Becton, Dickinson and Company

Q3 2024 Earnings Conference Call

8/1/2024

spk02: Hello and welcome to BD's third quarter fiscal 2024 earnings conference call. At the request of BD, today's call is being recorded and will be available for replay on BD's investor relations website at investors.bd.com or by phone at 800-839-2385 for domestic calls and area code 1-402-220-7203 for international calls. For today's call, all parties have been placed in a listen-only mode until the question and answer session. I will now turn the call over to Greg Rodetis, Senior Vice President, Treasurer, and Head of Investor Relations. Please go ahead.
spk08: Good morning, and welcome to BD's earnings call. I'm Greg Rodetis, Senior Vice President, Treasurer, and Head of Investor Relations. Thank you for joining us. This call is being made available via audio webcast at BD.com. Earlier this morning, BD released his results for the third quarter of fiscal 2024. The press release and presentation can be accessed on the IR website at investors.bd.com. Leading today's call are Tom Poland, BD's Chairman, Chief Executive Officer and President, and Chris DeLaurifus, Executive Vice President and Chief Financial Officer. Following this morning's prepared remarks, Tom and Chris will be joined for Q&A by our segment presidents, Mike Garrison, president of the medical segment, and Rick Bird, president of the interventional segment. Before we get started, I want to remind you that we will be making forward-looking statements. You can read the disclaimer in our earnings release and the disclosures in our SEC filings available on the Investor Relations website. Unless otherwise specified, all comparisons will be on a year-over-year basis versus the relevant fiscal period. Revenue percentage changes are on an FX neutral basis unless otherwise noted. Reconciliations between GAAP and non-GAAP measures are included in the appendices of the earnings release and presentation. Specifically during the quarter, we recorded accruals resulting from recent developments relating primarily to the Italian government medical device payback legislation, which essentially relate to years prior to the current fiscal year. We are presenting adjusted revenues excluding the impact of these accruals. With that, I am very pleased to turn over the time.
spk05: Thanks, Greg, and good morning, everyone. We continue to make excellent progress advancing our BD 2025 strategy. This quarter demonstrates the durability of our portfolio and strength of new innovations delivering mid-single digit organic revenue growth of 5.2%. Growth was broad-based and reflects strong volume and share gains across the portfolio. Our team executed very well through transitory market dynamics in BDB and PS and macro factors in China. We continue to grow above the market and believe we are extremely well positioned as these markets recover. We have growing momentum from our BD Excellence operating system that enabled us to deliver significant sequential and year over year adjusted gross margin increases. This drove strong operating margin expansion, contributed to over 18% adjusted earnings per share growth, and is allowing us to raise our earnings guidance once again. Our team's excellent execution also drove over 100% year-to-date growth in free cash flow, reaching over 80% free cash flow conversion year-to-date, with margins, earnings, and cash flow all ahead of plan. As a reminder, our strategy consists of three pillars, driving growth through innovation and tuck-in M&A, simplifying through BD excellence, and empowering our organization with the capabilities and systems to deliver on our strategy. I'd like to provide updates on each of these this morning, starting with our growth pillar and the critical care acquisition. Things continue to progress well towards a successful close. And as we've gotten to know more members of their team, we only become more excited to welcome them to the BD family. Critical care significantly advances our connected care strategy to use AI and digital tools to help clinicians deliver more efficient and higher quality care. Additionally, It adds a high-growth business that is immediately accretive to margins and earnings. Turning to several of our most significant long-term growth drivers. To begin with, our connected medication management strategy has strong momentum, with Q3 setting another new all-time record for the number of Valeris pumps shipped in a quarter. The scale of upgrading our fleet is unprecedented, and I'm very proud of the work our teams are doing to support our loyal customer base and deliver ahead of our commitments. Customer feedback has been very positive and we gained a market position in the quarter. We are now back at our historical quarterly run rate of about $100 million and have built a healthy committed contract backlog, which puts us in a position to be above our historical run rate for FY25. Our connected medication management portfolio, which includes Alaris, is just one example of how BD is at the forefront of combining AI, automation, and robotics to improve the core processes that run healthcare. Through our strategy, BD is advancing our leadership in automating the pharmacy, the medication management process, and the microbiology lab. Today, BD has a $4 billion-plus business in healthcare automation and informatics AI, and we'll increase this to over $5 billion as we complete the acquisition of critical care. This expands BD in the smart critical care space and creates new opportunities to combine AI-driven monitoring with systems such as infusion technologies to simplify nursing workflow and improve patient care. Looking ahead to 2030, we view healthcare process automation and informatics AI as having the potential to become a business exceeding $7 billion as we continue to build more connected, automated, and intelligent solutions to transform the core processes underlying care delivery. Turning to other key platforms, Q3 was the 28th consecutive quarter of double digit growth in our PureWIC platform. And our recently launched next generation female external catheter, PureWIC Flex, is expected to support this continued momentum. PureWIC Flex delivers improved performance