Hello, and welcome to BD's Fourth Quarter and Full Year Fiscal 2023 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 and area code 1-40220-1347 for International. 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.

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 fourth quarter and full year of fiscal 2023. 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.bt.com. Leading today's call are Tom Polen, BD's Chairman, Chief Executive Officer and President; and Crystal 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 Q4 and FY '23 financial performance and our 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 basis of presentation slide, which defines terms such as base revenues and the non-GAAP reconciliations included in the appendix. With that, I am very pleased to turn it over to Tom.

Thanks, Greg. Good morning, everyone, and thank you for joining us. Earlier today, we reported our results for the fourth quarter and full year of FY '23, a year characterized by strong differentiated performance driven by our BD 2025 strategy in action, impactful new innovations and our diversified business portfolio designed to help our customers navigate today's challenging environment. The diversification of our portfolio offers both durability through our leading positions and consistent demand for products essential to everyday patient care and strong growth through a purposeful shift into higher growth markets, anchored against three irreversible forces we see shaping health care, connected care, new care settings and chronic disease. Additionally, we have built capabilities and fostered a culture of operational excellence, where we make disciplined and strategic capital allocation choices, proactively address macro headwinds through our simplification programs and execute with speed and agility, all of which have and continue to play a key role in delivering strong consistent performance. This unique profile can be seen in both our current and 2-year performance and where our purposeful shift into higher growth markets has enabled us to drive the plus side of our targeted 5.5% plus revenue growth profile. In FY '23, we delivered 7% base revenue growth with base organic growth of 5.8%. Our team drove significant margin expansion and delivered $12.21 in adjusted EPS, which represents double-digit currency-neutral growth of 11%. Over the past 2 years, we have made excellent progress toward our BD 2025 financial targets, delivering a 7% base organic revenue CAGR and 390 basis points of operating margin expansion. We are now over 70% of the wave 2 and tracking ahead of our 25% adjusted operating margin target by FY '25. As a result, on the bottom line, we delivered an implied base EPS CAGR…

Thanks, Tom. We delivered strong, consistent results this fiscal year, which reflect the diversity of our portfolio and our BD 2025 strategy in action. Beginning with our revenue performance. We delivered $5.1 billion in revenue in Q4, exceeding our expectations with base organic growth of 7% and total base growth of 6.3%, which reflects the impact from the surgical instrumentation divestiture. For the full fiscal year, we delivered $19.4 billion in revenue with base organic revenue growth of 5.8% that is 100 basis points higher than our initial guidance. Total base revenue growth was 7%, driven by strong performance in BD Medical and BD Interventional. Base revenue growth was strong regionally as well with high single-digit growth in EMEA and Latin America and mid-single-digit growth in the U.S. and Greater Asia despite low single-digit growth in China. Our revenue performance continues to be supported by our durable core portfolio and an increasing contribution from higher-growth spaces that are driving the plus side of our targeted 5.5% plus revenue growth profile. We also continue to benefit from the organic contribution from tuck-in acquisitions we anniversaried, which was about 40 basis points for the full year. Over a 2-year period, we drove a strong base organic revenue CAGR of about 7%, which is well above our long-term target. Let me now provide some high-level insight into each segment's performance in the quarter. Further detail can be found in today's earnings announcement and presentation. BD Medical revenue totaled $2.6 billion in the fourth quarter, growing 6.2% with strong performance in Medication Management Solutions and Pharmaceutical Systems. BD Medical performance reflects a decline in medication delivery systems resulting from softness in China driven by market dynamics, including some impacts from volume-based procurement. This was partially offset by strong performance in catheter solutions in North…

[Operator Instructions] And our first question comes from Robbie Marcus with JPMorgan.

Okay. good morning. Thanks for taking the questions. I wanted to start on how you think about reported EPS growth because the range of $12.70 to $13 is just slightly higher than the original guidance for fiscal '20 of 12 [ph] I believe, 1,250 to 12.65. So just thinking about how you're managing reported EPS versus underlying organic constant currency EPS and how we should think about your ability to deliver the double-digit reported EPS growth going forward? Thanks.

