Becton, Dickinson and Company

Please stand by, your program is about to begin. Hello and welcome to BD's first fiscal quarter 2024 earnings call. At the request of BD, today's call is being recorded and will be available for replay on BD's investor relations website Investors.bd.com or by phone at 800-688-7339 for domestic calls and area code plus 1-402-220-1347 for international calls. For today's call, all parties have been placed on a listen-only mode until the question and answer session. I will now turn the call over to Greg Roditas, Senior Vice President, Treasurer, and Head of Investor Relations.

Good morning, and welcome to BD's earnings call. I'm Greg Roditas, Senior Vice President, Treasurer, 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 first quarter of fiscal 2024. We also post an earnings presentation that provides additional details on our business, strategy, and performance. The press release and presentation can be accessed on the IR website at investors.bd.com. Leading today's calls are Tom Poland, BD's Chairman, Chief Executive Officer and President, and Chris DeLorifus, Executive Vice President and Chief Financial Officer. Tom will provide highlights of our performance and the continued execution of our BD2025 strategy. Chris will then provide additional details on our Q1 financial performance and our updated guidance for fiscal 2024. Following the prepared remarks, Tom and Chris will be joined for Q&A by our segment presidents. Mike Garrison, president of the medical segment, Dave Hickey, president of the life sciences segment, and Rick Bird, president of the interventional segment. Before we get started, I want to remind you that we'll be making forward-looking statements. I encourage you to read the disclaimer in our earnings release and the disclosures in our SEC filings, which are both available on the Investor Relations website. Unless otherwise specified, all comparisons will be on a year-over-year basis versus a 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 note it as a calendar period. I would also call your attention to the non-GAAP reconciliations included in the appendices of the press release and earnings presentation. With that, I am very pleased to turn it over to Tom.

Thanks, Greg. Good morning, everyone, and thank you for joining us. Earlier today, we reported our results for the first quarter. Overall, we executed Q1 as expected. Total revenue growth was largely in line with our expectations. And on the bottom line, adjusted EPS was ahead of our expectations due to good execution on our margin goals through our BD Excellence operating system and the timing of a discrete tax item. Also consistent with our plan, we delivered very strong growth in cash flow that positions us well to deliver another year of growing free cash flow double digits. I want to thank our team of over 70,000 associates for the strong execution, agility, and unrelenting determination to deliver for our customers, patients, and shareholders. These results give us the confidence to increase our FY24 guidance. Turning to our BD2025 strategy, during Q1, we continued to execute well against the five actions we outlined at our investor day to drive profitable growth and value creation. This includes continuing to advance our innovation pipeline, which supports our durable 5.5% plus targeted revenue growth profile. We remain focused on advancing innovation in high growth areas anchored against three irreversible forces we see reshaping healthcare today and over the next decade. Connected care, new care settings, and chronic disease. Specifically in Q1, we made meaningful progress achieving several key R&D milestones for technologies that position BD as key enablers of care shift to new settings. In our PureWIC portfolio, which is now the market's leading platform for non-invasive urine management, in a billion-dollar market growing double digits, we started our randomized clinical trial pilot for PureWIC female to generate evidence to support future at-home reimbursement. Our PureWIC program is progressing well and we remain on track to launch our next generation female external catheter later this fiscal year, which will provide a better patient experience and a more dignified way for women to manage their urinary incontinence. In Q1, we received 510 clearance for our new BD MiniDraw capillary blood collection system. Based on a recent study, two-thirds of patients prefer MiniDraw's finger stick collection in a retail setting. over a previous experience with a traditional venous blood draw. Since it does not require a phlebotomist, MiniDraw can expand access to sample collection for several routine blood tests to new settings, such as retail clinics and pharmacies. And lastly, in molecular diagnostics, we initiated clinical trial enrollment for the BD-Eliance point-of-care molecular platform. And our first assay, a rapid CT-GC test for in-office testing and treatments. BD Alliance enables BD to enter into the high-growth molecular point-of-care market. We continue to see molecular diagnostics as a strong growth catalyst as evidenced by double-digit growth this quarter in our BD Core and BD Max platforms, where we continue to leverage our growing installed base through menu expansion with more than 20 assays currently available on BD Max. Both NextGen PureWik and BD MiniDrawl are on track to launch later this fiscal year, and we anticipate our first 510 case submission for the BD-Eliant system and our first assay this fiscal year as well. Regarding Alaris, servicing our customers and bringing all Alaris pumps in the field up to the cleared standard remains our priority. Customer response has been very positive with strong momentum engaging with customers, and while it is still early in the process, I'm pleased with our progress, and as we recently shared, we now believe $200 million is the floor on revenue in fiscal 24. We are also executing well on our broad simplification strategy to drive margin expansion and a double-digit base EPS CAGR through FY25. This includes accelerating adoption of our BD Excellence operating system, which focuses on the application of lean principles to drive excellence everywhere, every day, across our plants and business, and is driving productivity gains across our operations. In FY23, we held 18 week-long Kaizen events, and in Q1 FY24 alone, we executed as many, a trajectory which will continue through the rest of FY24. We've deployed this mindset outside of our factories, driving greater efficiency through the organization at all levels. Our BD Excellence operating system is an important new capability we're building to drive a world-class culture of continuous improvement and lean management throughout BD. We also progressed our project recode initiatives, including our network optimization effort to drive plant efficiencies. We have multiple site consolidations either completed or underway to reduce our footprint by approximately 20%. The combination of BD excellence with our Recode Network architecture program is supporting our FY24 goals, contributing to our plan for 25% operating margins in FY25, and also now providing visibility for continued margin expansion beyond FY25. We're also seeing our systematic focus on cash flow continuing to yield results. Through working capital efficiencies and our BD Excellence operating system driving more efficient capex spend, we delivered over $850 million in operating cash flows in Q1. This strong execution to start the year positions us well to deliver double-digit growth in free cash flows in FY24 and positions us to capitalize on M&A opportunities in higher growth categories and opportunistically return cash to shareholders. Lastly, our teams around the world continue to make meaningful advancements on our ESG strategy. Just last week, we announced a collaboration with the Kenyan government to advance access to critical cancer diagnostics for women in Kenya through self-sampling, furthering our commitment to expanding health equity and access around the world. We see the power of this self-sampling model as applicable across other underserved markets as well as in the U.S. In summary, I'm pleased with the progress we made in Q1 and the solid margin execution, which enables us to raise guidance for fiscal 2024. With strong progress of our innovation pipeline and growing momentum from BD Excellence and our simplification programs, we believe we are well positioned to achieve our BD 2025 goals. With that, let me turn it over to Chris to review our financials, guidance, and outlook.