for a wider range of body types, both in acute and home care settings. Given the incredible response from the first PureWix Flex users, we couldn't be more excited about the impact this will have on patients and their providers. As I think about PureWix overall, we see this as having the potential to become a billion-dollar franchise by 2030, continuing its double-digit growth momentum. We're also advancing our impact in immune health and oncology, continuing the super cycle of innovation within BD Biosciences, which positions it well as a long-term growth driver. Coming off the landmark BD FACTS Discover S8 cell sorter launch in FY23, we recently released additional three and four laser configurations, which contain the same new-to-world BD Spectral FX and BD CellView technologies, enabling new discoveries in a broader range of fields. We expect to continue our innovation cadence with our FY25 launch of the BD FACTS Discover A8 analyzer, which will provide customers high throughput sample analysis with the same innovative technologies. The combination of BD FACTS Discover and our BD Real Blue and Real Yellow reagents were used in the world's first 50 color flow cytometry experiment, which was published this year in the Journal of Cytometry. This serves as a testament to these groundbreaking new technologies. The immune health and oncology space remains a primary focus for research, and as the market returns to growth, we believe our leading technology and portfolio position us well to capitalize on future opportunities in this space. Finally, within our pharmaceutical systems business, in Q3, biologics drug delivery continued to grow double digits. Biologics now represent over 40% of our total pharmaceutical systems revenue, and we see it as a significant growth opportunity, including GLP-1s. Since the start of BD 2025, we've been implementing a strategy to enhance our innovation leadership, expand our manufacturing scale, and prioritize quality excellence to be the preferred partner for biologic drug delivery. And we believe that no other company in med tech is better positioned than BD to capitalize on this trend. First, the majority of biologics that use a prefilled syringe have and continue to be launched in the BD device. Since 2023, BD has been the chosen partner for 19 out of the 23 new biologic drug approvals that use a prefilled syringe. Second, as we consider the significant clinical potentials of GLP-1s, the strength of BD's innovation in this category, and our previously announced capacity expansion, we view GLP-1 drug delivery as a potential $1 billion product category by 2030. Today, we serve multiple market leaders, have device contracts with multiple novel GLP-1 therapies advancing through clinical trials, and beyond novel molecules, we now have over 40 signed GLP-1 biosimilar agreements across our pen, auto-injector, and syringe platforms. We are actively supporting biosimilars for early generation GLP-1s that are entering the market over the next 12 months. Outside of GLP-1s, our customers are working to develop next-generation biologics that have the potential to revolutionize care in conditions like Alzheimer's, certain immunological disorders, and types of cancer. Many of these are extremely complex molecules and proteins that will involve significantly greater volumes per injection and higher viscosity compared to therapies presently available in the market. At the same time, we see the trends to enable patient self-treatment that point to the need for wearable on-body injectors. We've developed the BD Libertas and BD Evolve wearable injectors to support the unique delivery needs of these therapies. who are actively supporting multiple customers, testing their pipeline molecules with our wearable solutions, and have provided product to support their clinical trials. While this is a longer-term opportunity that we expect to develop in line with drug development timelines, we believe we are well positioned for this future trend and are getting very positive feedback on our platforms. Moving to our simplification strategy in BD Excellence, First, let me express my gratitude to everyone in our organization who is accelerating BD Excellence through our global supply chain through the completion of over 500 Kaizen events this year. I'd especially like to thank those working in our manufacturing plants and warehouses who improved product quality and reliability for our customers this year while delivering double-digit improvements in both waste reduction and production yield. We are seeing the outcomes of BD Excellence in accelerating margin progression and delivering strong cash flow. Our plans to reduce our manufacturing network by over 20% remain on track. And as we are consolidating our plant architecture, we're investing in smart factories. Our top 30 sites are already accelerating performance, leveraging smart automation and digital capabilities, such as predictive analytics. We're excited about the opportunity to further accelerate manufacturing productivity through the combination of BD Excellence and our Smart Factory Strategy. The momentum in our simplification programs, including BD Excellence, positions us for success as we finish FY24 and as we look ahead to FY25 and beyond. Lastly, we continue to empower our organization through strong corporate responsibility and recently issued our FY23 Corporate Sustainability Report. Notably in FY23, we reduced Scope 1 and 2 greenhouse gas emissions 18% versus our FY19 baseline, surpassing our goal of 13%. We doubled the number of sites using green electric power and solar power, and we reduced our water usage by 21% and waste by 18% over the same time frame. In summary, we delivered above market mid single digit organic revenue growth and significant margin expansion and cash flow generation. On the strength in the quarter, we are once again raising our adjusted diluted EPS guidance for fiscal 2024 and believe we are well positioned for continued strong financial performance next year. We have leadership positions in many of the most significant trends reshaping healthcare, positioning us well in FY25 and beyond. I'll now turn it over to Chris to review our financials and outlook.
