. I'd even go so far as to put our own folks to help run supplier factories in certain cases, but we take those partnerships very seriously to optimize getting product to our customers. But we did end with a record backlog across each of the segments, and specifically to biosciences. I'll turn it to Dave.

Yeah, Larry, thanks for the question. So, you know, we've got, I mean, when you look at the backlog overall, we've not quantified it in terms of, the absolute number of instruments. This is an instrument topic for us. It primarily relates to the clinical side of the business, but as Chris had said in his remarks, we anticipate with some of the supply securements that we've done, the procurement leverage that we've been able to get, we expect this to clear up over the course of the year, so it just becomes a timing topic for us in the year, and the team is very confident about that. What we are doing to sort of mitigate any short-term impact is we're obviously working on an allocation strategy. You know, the research instrument base is still very strong, so we're prioritizing what we have to get everything out, and then we're just driving hard and aggressive on procurement of those chips and those electronic components. We have a lot of the instruments sort of ready to go, so as those things come in, We'll just execute and ship in the back out for the year.

Thank you very much.

Thanks, Larry. Thank you.

We will take our next question from Rick Wise with Stifel. Your line is now open.

Hi, Tom. Hi, Chris. Let's start off perhaps with BD Interventional. We haven't had a chance to dive into that. Strong quarter, clearly comps helped. A couple of things maybe you could comment on more expansively. I was a little surprised by the China double digits. Help us understand, you know, what's happening there and how sustainable that performance is. And curious, in general, are you all seeing the electric procedure volume recovery continue into April? And maybe last on interventional, help us think about the key drivers beyond recovery, beyond comps, as we look at not just the next quarter, but the next sort of year ahead. Is it product? Is it execution? Is it pipeline? Help us think through the drivers there. Thank you.

Go ahead, Simon. Good morning, Rick. Firstly, again, just a reflection on the quarter. It was a really solid quarter across all three of our business units. And the soft compare in some areas certainly helped us, but I'm still very proud of the team for executing across our broad and complex and clinically relevant portfolio. And then you might recall from analyst day all the plans that we had, and I'm pleased to say that all those programs that we shared with the with the broader community and analyst data, they are all on track. Now, specifically about performance in the quarter and China in particular, the peripheral intervention business is extremely strong in China, and you'll have heard us say in the past that BDI in China has doubled in revenue since BARD was acquired by BD, and that has been led by peripheral intervention and the oncology business in particular. We had some background challenges with the Oncor probes, over the past several months and that's begun to alleviate. We had a backlog in sterilization and that's begun to alleviate and that has certainly helped drive our business forward. But even in ESKD and PAD in China, they performed extraordinary well in the last quarter as they do very, very frequently. And that performance in PI was also reflected in surgery and to a lesser extent in UCC as well. Now, moving forward, our outlook for the future, as you know, we're focused on innovation and trying to out-execute the competition. And you've heard Tom mention in his prepared remarks about the relaunch of Lenovo. So we've just brought that back into the market in the last two weeks, and that's supported by the three-year vernacular data, which I think is unparalleled data in the Venus space, where super pleased with the response from our sales team and our customers to the relaunch of that product. And that will certainly be a driver this year and next year, particularly when we couple that with the expected clearance, anticipated clearance of the Aspirex thrombectomy catheter, which we hope to receive this quarter or next quarter. And that will put us in a very, very strong position in the venous space. The TREC biopsy device that Tom referred to as well, that's due for launch imminently. And then in our UCC business, the PureWik platform continues to, I would say, exceed our expectations. And in late Q3, early Q4, we do expect to launch the male version of PureWik, which we hope will be a driver of growth. And then finally, a comment on our acquisitions. The TIFA acquisition has really performed very, very well. The TissueMed acquisition, which was an acquisition for the China bio-surgery market that we hope to bring to other geographies, but the Chinese team, again, has executed on that. And then Venclose, as well, has performed very, very well in the PI space. And just referring back to TIFA and the plans that we shared with you about our anticipated expansion into the breast space over the next several years. Now, we do expect to begin enrolling patients in a pilot study here in Q4 in one of the categories that we're investigating for breast. So a lot of momentum behind the BDI team across all businesses and in the usual ways, innovation, inorganic M&A, and executing the field.

Great. If I could follow up, Tom, you highlighted, and I love your language, you're investing in three irreversible forces. That sounds great. So, my question is just reflecting on Chris's commentary about your cash position and your priorities. I was a little surprised that you're going to deploy the $2 billion more towards share repo as opposed to M&A. Clearly, it's going so well. So I just wondered if you could put all that in perspective, help us think about your priorities, and maybe on the M&A side, okay, is it AI, informatics, robotics, new care? What's top of mind for you? Thank you.