Thanks Tom and good morning everyone. As Tom noted, we executed well against our performance goals in Q1. Q1 revenue growth was largely as we expected and I'm pleased to share we exceeded both our margin and earnings goals and delivered strong cash flow that positions us well to support our double-digit free cash flow growth goal. I'll now provide some insight into our revenue performance in the quarter. Additional detail can be found in today's earnings announcement and presentation. Q1 revenue was $4.7 billion, with organic growth of 2.4%. It was driven by high single-digit organic growth in BD interventional and solid growth in BD medical, with China market dynamics playing out as expected, partially offset by a decline in BD life sciences, which was impacted by the comparison to the prior year respiratory season. As expected, China and respiratory were the primary drivers of Q1 revenue growth under indexing our full year goal. The respiratory season alone impacted total company growth by about 150 basis points. Regionally, organic growth was driven by the U.S., EMEA, and Latin America, partially offset by the expected decline in China. Total Q1 revenue growth of 1.6% reflects the divestiture of our surgical instruments platform. Turning to the segment performance, BD Medical revenue totaled $2.2 billion in the quarter, growing 2.4%, driven by growth in medication management solutions and pharmaceutical systems. Mid-single-digit growth in MMS was led by strong performance in dispensing, driven by innovations in our BD Pixis portfolio that are improving nursing workflows and efficiencies. In our infusion business, we are pleased with our strong progress, bringing the BD Alaris infusion system back to the market and continue to expect Alaris to ramp over the course of the year. Infusion also reflects strong demand for IV sets. Performance in pharmacy automation reflects the comparison to an outsized quarter in the prior year and the timing of planned capital installations. Growth of 3.4% in pharmaceutical systems was in line with our expectations and was led by strong double-digit growth in pre-filled devices for biologics, and as expected, was partially offset by customer inventory dynamics, including a slowdown in demand for anticoagulants. Growth in medication delivery solutions was about flat and slightly ahead of our expectations. Our vascular access management strategy continues to drive strong performance, particularly in catheter solutions. As expected, MDS growth was impacted by market dynamics in China, including volume-based procurement, which continues to play out within our expectations. EV life sciences revenue of $1.3 billion declined 2.5%, which reflects a decline in IDS as a result of a tough comparison in the respiratory season worth nearly 500 basis points. It was partially offset by strong growth in biosciences. Performance in IDS reflects the tough comparison in respiratory testing that was partially offset by high single-digit growth in our microbiology platforms and double-digit growth in molecular IVD assays on both our BD max and BD core platforms. Biosciences grew 5.7% as expected despite a strong comparison in the prior year. BDB performance was driven by strong mid-single-digit growth in our research and clinical platforms that reflects double-digit growth in research instruments driven by strong demand for our recently launched BD FACTS Discover S8 cell sorter and double-digit growth in clinical reagents as we continue to leverage our growing install base of FACTS Lyric and FACTS Duet solutions. BD interventional revenues totaled $1.2 billion in the quarter. growing 4.7% and 8.4% organic, which excludes the impact of the surgical instrument's divestiture. EDI organic growth was led by surgery and UCC. In surgery, double-digit organic growth was led by continued market adoption of our leading phasics-resorbable hernia products in our advanced repair and reconstruction portfolio and strong demand for our Chloroprep infection prevention solution. High single-digit growth in urology was led by strong double-digit growth in our Purwick chronic incontinence solutions, with continued strong demand in both the acute care and home care settings. Mid-single-digit growth in PI was in line with our expectations and reflects growth across the portfolio. It was partially offset by the expected timing of distributor orders. In our peripheral vascular disease platform, we continue to drive market penetration with our Rotarix, atherectomy system, and our venous portfolio. Performance in our oncology business was driven by growth in biopsy, including strong market acceptance of our recently launched BDTREC powered bone biopsy system. Now moving to our P&L. Adjusted gross margin of 51.1% and adjusted operating margin of 20.2% were ahead of our expectations due to good execution on our margin improvement