spk06: Thanks, Tom, and good morning, everyone. As Tom noted, the quarter's results reflect strong performance across multiple parts of our portfolio, even amid the previously noted transitory market dynamics and macro factors. Importantly, with strong execution of our BD Excellence programs, we exceeded our margin earnings, and cash flow goals. I'll now provide some further insight into our adjusted revenue performance. Q3 revenue grew 5.2% organic, driven by volume growth and share gains. Regionally, over 90% of our revenue, which includes our three largest geographies, grew 6% plus organic. This strong performance was partially offset by a decrease in China from continued market dynamics. BD medical growth was led by MMS with exceptional performance in infusion systems, driven by the BD Alaris return to market and higher utilization of infusion sets, partially offset by a tough prior comparison in dispensing. Broad volume growth and share gains across our MDS consumable portfolio in developed markets also contributed to the segment's growth. Farm systems had another quarter of increasing demand with double-digit growth in pre-filled devices for biologic drugs, primarily GLP-1s. This growth was offset by transitory market dynamics across the industry, including expected customer inventory destocking. BD Life Sciences' performance was led by IDS with high single-digit growth in specimen management which reflects both increased utilization and customer upgrades to higher value products that provide an enhanced patient experience. The segment's growth was partially offset by transitory market dynamics in biosciences that resulted in lower market demand for instruments. Given our leading portfolio in instruments and reagents, we significantly outperformed the category in the quarter. Strong organic growth in BD interventional was led by high single-digit growth in UCC with continued momentum in our Purewick franchise, delivering another quarter of double-digit growth. Surgery delivered another strong quarter across all three major platforms with double-digit organic growth across advanced repair and reconstruction, infection prevention, and biosurgery. we continue to make excellent progress with conversion to our bioresorbable Phasix technology, which we see as a durable contributor to future growth. BDI performance was also supported by peripheral intervention with double-digit growth in peripheral vascular disease that was partially offset by a decrease in oncology driven primarily by market dynamics in China. Now moving to our P&L. We realized strong sequential and year-over-year margin improvement with adjusted gross margin of 54.3 percent and adjusted operating margin of 25.2 percent, both above our expectations. The gross margin year-over-year increase of 170 basis points was primarily driven by increased productivity and cost improvement from our BD Excellence initiatives and moderating inflation. Our operating margin increased by 220 basis points year over year, driven by the increasing gross margin and healthy operating expense leverage, with expenses increasing slightly on a dollar basis year over year. As a result of these items, we exceeded our Q3 operating income and adjusted diluted EPS expectations, resulting in adjusted diluted EPS of $3.50 which grew double digits, or 18.2%, on a reported basis. Regarding our cash and capital allocation, I'm really pleased with our strategic choices and the execution on cash flow. As a result, year-to-date free cash flow increased $1.2 billion year over year to $2.2 billion, reflecting continued improvement in working capital, including continued inventory optimization, plan phasing of certain cash flow items, and the ability to leverage our capital expenditures as we benefit from BD Excellence productivity gains. We remain focused on free cash flow conversion and are on track to deliver another double-digit step improvement in fiscal year 24, with our year-to-date free cash flow conversion above 80%, and we remain well-positioned to achieve our long-term cash goals. Net leverage improved to 2.4 times, and cash and short-term investments totaled $5.3 billion, inclusive of about $3.4 billion in proceeds from the February debt refinancing and the critical care acquisition financing in June. Moving to our updated guidance for fiscal year 24, the detailed assumptions underlying our guidance can be found in our presentation. As we look ahead, we are confident in a strong close to fiscal year 24. We remain focused on driving multiple areas of momentum and share gains across our portfolio, including Alaris. For the full year, even with this broad-based momentum, it is prudent for us to reflect the latest market dynamics, which others are also experiencing. As a result, we now expect organic revenue growth to be 5% to 5.25% for the full year, Based on the strength of our margin performance, we were able to absorb the revised organic revenue growth guidance and are raising our adjusted diluted EPS guidance range to $13.05 to $13.15 on a reported basis. This reflects an increase of 5 cents at the midpoint and 10 cents at the bottom of the range. We believe we are well positioned to achieve our updated adjusted operating margin guidance over 50 basis points improvement, which implies full-year adjusted operating margins of over 24%. We continue to expect margin acceleration in Q4 driven by our BD excellence and continuous improvement efforts and continued expense leverage on our expected strong revenue performance, including Alaris. Looking ahead to fiscal year 25, while it's too early to provide guidance, as we are in our planning process, I can offer the following thoughts. We are continuing to monitor dynamics in select markets. Even in an environment where these dynamics continue to exist, we are confident in delivering strong performance, particularly our ability to exceed our 25% adjusted operating margin goal and deliver double-digit EPS growth, given the increasing benefit to gross margin from accelerating BD Excellence momentum We think 10% EPS growth would be a good starting point for fiscal year 25, including critical care and the expected impact of Pillar 2. So in summary, based on the durability of our portfolio and momentum in Alaris, we are confident in delivering another year of strong growth. Our team's execution supported over-delivering on our margin expectations, and as a result, as we entered Q4, We are on track to exceed our full year margin improvement goals, deliver another year of double digit free cash flow growth, and once again, increased our fiscal year 24 earnings outlook. Our strategy is demonstrating positive momentum, and we remain well positioned to continue to deliver on our BD 2025 value creation objectives. With that, let's start the Q&A session. Operator, can you please assemble our queue?
spk02: At this time, if you have a question, please press star 1. If at any point your question is answered, you may remove yourself from the queue by pressing star 2. In order to allow for broad participation, please limit yourself to only one question. Lastly, to provide optimal sound quality, please pick up your handset while you ask your question. Our first question will come from Robbie Marcus with JP Morgan. Please go ahead.
spk11: Oh, great. Good morning, and thank you very much for taking the questions. Two for me. First, I wanted to ask on guidance, particularly fourth quarter, what's implied there in revenue guidance and the margins. It looks like, by my math, about 6.5% organic growth. and still healthy operating margin performance. Maybe just walk us through, you know, some of the things that happened in third quarter that led to the touch lower organic growth and the confidence in fiscal fourth quarter, both from a revenue and a margin perspective where you did well in the quarter. Thanks.
spk05: Robbie, good morning. Thanks for the questions. This is Tom. I'll start off and then turn it over to Chris. I think as we look at Q3, first off, we're really pleased with strong performance across, you know, many areas of, most every area of the company, particularly as we look at compared to market, where we saw strong share gains in a number of areas. We saw strong volume performance. And even in markets that are undergoing transitory market dynamics, specifically, you know, the BDB research market environment and the destocking in farm systems, You know, as we look at our performance, I really like our competitive position in those spaces. You're seeing us outperform what's been announced by others to date. And so as those markets ultimately rebound, and you heard us talk about some of the new innovations in BDB, obviously, our position in biologics and the differentiated growth that we're getting there and the differentiated share gains that we're getting there in terms of our share of new molecules and even biosimilar spaces. we really like our position there long-term. So I think that's really, as we think about Q3, those dynamics in those spaces as well as just the continued play out in China is what we saw. I'll turn it to Chris just to talk a little bit more about how we think about guidance in Q4. It's pretty straightforward.
