Becton, Dickinson and Company Q1 2024 Earnings Call Transcript

Presentation

[Operator]

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 +1 402-220-1347 for international calls. [Operator Instructions]

I will now turn the call over to Greg Rodetis, Senior Vice President, Treasurer and Head of Investor Relations.

[Greg Rodetis, Senior Vice President, Treasurer and Head of Investor Relations at Becton, Dickinson and Company]

Good morning, and welcome to BD's earnings call. I'm Greg Rodetis, 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 posted 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 Polen, BD's Chairman, Chief Executive Officer and President; and Chris DelOrefice, Executive Vice President and Chief Financial Officer. Tom will provide highlights of our performance and the continued execution of our BD 2025 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 Byrd, President of the Interventional segment.

Before we get started, I want to remind you that we will 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 the relevant period. Revenue percentage changes are on an FX-neutral basis unless otherwise noted. When we refer to any given period, we are referring to the fiscal period unless we specifically noted as a calendar period. I would also call your attention to the 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.

[Tom Polen, Chairman, Chief Executive Officer and President at Becton, Dickinson and Company]

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 FY '24 guidance.

Turning to our BD 2025 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 in new settings. In our PureWick 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 pilots for PureWick Female to generate evidence to support future at-home reimbursement. Our PureWick 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 in a more dignified way for women to manage their urinary incontinence.

In Q1, we received 510(k) 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 the 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 Elience point of care molecular platform. In our first assay, a rapid CT/GC test for in-office testing and treatment. BD Elience 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 COR 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 PureWick and BD MiniDraw are on track to launch later this fiscal year. And we anticipate our first 510(k) submission for the BD Elience 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 as 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 FY '25. 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 FY '23, we held 18 week-long Kaizen events. And in Q1 FY '24 alone, we executed as many, a trajectory which will continue through the rest of FY '24. 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 FY '24 goals, contributing to our plan for 25% operating margins in FY '25 and also now providing visibility for continued margin expansion beyond FY '25.

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 FY '24 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 cell sampling model is 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.

[Chris DelOrefice, Executive Vice President and Chief Financial Officer at Becton, Dickinson and Company]

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% that 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 Pyxis 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.

BD 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 COR 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 FACSDiscover S8 Cell Sorter and double-digit growth in Clinical Reagents as we continue to leverage our growing installed base of FACSLyric and FACSDuet 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 Instruments divestiture. BDI organic growth was led by Surgery and UCC. In Surgery, double-digit organic growth was led by continued market adoption of our leading Phasix resorbable hernia products in our advanced repair and reconstruction portfolio and strong demand for our ChloraPrep infection prevention solution.

High-single-digit growth in urology was led by strong double-digit growth in our PureWick 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 Rotarex 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 BD Trek 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 FY '24. As we execute against our BD 2025 Strategy, we also remain well positioned to achieve our long-term cash conversion target of around 90%. Beyond our investments in 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 FY '24 organic revenue growth guidance and raised our adjusted EPS guidance, increasing the midpoint by $0.09. 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 year 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 FY '24 revenue guide, which at the midpoint is above our 5.5% plus target and results in a three year CAGR 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?

Questions and Answers

[Operator]

[Operator Instructions] Thank you. And our first question will come from Rick Wise with Stifel. Please go ahead. Your line is open.

[Chris DelOrefice, Executive Vice President and Chief Financial Officer at Becton, Dickinson and Company]

Good morning, Rick.

[Frederick Wise, Analyst at Stifel Nicolaus & Co., Inc.]

Hi, Chris. You used the word confidence repeatedly, and just picking up on that, heading into the quarter, we know you were very clear about things like currency and the peso divestitures, the flu benefit, if you will, time shift, but 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?

[Tom Polen, Chairman, Chief Executive Officer and President at Becton, Dickinson and Company]

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 recognize we're 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 and we saw VOBP 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 as we also think about the back part of the year, to your question, something else we are looking at as we started and gave guidance to begin '24 was, of course, Alaris. We're really pleased to have Alaris back with new improvements. Our new 510(k). 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 backed it proactively upgrading and remediating our base and we wanted to get feedback and engagement and it's been quite positive. And I think that 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're seeing now $200 million as the floor for the year.

In the other aspects, as you think about the growth drivers that we've been talking about and we often call out six specific platforms, we saw a really great growth in PureWick this quarter. Pharm Systems, we have signaled very clearly the anticoagulant topic that was going to create a slower compare or 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 FACSDiscover, 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. So 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?