goals across our portfolio of simplification initiatives and strong SSG&A expense leverage. R&D spend was in line with our expectations. In addition, as we previously shared, a discrete tax item that was contemplated in our full-year tax rate was realized in Q1. As a result of these items, we exceeded our Q1 operating income and our adjusted diluted EPS expectations, resulting in an EPS of $2.68. Regarding our cash and capital allocation, Q1 cash flows from operations totaled over $850 million. This reflects continued improvements around working capital, including good management of inventory levels, continued discipline around CapEx investments, and leveraging our fixed asset base as a result of the benefit from our simplification programs and BD Excellence operating system. We remain focused on free cash flow conversion and expect another step improvement in FY24. As we execute against our BD2025 strategy, we also remain well-positioned to achieve our long-term cash conversion target of around 90%. Beyond our investments and growth, we returned $775 million in capital to shareholders, including dividends and $500 million in share repurchases. We ended Q1 with a cash balance of $1.2 billion and a net leverage ratio of 2.7 times. Moving to our updated guidance for fiscal 24. For your convenience, the detailed assumptions underlying our guidance can also be found in our presentation. Based on our Q1 performance, including the strong momentum in many parts of our business and progression of our margin improvement initiatives, we raised the midpoint of our FY24 organic revenue growth guidance and raised our adjusted EPS guidance. increasing the midpoint by 9 cents. The increase to adjusted EPS reflects Q1 operational outperformance and a small improvement in FX. As a result, we now expect to deliver organic revenue growth of 5.5% to 6.25%, which increases our midpoint to slightly above 5.8%. We now expect adjusted diluted EPS including the impact of currency to be in a range of $12.82 to $13.06, which reflects about $12.94 at the midpoint. Regarding foreign currency, based on current spot rates, for illustrative purposes, currency has improved modestly and for the full year is now estimated to be a headwind of approximately 25 basis points to total company revenues and approximately 360 basis points to adjusted EPS growth on a full year basis. As you think of phasing over the balance of fiscal 24, the following are some considerations. First, we continue to expect organic sales growth to be higher than our full year range in the second half, partially driven by the expected ramp in Alaris, along with the easing of prior year comparisons, such as China. Second, our updated guidance reflects an improved margin cadence over the balance of the year. Specific to Q2, adjusted gross margin is in line with our prior expectation and continues to reflect significant sequential improvement given the lessening impacts from inflation, prior inventory reductions, and FX. We now expect Q2 adjusted operating margin to expand by 25 to 50 basis points year-over-year driven by our continued margin improvement efforts and continued leverage in SSG&A. Third, the discrete tax item realized in Q1 was largely a shift from Q2 and results in revised phasing of our full-year effective tax rate. Based on this timing dynamic, we currently expect our Q2 tax rate to be nearly 17%. We expect strong operating performance to offset the tax phasing impact And as a result, there are no changes to our expectations for Q2 adjusted earnings per share. Lastly, we remain confident in delivering about 50 basis points of adjusted operating margin improvement for the year. As a reminder, the first half inventory impact is transitory and behind us as we exit Q2. And as FX and inflation moderate at a meaningful rate through the back half, coupled with a continuation of the first half margin improvement, we expect to deliver from our strong simplification portfolio, we can naturally achieve our second half margin goals. In summary, based on the strength of our portfolio and new innovation, we have clear line of sight to deliver our FY24 revenue guide, which at the midpoint is above our 5.5% plus target and results in a three-year kegger of nearly 7% growth. I'm pleased with the continued strong execution by our talented organization to start the year, which supported over-delivering on our margin and operating income goals and increasing our earnings outlook. With a strong quarter of cash flow, we remain well-positioned to deliver another year of double-digit free cash flow growth, which increases our capacity to support additional value-creating opportunities, including M&A. We remain well positioned to continue to deliver against our BD 2025 strategy and financial targets. With that, let's start the Q&A session. Operator, can you assemble our queue?