spk06: Yeah, thanks, Tom. Thanks, Robbie, for the question. Yeah, Q4 is actually pretty straightforward. So to your point on the top-line revenue organic It implies upper 6% range consistent with what you shared, maybe a little north of that. It's really attributed to one key dynamic. It's the continued momentum of Alaris. By the way, we obviously have much stronger line of sight based on our committed contract position. This is the strongest quarter that we have this year as it relates to line of sight to that because now we're three quarters in that. In addition to that, if you recall last year in Q4, We have a favorable comp in Alaris as well because we had stopped shipping under medical necessity as we got the approval and were preparing for launch. So you actually have a favorable comp and you have continued momentum with Alaris, which as you saw was very positive in the quarter. The rest of the portfolio, we actually assumed similar performance. You know, we're not making assumptions of significant market recovery or things of that. We're going to continue to outperform in those spaces from a relative standpoint. So feel good about revenue. Margin, hopefully everyone had an opportunity to see Q3 was really strong. We outperformed margin. It led to the outperformance on EPS. The story there is straightforward. Gross margin, you basically just have to repeat Q3. which is already flowing through our cost base, right? We're in our cap and roll period there, so there's not a substantive change in terms of gross margin. On operating margin, the gross margin will flow through. We're actually increasing expenses slightly from an OpEx standpoint, where you end up with that, call it high 6% growth. You get a little bit of natural leverage there that'll flow through, and we feel really good about that. I think importantly, and we can talk more about this you know, pretends well for 25 as we think of margins.
spk11: Well, that's a perfect segue to my follow-up question on fiscal 25. You gave color of about 10% EPS growth. I want to make sure that's reported, I think I heard. And, you know, there's a lot of moving parts, timing of when critical care closes, the accretion that could add, you know, China versus Laris. You know, when you came up with that, the 10%, which I think is about where the street is when we factor in the critical care accretion, maybe just some of the components. I heard 25% operating margin you feel good about. Just anything else you could give us up and down the P&L. Thanks a lot.
spk06: Yeah, thanks, Rob. Yeah, look, we're excited about 25%. It's setting up nicely to deliver strong performance. You know, first top line, I'll just reiterate, we're extremely pleased. Our strategy is paying off in terms of strength of portfolio. Continue to focus on driving volume and share gains. And what you're really seeing in this quarter is the ability to deliver strong performance despite these market dynamics, most notably BDB farm systems and, as Tom noted, China. So We're not dependent on one thing. The durability of our portfolio sets us up nicely. And then I, you know, from a margin standpoint, I shared that on the momentum we have this year, we expect to now exceed 25 percent. I think importantly, what you'll see different in 25 going forward is the significant majority that will come from gross margin. And actually, if you look at where we are in the back half of the year, You can kind of think of Q3 as sort of a nice number directionally to think of 25 and carrying that through. So feel very good about line of sight to margin. As you noted, we're excited about critical care. It just gives us another positive catalyst to continue to deliver double-digit earnings growth. We are contemplating you know, headwinds from pillar two. Um, so still more to come on that. Um, it's premature to share specifics, but we do anticipate that's a headwind that we will absorb as part of that. And so all that collectively sets us up nicely, um, to your point. I think what I see externally where the street is, um, we, um, We would see that more in the low end of the range, and it would be 10%, and that is on a reported basis. FX at this point, there's a modest headwind into the year, but we've contemplated that. The other thing just, we did actually activate formally. We had talked about doing this, but partially de-risk transactional FX, but we are active with now cash flow hedges. It gives us another lever just to help solidify that performance.
spk11: Thank you very much.
spk02: Thank you. Our next question will come from Travis Steed with Bank of America. Please go ahead.
spk10: Hey, thanks for the question. I guess first two questions here. I wanted to focus on the guide change. And so I think China, biosciences, and pharma were the big reasons why we lowered the revenue guide this quarter. but it sounded like things were all on kind of track over the course of the quarter. So I was just curious, like what changed, what kind of surprised you when it happened? And, and yeah, I thought you didn't assume those markets to get better. So I was just kind of curious if there's, you know, are you changing your assumptions on, on when those things get better kind of going forward?
spk05: Hey Travis, this is Tom. Thanks for the question. Yeah. So as, as we mentioned before, we feel really good about the performance across the different businesses. Of course, you know, Mid-single-digit growth is a strong position, particularly given those dynamics that we see in those spaces. And even at flat, essentially, in BDB, that's differentiated versus what you're seeing competitively. I think what we're doing is just recognizing that we're not calling that those markets are going to turn in Q4, that we're going to continue to see some transitory dynamics in those spaces. We assume we're going to continue to compete and perform above market in those spaces, which we've been doing all year. And so that's what we've built in here. The same dynamic a bit in China. I'd say China's played out as we look at Q3 and into Q4. So MDS VBP playing out as we projected at the beginning of the year. No real change in that. I'd say in China the two things are the bioscience dynamic is certainly noted in China. You're seeing that reported across essentially every peer. where research spending is down in China, just given the economic macro environment. And so we're projecting that that would continue. And then also as we see anti-corruption in certain markets, one of the things that we see happen, and we saw that in Q3, is that distributors, when there's uncertainty, they'll pull back on their inventory until they better understand it. So they won't let their inventory levels come down. We saw that play out a bit in Q3. We don't expect Q3 China performance to repeat in Q4. We do think there was some one-time dynamics there. But nevertheless, particularly on the bioscience side, we expect that dynamic to continue through the year.