Robbie, thanks for the question. First of all, our guide range obviously reflects - we basically try and match the top line. So if you look at the top line, you've got about 1 point on the range in total. I mean you dollarize that, take the dollar of sales take margin drop-through on that. It basically mirrors kind of the number of earnings that you have on either side. So there's symmetry between the sales, the drop through at some margin level that's between, call it, GP and EPS. So it contemplates both upside on sales and reinvesting back in the business or vice versa on the downside, basically the opposite. So I mean that's the logic for the range. I think it's pretty consistent with - it modifies year-over-year depending on how you actually set those points and what each point is worth I think more importantly, look, our commitments, we can't control currency, first of all. So we always think of things on an FXN basis. If you look at our FY '24 guide this year, I think there's a lot of strong things. The underlying performance of the business is really strong. Let's start with the top line. So if you remember, last quarter, we talked about delivering 6% organic growth. That was excluding the impact of the COVID-only testing, which we expect to step down by about 25 basis points. That would establish a midpoint range of, call it, 5.75%, which is very strong. It's above our 5.5% plus average. Our 2-year average heading into this year, plus this year at the midpoint would imply a CAGR of just under 7% organic growth. When you think about from the time that we mentioned kind of the direction we were heading 3 months ago to where…

Yes. Very helpful. And you talked a lot about operating margins. It came in below - the Street in fourth quarter and just below the fiscal '23 guide. And first quarter is coming in pretty far substantially sequentially down. How do we think about your confidence levels for being able to achieve the stated operating margin guidance in the back half of the year? Thanks a lot.

Yes. Great question. So first of all, 23, I mean, look, we delivered exactly against our commitments from the beginning of the year. As a matter of fact, we increased our organic growth by over 100 basis points from our original guide. We increased our earnings $0.14 on an FXN basis, taking out the currency noise, which actually was favorable as that we advanced through the year. Margin, we fully delivered. Remember, there's a small accounting adjustment from employee benefits that actually gets adjusted in another line item. We're actually over our commitment when you think of that. So we're really pleased with what we did on FY '23. I think the last I looked, there's maybe less than a handful of companies, 2 or 3 that are able to drive margin improvement from the start of this outsized inflation. So over the last 3 years, we've absorbed $1 billion of outsized inflation while improving our margin by almost 400 basis points. So really proud of the organization and strong commitment to executing against that. It's a great question on '24. I actually view '24 in some ways, dress. So here's the criteria as you think of '24. So one, we have another 100 basis points of outsized inflation. Most of that is in labor. There's some other input costs, some packaging fuel. We have 50 basis points that we've actually made the choice around this absorption from lowering our inventories to drive outside cash. So that's an intentional choice that's in our plan because we do have such a strong cost improvement program in place to offset those and still achieve our long-term margin goals. And then we have 75 basis points of FX. We're going to more than absorb that with 225 basis points of cost to win…

Ravi, this is Tom. Just to add to Chris's excellent summary there, just to call out, we feel great about the performance in FY '23 as well as our outlook for '24. And just to give a little bit more detail on that inventory number. So in Q3, you saw meaningful improvements in our cash flow, including a $200 million reduction in inventory. In Q4, if you haven't seen yet, it's a $300 million reduction in our inventory in Q4 that we just achieved. Obviously, that - the inventory reduces within that quarter, the variance is then from producing less inventory from manufacturing, caps and rolls into the first half of next year. And so just to put it in perspective the scale that we've been taking inventory down at. And obviously, that has a meaningful benefit to cash flow and why we see such strong cash flow, growing nice double digits next year all in, which is really enables our continued strategy on our tuck-in M&A strategy, investing behind growth, right, continuing to drive the flywheel. Thanks again for the question.

Our next question will come from Vijay Kumar with Evercore ISI.