[Chris DelOrefice, Executive Vice President and Chief Financial Officer at Becton, Dickinson and Company]

I mean, just, sometimes it's easier just like bigger picture. I'm sure you're looking at our balance to go plans which we are very confident into Tom's point. We've expressed confidence in Alaris and 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.

So we see really good momentum there. So when you think of sort of Alaris adjusted, you're at six and we cycle over the China compare in Q4 which have 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 in biologics are well positioned and feel good about the rest of the year.

[Tom Polen, Chairman, Chief Executive Officer and President at Becton, Dickinson and Company]

Thanks for your question, Rick.

[Frederick Wise, Analyst at Stifel Nicolaus & Co., Inc.]

Yeah. And just as a follow-up, I'd ask about the EPS guide. The $0.07, Chris, I think I'm calculating correctly, you beat operationally EPS. You've raised $0.09 at the midpoint for the full year. Talk about your confidence in driving that midpoint EPS raise. 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.

[Chris DelOrefice, Executive Vice President and Chief Financial Officer at Becton, Dickinson and Company]

Yeah. Thanks, Rick. Yeah, we were definitely pleased with the margin progression and operating income delivery Q1 and it was strong and 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 of things. Whenever you start the year, you want to ask -- you want to see a couple of things. One, to recall 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 have outsized FX in the quarter. All those played out as expected and we have 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 nearly -- in Q1, we said it was almost 2 times what we're calling for the full year and 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.

[Frederick Wise, Analyst at Stifel Nicolaus & Co., Inc.]

Thanks, Chris.

[Operator]

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

[Travis Steed, Analyst at Bank of America Merril Lynch]

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

[Tom Polen, Chairman, Chief Executive Officer and President at Becton, Dickinson and Company]

Hey, Travis, this is Tom. Thanks for the question. Good morning. So on Pharm 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.

[Michael Garrison, Executive Vice President and President, Medical Segment at Becton, Dickinson and Company]

Just I'd also commented in addition to the double-digit demand in biologics, we've been pretty successful in terms of entering the development agreements for future pipeline of molecules in this space, our innovation portfolio around Hypak and Neopak, and also the wearables portfolio with Libertas and Evolve that continues to progress really well and additional developments -- development agreement in this area are occurring. We've described the Pharm Systems business as a high-single-digit grower going back to Investor Day and we continue to see that in '24. It's our expectation, despite any early part of the year headwinds.

[Travis Steed, Analyst at Bank of America Merril Lynch]

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

[Chris DelOrefice, Executive Vice President and Chief Financial Officer at Becton, Dickinson and Company]

Yeah. Thanks, Travis. So first of all, in the quarter, it wasn't one thing. I'd just say, execution is kind of the theme here, organization is hyper focused consistent with what we've done is predominantly our cost improvement programs. We had some mix 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. We have 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 2 times what we call 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 moderating 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.

[Travis Steed, Analyst at Bank of America Merril Lynch]

Super helpful. Thanks, Chris.

[Operator]

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

[Vijay Kumar, Analyst at Evercore ISI]

Good morning, Tom, and thanks for taking my question. My first one, Tom, if I just look at Q1 organic 2.4, a lot of questions on, look utilization is strong. Why is this optically 2.4 well below medtech sort of trends 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 bridge between the 2.4 and what it should have been without some of these underlying one-time items?

[Tom Polen, Chairman, Chief Executive Officer and President at Becton, Dickinson and Company]

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, etc., 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, double-digit growth, which is getting the benefit of procedure volume. We'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?

[Chris DelOrefice, Executive Vice President and Chief Financial Officer at Becton, Dickinson and Company]

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, etc. We're actually very pleased with our progress there. And as a matter of fact, we declared the $200 million 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, gives you almost basically a full point of growth tailwind that will help, which so when you look at the back half, think of that or 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.

[Tom Polen, Chairman, Chief Executive Officer and President at Becton, Dickinson and Company]

Yeah. I will 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 that 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.

[Michael Garrison, Executive Vice President and President, Medical Segment at Becton, Dickinson and Company]

And just to remind that, last year, we had the Certificate of Medical Necessity, how we were shipping, we're not doing that now. So it becomes more 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 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, yeah, 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, 750 live sites, order of magnitude more than anyone else. So it's almost being recognized a little differently that way. So that's good. And we have sort of exceeded -- we set certain expectations, we've exceeded those relative to return to market in terms of upgrading the fleet in 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.