spk10: So that's really it, Travis. Okay. And then I guess the follow-up question is more to next year. What kind of revenue growth do you need to kind of get to that double-digit reported EPS growth? Before you were kind of talking about BD at 5.5% plus, is that still possible if some of these headwinds that you're seeing this year linger into next year? Just kind of doing the math this year, kind of XLR, it looks like the growth is close to 3.5% to 4%. I just wanted to see how to think about the next year revenue growth.
spk05: We're not going to give revenue guidance on this call, Travis. What I can do is maybe just share some color. Obviously, you're seeing us even in this environment, which we do expect, particularly the farm systems is probably easier to predict on recovery timing, just given you can't destock forever. So that's pretty clear. Some of the life science research spending dynamics, if you think about a lot of pure players in those spaces are projecting recoveries later into 25 or early into 25, I think we'll hold to see that come up as we will give the next quarter to be able to observe that a little bit more before we give guidance on that space. But across all those spaces, we feel good. And while we're facing those exact transitory market dynamics, of course, you see us continue to deliver mid-single-digit growth this year, this quarter, despite that environment. And I think we would expect particularly those to only improve as we go into FY25. Yeah.
spk06: Travis, just maybe one other, just two things. One, in my prepared remarks, I did say even in an environment where these dynamics continue, we're confident in delivering strong performance. We did that this quarter. This is still quality growth. I think just to put in context your Alaris comment, these transitory market dynamics, just those two areas alone are worth more than Alaris' benefit, right? You've got high single-digit growth businesses that are nearly $4 billion. Farm systems used to be consistent double-digit grower. We're still seeing that strong biologics performance. That's a significant headwind that we're absorbing. And to Tom's point, we're well outperforming those markets. And so we continue to perform well there. And as those recover, those market trends are definitely long-term, durable trends. We feel good about that. So just to add to concepts, what that means is The rest of our portfolio, like look at BDI across the board was really strong. MDS performing while specimen management performing. There is strong growth throughout our portfolio.
spk05: Maybe just a couple other bits of color is as we look at kind of our core business, the durable portfolio, those high-volume products, what we're seeing really strong volume growth and share gain in areas like MDS, PAS, kind of the consumable side of MMS. And we don't see a slowdown to that momentum, so we feel good on that. Certainly as we think about our strategy in healthcare automation and AI informatics, and now with Alaris back in our connected medication management portfolio, we're making really good progress. You heard us say we're already back Q3. We're back at the $100 million plus per quarter run rate that we had prior to Alaris going on ship hold. That's three to six months faster than we had expected going into the year. So we feel really good about that. And that momentum, we expect to continue basically from here on out. We're at that $100 million plus run rate going forward. And we've built a nice backlog of orders for Alaris. Remember, we started with zero backlog as we went into the year. We expect to exit this year at, again, a normalized backlog that we had pre-ship hold, at least at that level. Other areas of that connected medication or the connected care healthcare automation portfolio we're really excited about for next year as well of course that's our pharmacy automation strategy and our laboratory automation strategy there as well which continue to really resonate very well with customers products like pure wick you know that are targeting new care settings we've got not only the new pure wick female launch happening but we also have the mobile pure wick launch happening next year which we're really excited about And then, you know, in that chronic disease management space you heard us talk about in farm systems, double-digit biologics growth, we expect that to continue, you know, very strongly into 25. And then as destocking on the vaccine and the anti-COAG side starts to alleviate, right, that'll lift that whole boat. But we certainly don't expect any change in our underlying biologics momentum there. Biosciences, maybe I can just give a little bit more color on that one, too, is I would say that Look, we're at the point now where we're, you know, we've seen us be flat. The market's certainly been down. If you look at peers, I think almost every single peer is down in that space. We've been a bit of an outlier as being flat. We are seeing, if we look at quarter-on-quarter instrument purchases, we're seeing them up a bit sequentially, quarter-on-quarters. As we think about China in the future, there is discussion around China stimulus that's been widely discussed across the industry. I think the timing of that still needs a bit more clarity. Certainly sometime in 2025 it's expected, but again, as we get into guidance and more specifics there on the November call, I would expect there will probably be a bit more clarity on the timing of stimulus in China too. But from a bioscience perspective, I think our assumptions now and what we're seeing is it's certainly not getting worse and we're seeing some green shoots of some positivity in some areas. Other signs that we see are people that Even in the U.S., from an NIH perspective, folks that were maybe turned down initially for grants, we're seeing on the second submissions those grants starting to get approved and more POs then coming in for those instruments.
spk02: Thank you for the question. Thank you. Our next question will come from David Roman with Goldman Sachs. Please go ahead.
spk03: Thank you. Good morning, everyone. I wanted to ask one question on revenue, then one on capital allocation. But maybe starting on the revenue side, appreciate some of the perspective around Alaris and the contribution that you expect that to drive this year and then the sort of high-level perspective into next year. But how should we think about the growth drivers in that business beyond the bolus of performance you have from Alaris? I think you have a next-generation Pixis platform launching. You have some of the pharmacy automation products starting to pick up steam at maybe sort of contextualize the growth in that business beyond just the Alaris boost that we should see for the next five quarters.