Hey, guys. Thanks for taking my question Sorry, there were a lot of numbers being thrown around. But if you can just -- let's start with Q1 on the top line com. Your Q4 performance was pretty impressive. I think for Q1, you said 200 basis points below the annual guide. Your comps don't seem crazy, right? It's pretty easy. So what's changing here? What are you assuming for pricing China headwinds Aleris?

Sure. Thanks for the question, Vijay and Chris will take that.

Yes. Yes, Vijay, thanks for the question. Yes. On sales, we indicated that our organic growth in Q1 was under-indexed by 200 basis points. There's really 2 factors, maybe 3. The key factors are, one, the respiratory testing dynamics, both in our base and the COVID only, which we're going to now just report as our base business, right? It was still more indexed in Q1 of last year. So as that normalizes year-over-year. The other one is some of the China slowdown that I noted, which is mostly in our medical business, we're still seeing strong performance, in particular, in BDI, which has been a source of strength for us. The good news is we've baked that into our planning by the time that we ramp up to the back of the year that normalizes throughout the year. So those are the 2 small items. The third one I would point to, of course, that we've articulated is the Alaris. As that comes back, we talked about that being a ramp throughout the year. So those are probably the key 3 considerations. To your point, I think especially on the back of absorbing 75 basis points of a China headwind in our growth rate, 5.75 really implies organic growth of 6% north. So it's just -- it's another year of really strong performance. I think it's -- when you think of BD, we're not dependent on one area of growth. I think that offers a source of confidence in complex times like this. And I think the growth is broad-based, right? We talked about the 6 key areas within our portfolio that offer opportunity to deliver that outsized growth of either high single digits to double digits. So we continue to focus on that, transforming our portfolio through organic investments in R&D and the tuck-in work we've done. If you noticed '23, the impact from our tuck-in acquisitions are now contributing 40 basis points to growth after having anniversaried them for 1 year.

And Vijay, just to add on. Obviously, with Aleris, we've always said, of course, typically from when we start booking installations, then we get contracts into 3 to 6 months from then that we actually start doing the installations, et cetera. And obviously, we started just a little over 90 days ago, engaging with customers. And so we're really pleased. We're making solid progress with Alaris, very constructive discussions. We started shipping. We've gotten our first contracts in place, but those will just take time to move through and therefore, we see the bigger ramp in the back half of the year. That's natural for that selling cycle. The other thing is, as Chris mentioned, we've made some assumptions for Q1 on respiratory testing and COVID levels being notably lower than last year. Obviously, that's to be determined. That could be an opportunity there depending on how the respiratory season plays out.

Understood, Tom. And then one on margins here. I think in the Q1 gross margin is 350 basis points below. I just maintain your OpEx dollars, I still end up with an operating margin close to 21.5%. I think your guidance is implying sub-20% for Q1. So is there some investments that's being pulled forward into Q1? And I think you mentioned gross margin flattish year-on-year. Are you planning to exit at 55%? Like what drives the gross margin from 51% to 55% as the year progresses?

Yes. You're talking specifically about Q1?

Q1 op margins, yes and gross margin progression?

Yes. So again, I mean, Q1 has - there's really 2 onetime dynamics in there. You have FX that's 200 basis points and you have the inventory take down, right? So the onetime impact of taking on increased absorption in your cost base, it's 400 basis points, all happening in Q1 that basically goes away. The FX becomes much smaller and more normalized throughout the year. The inventory is predominantly done in Q1. That goes away. You also have the outsized inflation that on average through the year is 100 basis points, but Q1 is more elevated because you have a carryover effect from last year. It's about 175 basis points. The good news again is we have really strong underlying cost improvements. I mean, at this point, Recode, which is supposed to deliver about $300 million savings as we enter into FY '20, 25. We're achieving about two thirds to 70% of that savings in this year. So we've made significant progress. We've actually fully completed the SKU rationalization program in terms of simplifying our SKU portfolio. We're not stopping there. We're going to actually increase that goal. There's more opportunity to go. So you have kind of 2 discrete onetime items in Q1, but the underlying and cost improvement are driving. We just need to maintain that throughout the year, and we'll be fine. Similar to what I shared before on Robbie's question was, last year, we had to deliver 200 basis points of margin improvement, a little bit north of that in the back half. We have to do the same thing this year. But last year, there was 200 basis points of outsized inflation. This year, there's half of outsized inflation. So we actually feel really strong. That's what's afforded us the opportunity to actually look at our inventory harder and maybe take some more aggressive goals, driving that down and driving improved cash. Again, FY '24 year that's going to have double-digit free cash flow growth year-over-year.