[Vijay Kumar, Analyst at Evercore ISI]

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

[Chris DelOrefice, Executive Vice President and Chief Financial Officer at Becton, Dickinson and Company]

Yeah. Again, 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.

[Vijay Kumar, Analyst at Evercore ISI]

Fantastic. Thanks, guys.

[Tom Polen, Chairman, Chief Executive Officer and President at Becton, Dickinson and Company]

Thanks, Vijay, for the question.

[Operator]

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

[Larry Biegelsen, Analyst at Wells Fargo & Company]

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 Pharm Systems? You just said you expect Pharm Systems to grow high-single-digits in 2024. So what are the expectations for MMS and MDS this year? Last year, Medical was 9%, was above the corporate average.

[Michael Garrison, Executive Vice President and President, Medical Segment at Becton, Dickinson and Company]

Yeah. So for -- I'll talk first about MDS. The business is actually showing really good momentum underlying, which is masked a little bit by the impact of VOBP in China. So that VOBP is a headwind for the year. It's playing out as we expected and built into our plan. But we're seeing strong momentum in the U.S., strong momentum in catheters and somewhat driven by some of the new recent product launches that we've had. Site-Rite 9, Nexiva, NearPort, PIVO Pro, these advancements are working out in the field and being very attractive to customers as we advance the One-Stick Hospital Stay vision. We're also watching injection systems and hypodermic. 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 MMS perspective, the way that I'm sort of seeing it and thinking about it as 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 -- very soon our upcoming market release of the ex-U.S. 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 MedBank 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 Rowa and Parata. As we noted previously and in the presentation, this quarter, last year was actually Parata's strong Q4 finish for their fiscal year. So 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.

[Larry Biegelsen, Analyst at Wells Fargo & Company]

That's helpful. And Tom, China was down 5% in this quarter in Q1. Talk about what you're seeing there and you're 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.

[Tom Polen, Chairman, Chief Executive Officer and President at Becton, Dickinson and Company]

Yeah. Thanks, Larry. That expectation remains unchanged. China played out essentially exactly as we expected in the quarter, 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 it's -- 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, high -- 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'll -- 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 compare in China as we go over that. Thanks for the question.

[Larry Biegelsen, Analyst at Wells Fargo & Company]

Thank you.

[Operator]

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

[Robbie Marcus, Analyst at J.P. Morgan]

Great. Thanks for taking the question. I wanted to ask -- I know we're in fiscal '24 here, but wanted to look out to '25. And based on operating margin guidance, it implies about 100 basis points expansion next year to get to your long range plan target. 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?

[Chris DelOrefice, Executive Vice President and Chief Financial Officer at Becton, Dickinson and Company]

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. We actually already completed our 20% goal of SKU 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 reduced 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 and scales, we'll get margin leverage there.

So all those things coupled with the continued strong growth profile of being able to consistently do 55 plus, 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.

[Tom Polen, Chairman, Chief Executive Officer and President at Becton, Dickinson and Company]

And maybe, Robbie -- and good morning. Just to add to Chris' good comments. I think another way just to think about it is, as we've launched BD 2025 in '22, it was a four year roadmap ahead. 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 FY '24, 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 are 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're building capabilities. Second was optimize our portfolio for growth spinning back up. Obviously, we sold the V. Mueller. We drove tuck-in M&A that's driving accretive growth, we rebalanced our R&D into high growth spaces. And we've built our portfolio 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. And it's our operating model -- 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, if you think about the Kaizens 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, those we also indicated, it's giving us visibility beyond '25 to continue margin progression as we look ahead.

So thanks for the question, Robbie.

[Robbie Marcus, Analyst at J.P. Morgan]

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.

[Tom Polen, Chairman, Chief Executive Officer and President at Becton, Dickinson and Company]

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

[Robbie Marcus, Analyst at J.P. Morgan]

Great. Thank you.

[Tom Polen, Chairman, Chief Executive Officer and President at Becton, Dickinson and Company]

Thanks.

[Operator]

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

[Patrick A. Wood, Analyst at Morgan Stanley]

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

[Michael Garrison, Executive Vice President and President, Medical Segment at Becton, Dickinson and Company]

Yeah. I'll take that. So for Pharmacy Automation, we feel really good on that. Like I mentioned, the tough compare, because they were incentivized, Parata 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. We continued 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, it's been -- yeah, 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.

[Patrick A. Wood, Analyst at Morgan Stanley]

Brilliant. And then maybe quickly one either for you, Tom or Dave. Elience, 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? Just curious, how you're going to fit into that market? Thanks.