At this time, if you have a question, please press star and 1. If at any point your question has been answered, you may remove yourself from the queue by pressing star and 2. In order to allow for broad participation, please limit yourself to one question and one follow-up. Lastly, to provide optimal sound quality, please pick up your handset when you ask your question. Thank you. And our first question will come from Rick Wise with Stiefel. Please go ahead. Your line is open.

Good morning, Rick. Tom. Hi, Chris. You used the word confidence. And just picking up on that, heading into the quarter, we knew you were very clear about things like currency and the peso, divestitures, the flu benefit, if you will, time shift. But, you know, the setup and your new guidance clearly says that the rest of the year we're going to see accelerating organic growth, second half, I think your language in the slide, above full year guide. Help us, maybe you could talk in a little more detail about the drivers of sales acceleration and the things that are most critical to creating that outlook that you're feeling confident about.

Yeah, thanks for the question, Rick, and good to connect. So as you said, Q1 played out as expected. Total revenue growth was largely in line with our expectations. As you said, there were really two factors that we recognized were going to be playing out in Q1. One was the flu compare, given the large kind of early timing last year. That was about 150 basis points that we knew was going to happen. And then value-based procurement in China. And those two factors played out actually exactly as we expected. In China, in fact... We were watching that. We saw DOBP stay focused within MDS, which was just our assumption. We had really strong growth in BDI within the quarter, double-digit mid-teen growth, high single-digit growth in life sciences. And so we saw that play out. China actually did a little bit better than budgeted in Q1, and so we feel good that that's going to continue to play out for the year. I think, you know, as we also think about the back part of the year, to your question, Something else we were looking at as we started and gave guidance to begin 24 was, of course, Alaris. We were really pleased to have Alaris back with new improvements, our new 510K. It's a big deal to be back servicing our customers fully. It's a great product and highly unique. And so, of course, Q1 was really the first quarter with Alaris relaunched and our team back to proactively upgrading and remediating our base, and we wanted to get feedback and engagement back. And it's been quite positive. And I think that's part also, as we look ahead, that confidence in those early engagements and the progress we're making is what's led us to also comment that we see now $200 million as the floor for the year. The other aspects, as you think about the growth drivers that we've been talking about, and we often call out six specific platforms, you saw really great growth in PureWIC. This quarter, farm systems, we had signaled very clearly the anticoagulant topic that was going to create a slower growth in Q1. We're seeing the underlying business there do really well. Biologics grew double digits in the quarter. Flow playing out strong demand for Facts Discover. Molecular double-digit growth, as you heard in the prepared remarks. Peripheral vascular and pharmacy automation, those trends in the marketplace continue with strong outlooks for those businesses. Again, we saw very clearly the two factors that we knew were going to impact us in Q1, and they played out as expected. Chris, any other comments to add?

I would just, you know, sometimes it's easier just like bigger picture, right? I'm sure you're looking at our balance to go plans, which we are very confident in. To Tom's point, we've expressed confidence in Alaris in establishing a floor now. I think the Alaris dynamic is important if you look at the balance to go. It's about 7% revenue growth. Last two years, we delivered right around 7%. This year, actually, if you think about it, Alaris is going to cycle over medical necessity. It's not a significant contributor to growth in the first half, despite seeing very strong progress. But what that does is it adds about a point to growth more in the second half, right? So we see really good momentum there. So when you think of this sort of Alaris adjusted, you're at six. And we cycle over the China compare in Q4, which had declined as well. So, I think plans are intact. The strong underlying fundamentals in kind of these six key areas we keep pointing to, like Tom mentioned, of biologics are well positioned and feel good about the rest of the year. Thanks for the question, Rick.

Yeah. And just as a follow-up, I'd ask about the EPS guide. Seven cents, Chris, I think I'm calculating correctly. You beat operationally EPS. You've raised nine cents at the midpoint for the full year. Talk about your confidence in that driving that midpoint EPS raise and, you know, again, how margins are in more detail are going to or mix or volume are going to help you get to those EPS targets. Thank you.

Yeah, thanks, Rick. Yeah, we were definitely pleased with the margin progression and operating income delivery. Q1, it was strong. It exceeded expectations. We basically passed that through, to your point. The other thing we did is we actually accelerated margin improvement in Q2. by about 25 to 50 basis points, so de-risks the back half of the year. We did that on a couple things. Whenever you start the year, you want to see a couple things. One, did we call some of these transitory headwinds like China? We knew we had a transitory item in inventory that hit us in the first quarter that was 200 basis points. We had outsized FX in the quarter. All those played out as expected, and we had stronger delivery on calling inflation dynamics and, more importantly, our margin improvement program. So we continue to accelerate those. We've had two years now of consistent track record of delivering against our margin expectations back to pre-pandemic levels, 400 basis points over two years. If you look at our margin progression throughout the year, Basically, with these transitory items behind you, the level of cost improvement we delivered in Q1 alone, with moderating outsized inflation through the back half of the year, it goes from really, in Q1, we said it was almost 2x what we're calling for the full year in outsized inflation, 100 basis points. It cuts in half in Q2 and then moderates in the back half. So we just have to keep executing against our margin improvement portfolio, which is really strong. And that's what gave us confidence with the Q1 performance and our ongoing programs to raise for the year, and we're focused on executing against that.

Thanks, Chris.

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

Hi. Thanks for taking the question. I'll take the first question on revenue. Just curious if there's anything to call out in some of the kind of non-flu areas, farm systems, MMS, if you think kind of growth outlook there is still on track with your expectations and the decision to raise the revenue guidance. Just curious what's given you the confidence at this stage to go ahead and raise that revenue guidance at this point.

Yeah, Travis, this is Tom. Thanks for the question. Good morning. So on-farm systems specifically, again, as I mentioned, we saw that play out as expected with the impact of the one customer that we mentioned in anticoagulants and strong underlying growth beyond that. Again, double-digit growth in biologics. Our capacity continues to – those investments that we made continue to play out as expected. We have capacity to meet customer needs, and we're engaging very actively in that space. And as we think about the slight raise on revenue – Again, we feel really Alaris, the floor of 200 as we see now for the year based on, again, early engagement with customers. We thought that was prudent to do given our outlook in that space. I don't know, Mike, if you have any other comments to add.