So sorry, the OpEx dollars, are you expecting it to be constant sequentially? Or is that stepping up, Chris?

I mean there's - we can follow up. But there are timing on. If you remember last year, I mean, there are some timing dynamics you're going to see. R&D, you're going to see is much more normalized this year. That's one area I would point to. So I think you should expect to see OpEx actually down a little bit in the first half of the year, partially because of that when you're looking at pure SSG&A spend and R&D spend, and then that will renormalize in the back half of the year. We were very front-end loaded with R&D this year in '23. And then we moderated it back in the second half due to timing of programs, milestones and things like that. This year is more normalized, and we're going to spend about the same in R&D year-over-year from a dollar base. That's probably the one key thing I would point to.

Thanks, guys.

Our next question will come from Larry Biegelsen with Wells Fargo.

Thanks for taking the question. Just I'd love to focus on China a little bit, 13% decline in Q4. What were the drivers of that? How much was the anticorruption initiative versus VBP? And how are sales going to be flat to up in fiscal '24, given the Q4 decline. And just one follow-up on fiscal '24, Chris. The tax guidance, does that include the Pillar 2 changes? And how should we think about the tax rate going forward? And the FX headwind of 75 bps to sales, how can that be a 375 basis point impact to EPS?

Yes. Thanks, Larry. I appreciate the question. Let me take the last 2 first, I guess. First of all, BD, we started our fiscal year before everyone else. So Pillar 2 is not contemplated more applicable to us in fiscal year '24. We continue to assess those dynamics. We expect a lot more information as this year progresses. We'll share more on that at a future date. Obviously, our tax rate, we are planning for a step up in tax that we've absorbed in our guidance. But I think more to come on Pillar 2, we'll see how this plays out for us. So we have time on that one. The FX. So again, you have a combination of - when every currency moves, so quickly in such a short period of time by a high degree. And I'd mentioned these examples of where you have pure sourcing locations, Think of them as basically a cost center. Mexico is a good example where actually the peso strengthened against the dollar, you end up with cost dynamics that are also going to rollway. So literally, every currency went the wrong way and you also have timing of how that FX flows through inventory and started last year. So it does create this disconnect that we have. It does normalize over time within our portfolio. And certainly, by the time we get out of Q1, you'll see a more normal drop-through on FX. I'll turn it over to Tom on China, just one high-level comment because remember last year, we did have a comp from the recovery. So if you look at the 2-year growth it's more normalized closer to that double-digit range. With that said, we have contemplated some of the headwinds we're seeing in terms of the market dynamics playing out there. But I think the Q4 result was also impacted by the comparison to last year.