Sure. Thank you for the question, Rick. And I'll start off, and then I'll turn it to Chris. So as we had described at Analyst Day, we've really rethought how we view our portfolio and our approach to growth. and we are looking at how we invest in our large essential to healthcare durable core portfolio and fast-growing transformative solutions. And those three areas that you mentioned, smart connected care, new care settings, chronic disease outcomes. And we're really pleased with the performance of both. Hopefully there's something I said in my prepared remarks that I think is an important takeaway for everyone, which is we've had a focus over the last several years of increasing BDs R&D execution capabilities. And you may have heard me say that we reached a peak performance this past, actually year to date, where over 90% on-time milestone deliveries and on-time launches. That's absolutely top quartile in the industry and something that we're really proud of the momentum that we've had there. If you look at the pipeline that we shared at Analyst Day as well, all very much on track, and you're seeing us announce those executions, and as we look at milestones for those things, also very much on track, which is giving us a lot of confidence as we look out over the LRP and the years ahead. To your point, we're really pleased with how we're executing that tuck-in M&A strategy. We've got very strong core growth. We're staying very disciplined to making sure that we're creating value for our shareholders through the acquisitions that we're doing. We don't have to go out and buy growth. We've got strong growth in our core, And we're adding value on top of that with 80% of those tuck-in M&As focused in those high-growth transformative solution areas. And you heard Chris describe that. So we're going to continue there. We have a very strong, robust pipeline. We think that actually this environment, if anything, is creating incremental opportunities for us as we look ahead. And so we're going to stay active and disciplined in there, but we do see the opportunity for that to continue to shift BD's growth rate upward as we look ahead over the next coming years. In terms of our decision and how we're using the cash specifically from the SPIN, let me turn it over to Chris on that.

Yeah, thanks, Tom. Yeah, and Rick, thanks for the question. So first of all, the tax-free nature of the SPIN requires you to think about allocating between either debt and or share repurchase. What we actually outlined in the script was We're going to prioritize a billion dollars of debt pay down that's very consistent actually with our capital allocation strategy, maintaining a strong net leverage ratio, which gives us a lot of financial flexibility to actually support the strategy that Tom just outlined. The balance of about $400 million plus we'll be opportunistic about. We do have a bias for that smaller remaining portion towards share repurchase, but of course we'll be dependent on market conditions and other strategic considerations. And then just to double down a little bit on, that's a discrete and separate decision that we're taking associated with the spin. Beyond that, our capital allocation strategy remains exactly intact, as Tom articulated. The most important thing, actually, that I think he shared is we're doing all this from a position of strength, underlying strength. It allows us to be extremely disciplined and identify assets that have strong margin profile, strong growth profile, strategically fit against those three irreversible forces, drive transformative solutions. So we will look to continue to drive strong cash flow with, by the way, higher R&D investments. We, of course, have continued to prioritize our dividend, which actually the payout ratio increased post-spin, another value to BD shareholders. And then we expected about $1.5 to $2 billion of excess cash after doing all of those things, where tuck-in M&A would continue to absolutely be our priority. But importantly, we did agree that we would make sure, at minimum, we would do share repurchases that avoid any dilution from share-based comp. So that's the capital allocation strategy that we're executing now.

Thanks. Thanks so much. Thank you.

We have no further questions on the line at this time. I will turn the program back over to Tom Pelman for any additional or closing remarks.

Okay. Thank you, operator, and thank you today for joining our call and for all of the questions. I hope everyone took away a couple key points from our discussion today. BD is very well positioned to continue to deliver value in uncertain times, and we're seeing that driven by the execution of our BD 2025 strategy, which is led by our innovation-driven growth strategy. We had strong base business performance across all three segments. We're continuing execution, delivering enhanced margin profile amidst macroeconomic pressures. We've now successfully completed the spinoff of our diabetes care business as part of our simplification strategy, and today we further increase revenue and EPS guidance on strong results despite continued market uncertainty. As we wrap up today's call, I want to just take a moment to thank the 75,000 members of the BD team and those listening today who are working around the clock to ensure production and availability of essential products for patients and providers and who are going above and beyond to support our customers. I want to thank our teams who are working to bring new innovations to market that improve outcomes for patients and providers and that are reshaping the future of healthcare through both our durable core and transformative solutions. And I want to thank our teams who are working to make BD stronger by simplifying our network, our portfolio, and our processes. As I've said many times, while every company is navigating macro challenges, we're focused on being the best in our industry at doing so and to approach every challenge and every opportunity with a growth mindset. And we're doing exactly that. So thank all of you for attending today and be well.

Thank you. This does conclude today's audio webcast. Please disconnect your lines at this time and have a wonderful day.