Just to also comment that in addition to the double-digit demand in biologics, we've been pretty successful in terms of entering, you know, the development agreements for future pipeline and molecules in the space. Our innovation portfolio around HIPAC and NEOPAC and also the wearables portfolio with Libertas and Evolve, that continues to progress really well. Additional development agreement in this area are occurring. We've described the farm systems business as a high single-digit grower, going back to investor day, and we continue to see that in 24. That's our expectation, despite any early part-of-the-year headwinds.

Great. And last question, Chris, just on margins in Q1. It was a nice kind of core outperformance on margins in Q1, especially without the revenue upside. Just curious to kind of go through what got better in Q1 on the margin side and confidence and what gets better if you think about the 300 basis points step up and margins from Q1 to Q2, just to give some confidence that that 300 basis points step up sequentially is achievable.

Yeah, thanks, Travis. So first of all, in the quarter, it wasn't one thing. I just say execution is kind of the theme here. Our organization is hyper-focused, consistent with what we've done. It's predominantly our cost improvement programs. You know, we had some mixed benefit as well, which has been part of our strategy on portfolio as well. So all of that, I would say the headwinds kind of played out as expected, and we over-delivered through good focus execution on our margin improvement initiatives. To your point, the Q1 step up, the step up from Q1 to Q2, about 300 basis points that we've signaled. If you think of it this way, again, we had two what I would call pretty transitory items in Q1 with the outsized FX coupled with the inventory reduction and absorption dynamic. Those two items alone, as you head into Q2, are about 30%. So those were 400 basis points. they're only about 30% of that value in Q2. So you pick up momentum there, coupled with the fact that the outsized inflation, which was almost 2x what we called for the year in Q1, it starts moderating significantly, almost in half in Q2. And then it further moderates by the back half of the year. So really, it's just cycling over those kind of one-time items, outsized inflation monitoring back, and us continuing to deliver what we already delivered in Q1. So we're confident that that progression continues. With that, you naturally get the sequential step-up that we're driving towards. And, again, feel good about our operating margin, which is why we improved our phasing, increased Q2, and feel good about the line of sight we have to the back half of the year.

Super helpful. Thanks, Chris.

We'll take our next question from Vijay Kumar with Evercore ISI. Please go ahead. Your line is open.

Good morning, Tom, and thanks for taking my question. My first one, Tom, if I just look at Q1 organic 2.4, right, a lot of questions on, look, utilization is strong. Why is this optically 2.4 well below MedTech sort of prints we've seen so far? Can you help us Bridge, I think you mentioned 150 basis points of respiratory. Does that include COVID? I think you mentioned China. What was the China impact in Q1? I think you mentioned some timing elements, customer orders. What was that impact? And Alaris, it looks like it was not a contributor to growth. So maybe just help us draw a bridge between the 2.4 and what it should have been without some of these underlying one-time items.

Yeah, great question, Vijay. Maybe just those two items that we've referenced from the start of our guide, flu and China, those two combined, if you take those out, it's about 5% underlying growth, just excluding those two items. So those are quite significant. If you look at procedure volumes, et cetera, you're seeing that flow through in the base business where those two items aren't. So as an example, If you look in interventional, you'll see that very strong growth in surgery rate, double-digit growth, which is getting the benefit of procedure volume. You're seeing in UCC 9% growth there as an example, solid in PI, a little bit of inventory timing there. But we're seeing those factors play out. Again, I'd concentrate on those two topics, which, again, played out as we expected. The large flu compare, just given the early timing last year in China, underlying was about five. Chris, any other comment?

No, just, I mean, on Alaris, Alaris played out as expected, actually. Again, what we've highlighted is it was going to be a journey, as you think of the natural progression of engaging with customers and the natural kind of life cycle of then placement, revenue recognition, et cetera. We're actually very pleased with our progress there. And as a matter of fact, right, we declared that $200 million is more of a floor That was part of what gave us confidence to increase the low end of the revenue guide. And so we're continuing to focus on executing there. And that was as expected. On the flip side, what it does is in the back half of the year, it gives you almost basically a full point of growth tailwind that will help. So when you look at the back half, think of that. It will kind of moderate the expectation that you're seeing around feeling like That growth is outsized versus the front half of the year. It's as expected with the ramp we were expecting on Alaris.

Turn it to Mike here. I think it's obviously this is the first quarter that we've relaunched Alaris. And so the focus is first on engaging customers, getting agreements in place for remediation and upgrades. And those are the key metrics that we look at in the first quarter of launch. Because that's what's indicating how the revenue is going to evolve in the back half of the year. And that's what we are feeling good about.