And specifically on China, I'd really focus on 2 key areas. One is VOBP and then the topic related to farm systems, which Chris mentioned, which obviously we overcame at a global level, but you see it acute the topic within China, and we ended up reallocating the supply to other customers that were outside of China. So on the farm systems, one is, as Chris mentioned in the prepared remarks, we're just seeing specifically within China, basically a slowdown in exports of pharmaceutical products, specifically anticoagulants from China and so lower demand as those companies are seeing significant drops in their exports. So that's really one again, that ended up showing up in our - it will show up in our China numbers as a decline, but that same volume that would have gone to them gets reallocated to other customers globally who are - still have that business in their prefilled syringes for anticoagulants. And so we make - we didn't see it at a pharmaceutical systems level. So that's one and was notable within the quarter. I think the other one is really more VP - and again, primarily focused within the MDS business. We continue to see strong high single-digit, double-digit growth -- strong double-digit growth in Interventional and high in life sciences. So really, they continue at our historically expected growth rates, not only in '23, but through as we look ahead towards '24, that's our outlook there as well. It's really acute within specifically the MDS business and then the continuation, annualization of what we're seeing in China anticoagulants and exports So when it comes to anticorruption campaign, that's obviously a macro topic. We feel very strong about our compliance system, et cetera, nothing we're worried about. I think we saw some stabilization in the market on that versus maybe when it first came out in customers' reactions, but I wouldn't overly attribute it to that topic as much as the other 2 that I mentioned.

Our next question comes from Travis Steed with Bank of America.

I'll ask the Alaris question. Are you still penciling in $200 million for the full year? And any help on maybe what you've expected in kind of Q1 just to help with the ramp for Aleris? And is that -- when you think about margins, is that one of the drivers of the second half margin ramp?

Yes. It's - I'll start and then turn it over to Mike, just maybe start with the margin ramp. It's not a part of the margin ramp. It's not accretive to BDX margin. I think we've shared that in the past the capital itself is not. Obviously, the consumables associated with that tend to be, but not the capital itself. As we think about the $200 million, and then I'll turn it to Mike to just share some broader context. Again, at this point, we're a little over 90 days in. We're making solid progress we're at or ahead of our expectations there. But again, as we said, it's typically 3, 6 months - it's a 3-plus month process once you get a purchase order to get the installs, but then it's even - it's more like a 6-month plus sales process, which we started 90 days ago, right? And so some we are getting in earlier. We're getting contracts signed. We've already started shipments. But what we'll do is we'll continue to share our progress on that. We're not changing the 200 number now. And I think that was also -- just keep in mind that was something that we shared to give some color as related to clearance, but for competitive reasons, I wouldn't expect that we'll share a specific revenue number for Aleris going forward, just like we don't for any other product line. But we will make sure that we share color on our progress in terms of where we are relative to that absolute number. So maybe, Mike, other things to add.

Just really pleased that we were able to manufacture and ship product to the first customers ahead of schedule. We have been sort of planning for that more in Q1 of this year, but the team was able to execute to be able to ship products in end of September. And overall, I think that our discussions with the customers are going well, and we're able to start to line up for focusing on our existing customers for remediation out in the field. The other point that I would make is that we continue to sort of make solid progress just working with the customers. And we've mentioned before how important interoperability was during COVID. And certainly, for a lot of our customers, that's a key consideration in the discussions that we're having with them. So that's good for health care. I think that's good for public health. And so we're really happy that that's a key consideration from their perspective. And we're well positioned in that area.

Our next question comes from Matt Miksic with Barclays.

Great. So with all the swing in FX and dominating the questions around the guide here. I have one sort of follow-up on that and then a follow-up on your growth and sort of growth priorities and other sort of investment provides you're making during the year, but out FX, the swing obviously is expecting everybody and we're starting to get a sense of that into year-end and early next year. But if you could maybe highlight the way that, that is managed through your P&L, how it at all there's any...

Hey, Matt [indiscernible] there are slightly different than other folks in the space decisions that you make or make in terms of managing FX. And as I said, one follow-up.

That’s the first question.

Yes. Matt, so a couple of things. I mean, I think no different from anyway. There's many ways that we mitigate currency dynamics, right? One, we netting where you have crossed currencies. Two is we actually try and match sourcing location-wise, to look at our manufacturing footprint. With that -- and there's hedging that we do, of course, in particular, to preserve cash is the way we think of it, right, like anything translational has no impact to underlying economic value of the currency in the local market. It always really becomes a strategy of how do you match sources and uses of cash. And so those become some of our principles when we think of FX. At the end of the day, what we can control is the underlying business, and that's what we presented here was an extremely strong top line growth, again, another year of margin improvement despite FX, by the way, right, 75 basis points of an FX headwind on margin. So we've committed to the at least 50 basis points. So it's really north of 100 when you think of it that way. And then again, we're being super focused on cash, which is the ultimate thing that creates value. And we expect to have double-digit free cash flow year-over-year. What was the -- was there another part of the question?