spk05: Yeah, I'll start off, David, and thanks for the question. This is Tom, and then I'll turn it to Mike Garrison, who we have here with us in the room. Really, in MMS, I'd break it into kind of we've got three or four categories. One is the consumable space. Let's just start off with that. We see really strong growth in overall procedure volumes, driving strong growth consumables of IV sets, et cetera, that fit along with Alaris. As you mentioned, Alaris is not only back to its historical run rate, but we believe we took share in the quarter as we look at independent market data and as well as our own. So we feel really good about the position there. And then, of course, that starts pulling through other elements of our connected care portfolio, inclusive of interoperability, health site, and other solutions. We do have the next-gen PIXIS launching in the back half of next year, which we're excited about long-term, and Mike can comment on that. And then, of course, we have pharmacy automation, both in the U.S. and Europe, and the overall trends there around pharmacy shortages, labor costs, and big demands for productivity improvements, which we're ideally suited to address and are by far the market leader in each of those spaces when it comes to serving those customer needs. So maybe Mike, some more details on what we're seeing there.
spk07: Sure. So in addition to the NextGen PIXUS launch for next year, we've got about 10 additional releases across the Connected Med Management portfolio that will come out. What we've implemented is a cadence of innovation. So whether it's in a core pharmacy, the acquisition of MedKeeper, which is growing very nicely, some additions to that portfolio. Our med bank acquisition, which is going into long-term care settings and non-acute settings, these are some ways that that entire market, we're starting to expand and go along with the shift of care into less acute environments or less hospital-based environments. But still... the hospital needing to stay connected from a data perspective, from an understanding of their total inventory perspective. So I think we're really well positioned for the innovation there. You know, growth in that market is cyclical, so it goes sort of with the book of business as, you know, capital would happen. But we do have, you know, a very strong service model there, and also we offer a very flexible set of financing terms around, you know, capital operating leases. So we're we have a little bit less cyclical nature than maybe some of the competitors that show a little bit more volatility in that area. Pharmacy Automation, between Parada and Roa and our RapidRx acquisition, we sort of built a fairly significant, I think it's the largest pharmacy automation robotics company in the world. And the customer interest in that is very, very strong. It's been It was very high double-digit growth last year. A bit of change in tax incentives in Europe that we've commented on before that we've been watching caused a little bit of a slowdown in Europe here this year, but we've also started to see the order book pick up sequentially quarter to quarter both in the U.S. and in Europe. So we feel good about that. The fundamentals there are very, very strong. around labor efficiency, around safety, around the use of both artificial intelligence and robotics to provide additional efficiencies in healthcare, in the retail sector, in the long-term care sector, and as hospitals start to reinvent their pharmacy. So I think in both areas, they're... There are areas that augment and underscore. While Alaris is obviously coming back very strong, it's just the one-year anniversary on this call last year is where we announced that we had gotten clearance, and that couldn't be going any better than the expectations than what it's going right now. But the fundamentals across that connected net management strategy are very strong and continue to resonate with the customers. Thanks for the question, Dave.
spk03: Sorry. Can I ask a follow-up here? Sorry about that. Can you maybe just on the P&L comments for next year, one of the things that would be helpful to put together here is as you think about your growth rate, a lot of what you're describing here are macro factors and sort of end market dynamics, which logically flow through to you given your high market share ratio. But what can you do to differentially position BD from a performance perspective, especially given what looks to be like flattish operating expenses? So what are the sort of underlying assumptions around discretionary expense spending that are in that kind of 10% type earnings sort of floor that you've put out there for next year? And how should we think about the rest of the P&L below gross margin?
spk06: Yeah, thanks, David. It's Chris. Yeah, I think the The exciting pivot is, and think of Q3 as kind of an indicator of what 25 would be, full year 25, based on the comments I shared. So we talked about exceeding now 25% operating margin in FY25. So it implies north of 100 basis points of improvement. The significant majority of that's coming from gross margin. So you're seeing all the benefit of BD excellence flow through. which, to your point, creates an opportunity for us to kind of reshape below gross margin. The intent is to, as part of that 10% starting point, is to drive more investment in R&D and more investment in business building, growth, digital capabilities, commercial go-to-market, et cetera. Our principle will always be to sort of get natural leverage from kind of our G&A space, and we've also talked about that we're advancing a global business services model there as well. So that'll be a minor catalyst in 25. The leverage will be there, but it's also a go-forward catalyst. So that's how we think of the formula, more value out of gross margin. To your point, that lends itself nicely to the natural flow through on sales and then reinvestment to support growth and leverage kind of your core infrastructure base.
spk05: David, maybe just one other thing to add to Chris's good points there. And you heard us talk about this in the prepared remarks. BD Excellence, which we really launched last year, we couldn't be more pleased with the momentum that we're getting there. So as you heard, we're up to over 500 Kaizen events this year. Of course, BD Excellence is based on Shingijutsu Kaizen, which is the idea of the pursuit of excellence through continuous improvement. and providing our organization with the tools, the systems, the capabilities to do that as part of their everyday work, and then a series of major events like the 500-plus Kaizen that we mentioned where we immerse in that as an organization in specific areas. And we're really seeing that come through in reduced waste and improved line productivity. You're seeing that flow through also in our cash flow performance with exceptionally strong year-to-date as we're able to actually operate the company on a continued basis with less capex, just given the productivity improvements that we're seeing from that. At the same time, of course, Project Recode, which we've folded up under our excellence initiative now, which is the consolidation of over 20% of our manufacturing plants, that starts kicking in in 2025 as well, which at a scale level. We got a bit of it in 2024, but we really see that ramping up in 2025. which further flywheels that margin. And then you also heard me mention that, of course, as we now are consolidating plants, one of the things that happens is you end up with fewer, larger plants. And as you're having fewer, even larger plants, we're taking advantage of investing behind our smart factory strategy in those as well. We think, as we think about technology, around AI, predictive analytics, companion robotics, et cetera, there's no company in med tech that's better positioned to be able to capitalize and get value out of that than BDS, given the scale of production that we have. And so we've been digitizing. We have now quite a few areas that are fully paperless, so we're digitizing all the data coming off of our lines, which has been allowing us to now start putting predictive analytics against those. As I mentioned, we've done that. and with a focus in our top 30 plants, where we're seeing accelerated performance from that. And so we're really combining that excellence Kaizen strategy with that smart factory strategy as well, which is going to be continuing to drive that GP strategy of ours, not just in 25, but that's going to be a key theme as we look forward to investor day in Q2 of 25. Expect to hear more about that and margin focus over the next phase post-BD 2025.