[Tom Polen, Chairman, Chief Executive Officer and President at Becton, Dickinson and Company]

I'll turn that to Dave. Thanks for the question, Patrick.

[Dave Hickey, Executive Vice President and President, Life Sciences at Becton, Dickinson and Company]

Thanks, Patrick, and for picking up on Elience. Just take a step back. If you look at the molecular dynamics overall, we have said that this is one of the sort of six growth drivers for BD. So we continue -- and if you look at the divergence of the market, there is real thesis playing out in terms of the way customer evolution will happen. So you think about the centralization of high volume molecular cervical cancer testing, we satisfy that with BD COR. You think about BD MAX in the acute setting. And we're seeing good, as you heard Tom say in the prepared remarks, 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, Elience will be our entry there in this sort of high-single-digit market.

If I think about it specifically on Elience, the way to think about it is, what is different about it? Our goal here will be that we would anticipate it to be CLIA-waived, giving critical results within less than 15 minutes, but can be used in a wide variety of settings. What is the unmet need that it will actually address. And deliberately, we've actually selected CT/GC 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.

And I think about it now, if you're one of those unfortunate patients and you're in the clinic, you could get that result diagnosed and a potential treatment administered while you're in a clinic in a decentralized setting. So deliberately, we think CT/GC 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, focused on respiratory assays, other STI assays, vaginitis, etc.

[Tom Polen, Chairman, Chief Executive Officer and President at Becton, Dickinson and Company]

Yeah. That test and treat concept with 15 minutes or less time to resolve the core component.

[Patrick A. Wood, Analyst at Morgan Stanley]

Love it. Thank you.

[Tom Polen, Chairman, Chief Executive Officer and President at Becton, Dickinson and Company]

Thank you.

[Operator]

We'll take our next question from Patrick [Phonetic] Miksic with Barclays. Please go ahead. Your line is open.

[Tom Polen, Chairman, Chief Executive Officer and President at Becton, Dickinson and Company]

Good morning, Patrick. Sorry, Matthew.

[Matthew Miksic, Analyst at Barclays]

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

[Chris DelOrefice, Executive Vice President and Chief Financial Officer at Becton, Dickinson and Company]

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 and 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. 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 I think we're happy with the operational performance in passing through both the $0.07 operational beat and the $0.02 of FX.

[Matthew Miksic, Analyst at Barclays]

And maybe Mike for Pharm Systems?

[Michael Garrison, Executive Vice President and President, Medical Segment at Becton, Dickinson and Company]

Yeah. For Pharm Systems, the capacity that's freed-up for anti-coagulants, 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 our 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 -- there has 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 anticoagulant dynamic.

[Tom Polen, Chairman, Chief Executive Officer and President at Becton, Dickinson and Company]

Thanks for the question, Matt.

[Matthew Miksic, Analyst at Barclays]

That's 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 threw that, you made nice progress on leverage. Could you talk a little bit about what that looks like for the rest of the year, drove M&A outlook and the kinds of things, maybe the size of things that you might be -- we might expect in the next, six, 12, 18 months? Thanks.

[Chris DelOrefice, Executive Vice President and Chief Financial Officer at Becton, Dickinson and Company]

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. There was really strong cash flow, strong double-digits, 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 a simplification efforts on BD Excellence that we're driving through our plans. 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. So 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?

[Tom Polen, Chairman, Chief Executive Officer and President at Becton, Dickinson and Company]

Extremely well said. Remains an active part of our growth strategy and I think as we've shared in the past, 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, active pipeline 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 is 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.

[Operator]

At this time, I'll return the call to Tom for any closing comments.

[Tom Polen, Chairman, Chief Executive Officer and President at Becton, Dickinson and Company]

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 BD 2025 goals and increased outlook for FY '24 on our next call in May. Thank you very much, and have a great rest of the day.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Greg Rodetis, Senior Vice President, Treasurer and Head of Investor Relations
• Tom Polen, Chairman, Chief Executive Officer and President
• Chris DelOrefice, Executive Vice President and Chief Financial Officer
• Michael Garrison, Executive Vice President and President, Medical Segment
• Dave Hickey, Executive Vice President and President, Life Sciences

Analysts

• Frederick Wise, Stifel Nicolaus & Co., Inc.
• Travis Steed, Bank of America Merril Lynch
• Vijay Kumar, Evercore ISI
• Larry Biegelsen, Wells Fargo & Company
• Robbie Marcus, J.P. Morgan
• Patrick A. Wood, Morgan Stanley
• Matthew Miksic, Barclays PLC