And I just remind that last year we had the certificate of medical necessity. That's how we were shipping. We're not doing that now. So it becomes more of like a step over to get to there and then growth on top of that. So that's what we're seeing in first quarter. So it's actually starting from ground zero in terms of the selling process and ramping it up. I actually feel really good about that. I feel really pleased with the way our manufacturing ramp-up has gone, and that scale-up is going quite well, so we're able to supply product to our customers. I think the customer response, they're recognizing that Alaris is almost like a different system. It's a different category in a way. It's the power of one with all the infusion modalities as a single system, the most advanced interoperability in the category. You know, 750 live sites, you know, order of magnitude more than anyone else. So it's almost being recognized a little differently that way. So that's good. And we've sort of exceeded, we've set certain expectations. We've exceeded those relative to the return to market in terms of upgrading the fleet and the field. So it's early, but I think the way things have progressed, that's what, those are the sort of the elements that led us to build confidence to say that we think 200 is the floor.

that's helpful. And Chris, maybe one quick one for you. The margins still imply a 300 basis point step up and back half versus your 2Q levels. Can you just talk, I think inflation was part of it, which is maybe a similar bridge on margins from the 23 to 26 and back half. Yeah, again,

You know, it's basically a continuation of Q2. When you move out of Q2, both FX, the inventory dynamic goes completely away, which is almost 75 basis points still in Q2. So right off the bat, you pick that up as you move through Q2. That's probably the biggest item. FX continues to moderate. We have reasonable signals on FX, obviously, can continue to move. But that moderates down. The other thing is, Outsized inflation moves from about 100 basis points, which is our full year average in Q2. That further moderates down significantly. And then again, if you just continue the cost improvement and margin improvement initiatives we already executed in Q1 throughout the year, it gets you to where we need to be from a margin standpoint.

Fantastic. Thanks, guys.

Thanks, CJ, for the question.

We'll take our next question from Larry Beigelson with Wells Fargo. Please go ahead. Your line is open.

Good morning. Thanks for taking the question. Mike, why would medical growth in fiscal 24 be in line with the corporate average given the tailwinds in MMS and farm systems? You just said you expect farm systems to grow high single digits in 2024. So what are the expectations for MMS and MDS this year? Last year, medical you know, it was 9% was above the corporate average.

Yeah. So, you know, for, for the, I'll talk first about, you know, MDS, you know, the business is actually showing really good momentum underlying, uh, which is masked a little bit by the impact of VOBP in China. So the VOBP is a headwind for the year. Yeah. It's playing out as we expected and, you know, built into our plan. Um, but we're seeing, you know, strong momentum in the U S strong momentum, uh, you know, in catheters and, you know, in somewhat, you know, driven by some of the new recent product launches that we've had, uh, you know, site, right? Nine, the next even year port people pro, you know, these advancements are, are working out in the field and being very attractive to customers as we advance the ones that cost will stay vision. Uh, we're also watching injection systems and hypodermic. Um, we're aware of some of the recent recalls agency action in this area. And we've ramped our capacity, prepared to serve if market needs arise in the U.S. So that's sort of MDS. From an MMS perspective, the way that I'm sort of seeing it and thinking about it is Infusion sort of returning to be a contributor to growth versus maybe flat to a drag with return of Alaris. And then also we're really excited for Yeah, very soon our upcoming market release of the ex-US infusion system, BD Nexus. Our dispensing business continues to perform very well. It's got solid growth, both in the quarter in hospital and alternate site. Our med bank acquisition grew double digits in the quarter and continues to expand our presence in non-acute settings. So I feel good about that. Pharmacy automation, that proposition continues to resonate really well. for both ROA and Parada. As we noted previously and in the presentation, this quarter last year was actually Parada's strong Q4 finish for their fiscal year. So it created a bit of a tough compare. This was expected and our timing ramp of installs is weighted more towards the back half. So those are sort of the things that give me confidence around MDS and MMS.

That's helpful. And Tom, You know, China was down 5% in this quarter, in Q1. Talk about what you're seeing there and your confidence. I think in the past you said you expect China to be flat to up low single digits this year. Thanks for taking the question.

Yep. Thanks, Larry. That expectation remains unchanged. China played out essentially exactly as we expected in the quarter. It was a little bit favorable to budget. What we saw and what we expected was VOBP, as Mike described, specifically within MDS. which is where it's remained. We didn't see it expand to other areas at all. We're not seeing that. Our view is as we had projected. And we also expected to see strong growth in BDI, which we've had over the last several years. We saw that play out in the quarter, mid-teens growth in BDI in Q1. And we saw solid growth, very high single digits on the cusp of double-digit growth in life sciences in China. And so that base business in China is continuing to do well. We saw VOBP start in the back half of last year. And so again, that's going to become a tailwind for us as we think about a compare in China as we go over that. So thanks for the question. Thank you. Thank you.

We'll take our next question from Robbie Marcus with JP Morgan. Please go ahead. Your line is open.

Oh, great. Thanks for taking the question. I wanted to ask, I know we're on fiscal 24 here, but wanted to look out to 25. And, you know, based on operating margin guidance, it implies about 100 basis points expansion next year to get to your long-range plan target. You know, so I'm sure the answer is pretty similar to the 24, but how do we think about the implied about 100 basis points next year and your confidence in that?