spk03: Perfect. Thanks for all the detail.
spk02: Thank you. Our next question will come from Patrick Wood with Morgan Stanley.
spk01: Please go ahead. Amazing. Thank you. I'll keep it to one just given the timing. And I appreciate you guys have covered this, but I definitely want to dig into China a little bit more because you've had quite a few companies come out across a range of different industries and have a reasonable tough time in the market. So I guess, you know, obviously the VPP dynamics, we know there's biosciences on that side, as you said, lots of companies flagging on that. I guess my question is like, what are you hearing from some of the customers? Have you seen any, you know, MDS volume changes outside of stocking? I'm just trying to dig into underlying in the market. Is there anything that you feel has structurally changed or these genuinely transitory dynamics? Awesome. Thanks.
spk05: Yeah, thanks, Patrick, for the question. So we've got a great team in China. We still view it as a large market with significant unmet needs, and we continue to serve that market opportunity across the breadth of our portfolio. We continue to invest in advancing health care practices and access in China. As you mentioned, we see VBP has been playing out in MDS as expected. Just as a note there, our volumes – in MDS China are actually up very nicely. So as we look at even the categories where we're seeing VBP, we see price pressure, but we're seeing strong volume growth in those categories in MDS that are complementing that. So our plants are very busy in China because of higher volumes in those spaces. The lower research funding, as you mentioned, that's been broadly commented on across the board, and we do think there will be an end in sight to that as the market ultimately recovers in research investment. We don't see that as a long-term, that China will be de-investing in research over the long-term. We expect that that will recover, and that's more of a transitory dynamic. And then some of these other factors, they are related. There are economic challenges at a macro level happening in China where I think that combines with the anti-corruption and some of the actions that distributors take when there's uncertainty, and they'll pause to pull inventories down a bit. Those dynamics will evolve as just clarity in the economy and in those processes end up coming into light, which, again, we would expect to be more transitory in nature. So we continue to invest in the market. We still see it as a long-term attractive space, an important market for us. And we do have areas of the business that are continuing to do really well in China. you know, beyond some of those transitory spaces that we see. So maybe that's a high-level overview of what we see and as we look forward.
spk02: Thank you. Our next question will come from Larry Beagleson with Wells Fargo. Please go ahead.
spk12: Thanks for taking the question. Two quick ones for me, and I'll ask them both up front. On Alaris, the $350 million in fiscal 24 sales implies about a $600 million annual run rate. using the implied q4 sales about 150 million if i'm doing the math right is that the right way to think about fiscal 25 alera sales about 600 million just lastly chris the last two years you know growth and margins have been very back-end weighted and obviously it's uh you know caused a lot of investor anxiety is there any way or do you expect you know fiscal 25 to look different from a cadence standpoint thank you
spk06: Hey, Larry, thanks for the question. On the second question, but we're still in our planning stance, and we need to continue to monitor market dynamics, all these factors. I think the one thing is for sure that the margin rhythm is going to be much more balanced throughout the year. I mean, last year we had one, a strategic choice on inventory takedown that was all front-end loaded, right? That was a predominant driver. The execution this year played out exactly as we talked about. As a matter of fact, the past two years, I mean, we've executed against everything we said from a margin standpoint the past two years. So that's a big change. FX also was another big front-end item that we don't see that same degree. So I think naturally we're going to end up with a much more balanced phasing, and we'll share more when we provide our official guide in November. But I don't think that's an item that should be top of the list.
spk05: The other big thing that we had this year was, of course, Alaris was a ramp in the second half, given that we just launched the very end of Q4. So you're going to have much more ratable performance in Alaris Q1 through Q4 of next year as well. So we would expect much more smooth, which we're very much looking forward to being back at that as we look forward. Just on Alaris, we're not certainly going to give guidance by any product line. for 24, you know, we're not at that point. I think that's, I wouldn't take the run rate necessarily from that and take it through 25, but back to my commentary, we're back at at least the $100 million historical run rate. It cannot be an opportunity to do better than that as we go into 25 for sure, and we'll give more color on that on the November call.
spk02: Thanks for the question, Larry. Thank you. Our next question will come from Rick Wise with Stifel. Please go ahead.
spk09: Good morning to you both. Maybe, you know, back to the fiscal 25 guide, I just want to make sure I'm thinking about it correctly. It's been talked about several times, but I just want to hear your language one more time. That 25 EPS growth commentary and the operating margin for over 25 percent, It clearly includes critical care, if I understand correctly. But to make sure, doesn't that sort of imply that everything else on a total basis is not going to grow as fast in fiscal 25 as it has in 24? And if I'm thinking about it remotely correctly, maybe I'm too deep into earnings season, I'm not thinking about it clearly. Does that imply you're being conservative or careful in this initial commentary? Just want to make sure we're thinking about it correctly.