Yes. And that's kind of actually dovetails nicely into the part 2, which is -- so you're making some choices that are impacting the margins as you talked about inventory takedowns, which are -- have an absorption effect, which I think everyone would agree is those are solid fundamental cash-generative decisions. And just with the questions as I think everyone is seeing there will be some -- there is some pressure here before the open, and it kind of gives the impression of a company that is under some pressure or defensive posture, but your actions obviously are saying the opposite. And I was wondering if you could talk a little bit about some of your continued efforts to either invest inorganically or highlight some of the drivers that you think are going to be significant growth leaders in the early and mid part of the year in 2024.

Yes, Matt, and Tom can expand on this, too, maybe on how we're thinking of tuck-in M&A. But to your point, throughout this time frame, in addition to navigating significant complexity, absorbing outsized inflation, we've actually been leaning in and making bold choices that are paying off on growth and creating kind of a virtual cycle of strong growth. Margin improvement. So inventory is an example, it's an intentional added sort of pressure that we're putting on ourselves in terms of absorption because we know it actually creates net positive from a cash flow standpoint and yet we're absorbing that because we know we have a strong portfolio of cost to win programs like recode, et cetera. So we're doing that from a position of strength and actually you should view that as a sign of confidence, especially in a high interest rate environment, right? Cash is worth a lot more. We're also setting ourselves up from a tuck-in M&A, right? We've talked about the ability to execute against larger tuck-in size deals. Our net leverage is down to 2.6 times. We built strong cash throughout this year. So we feel really well positioned from that standpoint, and we'll continue to be disciplined, but strike on opportunities as they become available.

And Matt, I think, as Chris said, we just set the inventory piece aside, create awareness in that, but it's really irrelevant at the end of the day in terms of we're delivering right our 6% top line organic growth, and we're delivering double-digit EPS growth organic, and then it's really FX is what gets flowed through, right? We're not going to cut R&D or cut other investments that we're making to drive our strong growth profile, which is a 7% CAGR over the last couple of years. We're not going to cut that to do FX when - particularly when we look at the cash flow, which is what we use to invest behind that growth has 0 impact from FX really that we see. We're continuing to drive actually outsized free cash flow. Think about in FY '23, we grew free cash flow by $600 million in the year, right? That's strong free cash flow growth, and we expect continued strong growth as we look at '24 and beyond. So I think in terms of we are extremely excited by our portfolio and what we have today. And I think you're seeing outsized performance across our different segments. I mean, if you look at BD Interventional, the strong growth in surgery with our bioabsorbable materials really taking off, and you can see there's been several quarters of strong growth there. PI doing well and obviously, PureWick now with the mail product. You heard us in our prepared remarks actually say that's going to be a bigger product than we thought it was going to be. When we originally put out our guide and declared which products were going to be over $50 million, we just increased PureWick mail to be one of those products that's going to be…

Appreciate the color.

Thank you. All right. This does conclude the question-and-answer portion of our call. So I would like to turn the floor back over to the speakers for any closing or additional remarks.

Thank you, operator, and thanks, everyone, for your time today. I'd like to take a moment and again, thank our global team of BD Associates who are advancing our strategy and who are making meaningful impacts for our customers and the patients we mutually serve. Our BD 2025 strategy is demonstrating strong momentum. We're exceeding our commitments and have outlined a strong outlook for fiscal 2024. We look forward to connecting with everyone again on our next call, and thank you very much, and have a great rest of the day.

Thank you. This does conclude the audio webcast. On behalf of BD, thank you for joining today. Please disconnect your lines at this time, and have a wonderful day.+