Yeah, Robbie, thanks for the question. Actually, at J.P. Morgan, as you know, we outlined a strong plan outlining all of our margin improvement initiatives. I think gross margin is the next stage of accelerated focus for us, and we already have a great pipeline of margin improvement initiatives there through Project Recode, right? We actually already completed our 20 percent goal of skew rationalization. We're actually going to go further there. The network architecture, Tom highlighted in our prepared remarks, the strong progress there with initiatives underway that reduce our network by 20%. As a matter of fact, next year, the network architecture value we get out of that actually doubles going into 25, so you're going to really start seeing the benefits of that. BD Excellence is another one. We're getting great traction this year. It's part of the momentum we have in this year on margin that will continue into next year. You also have the Alaris dynamic. As that fully ramps up in scales, we'll get margin leverage there. So all those things coupled with the continued strong growth profile of being able to consistently do 5.5+, which we've been well above, gives us strong confidence in 2025 and the 100 basis points. As a matter of fact, as we exit this year, doing everything we did, we really should be well-positioned to carry that kind of momentum into next year. It's premature to kind of make a formal commitment and manage all the puts and takes, but certainly high confidence in the 25 and great momentum there.

Maybe, Robbie, and good morning. Just to add to Chris's good comments there, I think another way just to think about it is as we launched BD 2025 in 22, it was a four-year roadmap ahead, right? And so the end of 24 will be – 75% of the way through BD 2025. As you think about the margin number that we've set out as our guide for FY24, that's 80% of the way through our margin goal. So from a timing perspective, 75% of the way through BD 2025, 80% of our margin goal. We're clearly on track slightly ahead, and we're seeing really good momentum in our programs as evidenced this quarter. I think you've heard us talk about BD excellence. Obviously, as we started BD 2025, Our focus was let's get Alaris back, number one, take those learnings, apply them across the company to make sure we were building capabilities. Second was optimize our portfolio for growth. Smith & Becta, obviously we sold B. Mueller. We drove Tuck & M&A that's driving accretive growth. We rebalanced our R&D into high-growth spaces. And we built our portfolio of simplification programs starting with Recode, which are on track and you're seeing those play out. Along the way and starting last year, we began to develop capabilities for BD Excellence, right? And it's our operating system to drive a whole new scale of lean capabilities across the company. And last year, we had thousands of associates across the company engaged in BD Excellence. This year, we're really pressing the pedal on that program now as we've made progress on those first three areas that I mentioned. And so as we said in the prepared remarks earlier, If you think about the Kaizans that we did all of last year through BD Excellence, we did just as many in Q1 of this year, just completed. And that's going to continue to scale as we go through the year. And so we see really good momentum there. It's giving us visibility not only on our 25 margin goal, but as we also indicated, it's giving us visibility beyond 25 to continue margin progression as we look ahead. So thanks for the question, Rob.

Great. Really helpful. Just a quick follow-up. China VBP is a headwind you've talked about. How do we think about where that's hitting each of the business units and the size, just so we can kind of try and back out that headwind in our models? Thanks.

Robbie, it's almost all within MDS specifically. Essentially, it is all within MDS. That's where we see it.

Great. Thank you. Thanks.

We'll take our next question from Patrick Wood with Morgan Stanley. Please go ahead. Your line is open.

Amazing. Thank you. Two quick ones. I guess the first is pharmacy automation completely get the timing of their year end and that side of things. But just curious, you know, I just think things on orders, whether it's like order mix and kind of the outlook for the rest of the year based on, you know, what you're hearing from the customers right now from the order book.

Yeah, I'll take that. So for pharmacy automation, you know, we feel really good on that. Like I mentioned, the tough compare because, you know, they were incentivized, Parada and the team there was incentivized to finish their Q4 strong. So they had already lined up installations last year for their finishing. They had a record for them quarter last year. So it's a little bit of a tough compare. Order book looks good, especially in the sort of retail long-term care channels. And we continue to leverage our BD sales force to talk to our acute care customers about starting to transform the pharmacy in the acute care with our IDN customers. So we see that continuing to grow throughout the year. Overall, we've described it as sort of a low double-digit grower, and that's sort of what we have projected and expected for the rest of the year.

Brilliant. And then maybe quickly one either for you, Tom, or Dave. You know, Allianz, you know, molecular point of care is obviously a very fast-growing but very competitive market. Just curious how you're seeing that product fit in, the interplay between, like, high and low plex. You know, just curious how you're going to fit into that market.

Thanks.

Turn that to Dave. Thanks for the question, Josh.

Patrick. Thanks, Patrick, for picking up on Allianz. And, you know, if you just take a step back, if you look at the molecular dynamics overall, You know, we have said that this is one of the sort of six growth drivers for BD, right? So, you know, we continue. And if you look at the divergence of the market, there's a real thesis playing out in terms of the way customer evolution will happen, right? So you think about the centralization of high volume molecular cervical cancer testing. We satisfy that with BD core. You think about BD max and the acute setting, you know, and we're seeing good, as you heard Tom say in the prepared remarks, you know, good double digit growth there. But clearly, there is decentralization of relevant testing to the point of care and these new care settings. And obviously, Allianz will be our entry there in this sort of high, you know, single-digit market. If I think about it specifically on Allianz, the way to think about it is, you know, what is different about it? You know, our goal here will be that we would anticipate it to be clear-waved, giving critical results, you know, within less than 15 minutes. It can be used in a wide variety of settings. You know, what is the unmet needs that it will actually address? And deliberately, we've actually selected CTGC as our first assay because when you look at all the CDC and NIH reports, there is an increasing burden of STI. So it will increase access to testing. You know, and think about it now. You know, if you're one of those unfortunate patients and you're in a clinic, you could get that result diagnosed and a potential treatment administered while you're in a in a clinic in a decentralized setting. So deliberately we think CTGC is really the right assay to lead with. And then, of course, because of the capabilities and these less than 15-minute results, we see a strong roadmap behind it, you know, focused on respiratory assays, other STI assays, vaginitis, et cetera.