spk06: Yeah, thanks for the question, Rick. Yeah, I mean, look, 25 is, you know, we think there's a lot to be excited about. Critical care is part of it, to your point. That's not a substantive contributor, just to be clear, to margin. the margin we're generating is fully on the BD base business. So we're well positioned there to now exceed the 25% operating margin goal. Again, importantly, the mix shifts significantly in terms of where margin improvement's coming from. It's coming from gross margin. Look, I think external estimates now are sitting actually just under 9%, right? We see that to the low end of our range. 10% reported is a great starting point. above where we are externally. And like we do every year is, you know, our goal is to continue to create opportunity to, you know, exceed that as we move throughout the year. So it's early. We just knew it was important to kind of share context. And we've been able to do this, by the way, this year, like on the top line, the questions deliver strong performance despite these market dynamics. So we'll continue to monitor those, but feel really good about how we're positioned moving into 2025.
spk02: Thank you. Our last question will come from Vijay Kumar with Evercore ISI. Please go ahead.
spk04: Good morning, Vijay. Hi, Tom. Good morning. And thanks for taking my question. Just one for me. Some of these issues we've mentioned, right, I think on the pharma side, some of your tools peers are talking about a bottoming on destocking. So just maybe from your perspective, like how are you seeing this destocking impact playing out? And when I look at those moving transitory sort of issues, right, China, bioscience, and pharma desocking, it looks like bioscience should certainly, headwinds should continue. I think most of the tools companies have been cautious about first half of 2025. How should we think about China? Is that, you know, should that get back to growth? Or is this VBP headwinds, could that last for a while? Thank you.
spk05: Yeah, it's a great question, Vijay. So let me start with... with maybe the bioscience, then we'll touch base on farm systems, and then we'll touch base on China. So on farm systems or on biosciences, I think, as you mentioned, it's been widely commented on across the tools companies. Again, we see ourselves outperforming the market this year. That's pretty straightforward. There's very few that are flat like we are in that space. And you heard us share in our prepared remarks some of the really exciting innovations that we see driving that. And not only are they driving that in this environment, as the market ultimately recovers, those same technologies around Facts Discover and the continued cadence of new innovations, not only with sorters, but next year launching our first analyzer in that segment, continued innovation with dyes and other technologies that are allowing more and more multiplexing in that category, are all just going to benefit us as that market picks up and people can begin to buy products. those systems in larger volumes. So we feel good about that. And it really comes down to the timing of the recovery, which, as you mentioned, we're assuming is going to continue to be tight through the balance of this year, which is how we've updated our guidance. And then we would expect at some point in 25, again, let's watch Q4, we'll update 25 guidance in November on that. I think we'll benefit from that timing to get clarity, as will the whole market. On farm systems, Look, we continue to see that strong demand on biologics underlying, which is also differentiated versus peers, double-digit growth again in biologics within that space. We see no slowdown there. Obviously, GLP-1s are a big component of that, and our position that we have on some of the large current market molecules is benefiting us. We also shared we've got a position with a number of new GLP-1s that are moving through the pipeline towards launch, are already having our device specced in, And then we also see we have over 40 signed agreements for biosimilar GLP-1s, the early molecules of GLP-1s that we start seeing launch as early as the next 12 months there, and that will play out over the longer term as those play out. But we really like our position there. Of course, the destocking that's happening that, as you mentioned, everyone's seeing across the sector has really been focused on the the anticoagulant and vaccine segments for us, and I think broadly for others, and that can't continue forever. So we would expect that as we move into FY25, and again, we'll give more specifics on timing as we go into guidance, but certainly as we go to the back half of that, we would expect that to start returning to more normalized growth. On China, look, we have China. We don't have, as we think about The numbers that we've shared around double-digit EPS growth for next year, we don't have a major assumption of China returning back to high growth next year in that. We've taken a conservative position in our internal modeling on that, and we'll continue to watch that market play out as we go forward, but we've taken a conservative stance in our own internal modeling there as we look at and build our plan for the 10% EPS growth number. We still see, and again, that'll be related to the biopharma research spending that's happening in China will be something we'll continue to watch closely and how that overall macro market recovers. We'll continue to watch the China macroeconomic environment overall. We do see MDS. We don't see a change in terms of the timing of VBP starting to decline. We're seeing that play out this year as we expected. We don't expect that to be as significant next year for MDS, just given the scale that happened this year. I think we've said that in the past. We don't expect that to change, i.e., we see less pressure in MDS next year in China from VBP, but more to come on China as we give guidance. But hopefully that just gives some color on China and what we've built into some of our preliminary thinking as we share the number on EPS for next year.
spk02: Thank you. That concludes today's question and answer session. At this time, I'd like to turn the floor back over to Tom Pollin for any additional or closing remarks.
spk05: Okay. Thank you, Operator, and thank you to all of our investors for joining us on our call today. We are pleased to deliver strong above-market broad-based growth and are well-positioned to achieve our increased FY24 earnings guidance. As we look ahead to FY25, we are excited by multiple growth opportunities across our portfolio momentum in BD excellence, driving continued strength in gross margins and cash flow, and welcoming the critical care team to BD. We look forward to connecting with everyone again in November, and thank you for your continued support of BD. Thank you, Operator.
spk02: Thank you. This does conclude this audio webcast. On behalf of BD, thank you for joining today. Please disconnect your lines at this time and have a wonderful day.
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