That test and treat concept with 15 minutes or less time to result is a core component. Love it. Thank you. Thank you.

We'll take our next question from Patrick Mixick with Barclays. Please go ahead. Your line is open.

Good morning, Patrick.

Hi. This is Matt. This is Matt. It's okay. Just a couple follow-ups on some of the factors that played through Q1. You talked about last quarter, and I have one follow-up. One was... Obviously, you know, a lot of detail and questions that came after around the peso and around wages. If you could just sort of, you know, sounds like you're most of the way through that entering Q2 and just maybe quick update on that. And then the anti-coagulation business in China, I think that was something that you were hoping was going to find, that capacity would find a new home perhaps in this quarter, next quarter, and an update on that. And then just one follow-up if I could.

Yeah, it's Chris. Thanks, Matt, for the question. Appreciate it. Yeah, when we started the year, we talked about kind of the inflationary dynamics in supply chain. One of the biggest ones that we were still seeing play out through the year was wage dynamics in our supply chain organization. You know, that continues, but it's playing out as expected, so nothing new there. Regarding FX, good news is moderately favorable. We passed through both the revenue and earnings on that. So stable at this point and moving in the right direction. We'll continue to watch it. And, you know, I think we're happy with the operational performance and passing through both the 7 cent operational beat and the 2 cents of FX.

And maybe, Mike, for farm systems. Yeah, for farm systems, the capacity that's freed up for anticoagulant, there is some of it where the teams are hunting for home for that. And there's been some success there. But I think we also just took a strategic decision to look at the anticoagulant market overall and it returning to more of a post-COVID normalization there and are converting lines over to biologics to help accelerate our ability to have capacity to serve in that area. And that's playing out pretty well. So we've been able to, you know, there's been some increased demand that's come in for biologics that we'll be able to recognize later in the year, and then we'll be able to serve that in part because of these line conversions. So it's been a little bit of both relative to that anti-coagulant dynamic. Thanks for the question, Matt.

That was super helpful. You bet. And just one follow-up, if I could, on cash flows and sort of M&A. And I remember last quarter, Chris, you emphasized a bunch of times, and part of that impact was bringing up excess inventory having an impact on margins. You're through that. You know, you made nice progress on leverage. Could you talk a little bit about, you know, what that looks like for the rest of the year in terms of M&A outlook and the kinds of things, maybe the size of things that you might be, we might expect in the next, you know, 6, 12, 18 months? Thanks.

Yeah, thanks for the question, Matt. I appreciate you recognize. We've definitely been extremely focused on cash flow performance. I was really pleased with the quarter. It was really strong cash flow, strong double digits. It gives us confidence for the year. It played out in all the areas we've been trying to leverage. One, we're getting more efficient with our CapEx expenditures. Part of this is from the simplification efforts and BD excellence that we're driving through our plants. In addition, you saw improvement in inventory, and you saw improvement in our collection cycle as well. So all really positive things. We sit basically at our net leverage target. And so we're well positioned and consistently will remain disciplined as you think of M&A. But as you can imagine, we always have an active portfolio of things that we look at. We're going to remain disciplined. It's been a nice contributor organically to growth last year, delivered nearly 40 basis points. Certainly something that we're going to continue to focus on as part of our growth strategy and more to come on that. Tom, I don't know if you want to add.

That was extremely well said. It remains an active part of our growth strategy. And I think as we've shared in the past, right, we've been focused on accretive growth, accretive margin acquisitions, which has been our track record, and we've executed well against those over the last several years. I think we've clearly built a good track record of that. And so we've got a strong, healthy M&A, you know, active pipeline there. focused again in strategic areas where the market has significant structural or macro tailwinds to drive sustainable growth and where we can bring meaningful additional value either through our channel, our global footprint, our manufacturing prowess. And again, we remain very disciplined on strong returns, accretive growth. We haven't been doing dilutive deals. That remains our emphasis as we're focused on delivering on our 25% operating margin goals. But we're going to continue to focus on that, and we have a strong pipeline. Thanks for the question.

This time I'll return the call to Tom for any closing comments.

Thank you all for joining our call. As you heard, we had good momentum to start the year, and we look forward to sharing our progress towards delivering our BD2025 goals and increased outlook for FY24 on our next call in May. Thank you very much and have a great rest of the day.

Thank you. This does conclude today's program. On behalf of BD, thank you for joining today. Please disconnect your line at this time and have a wonderful day.