Title

Presentation

Becton, Dickinson and Company beats earnings expectations. Reported EPS is $3.5, expectations were $3.31.

Operator: 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.

Greg Rodetis: 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 releases 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 Polen, BD’s Chairman, Chief Executive Officer and President; and Chris DelOrefice, 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 Byrd, 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 relates 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 it over to Tom.

Tom Polen: 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 [ph] 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 3 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 Alaris 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 FY ’25. 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 health care. 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 health care 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 health care 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 PureWick platform. In our recently launched next-generation female external catheter, PureWick Flex, is expected to support this continued momentum. PureWick 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 PureWick Flex users, we couldn’t be more excited about the impact this will have on patients and their providers.

As I think about PureWick overall, we see this as having the potential to become a $1 billion franchise by 2030, continuing its double-digit growth momentum. We’re also advancing our impact in immune health in 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 FACSDiscover S8 Cell Sorter launch in FY ’23, we recently released additional 3 and 4 laser configurations which contain the same new-to-world BD SpectralFX and BD CellView technologies, enabling new discoveries in a broader range of fields. We expect to continue our innovation cadence with our FY ’25 launch of the BD FACSDiscover A8 Analyzer which will provide customers high-throughput sample analysis with the same innovative technologies.

The combination of BD FACSDiscover and our BD RealBlue and RealYellow 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 ground-breaking new technologies. The immune health and oncology space remains a primary focus for research and as the market returns to growth, we believe a 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 [ph], 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 and 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 for 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. We’re 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 time lines, we believe we are well positioned for this future trend and are getting very positive feedback on our platforms. Moving to our simplification strategy and 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 especially like to thank those working in our manufacturing plants and warehouses to improve 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 FY ’24 and as we look ahead to FY ’25 and beyond. Lastly, we continue to empower our organization through strong corporate responsibility and recently issued our FY ’23 Corporate Sustainability Report. Notably, in FY ’23, we reduced Scope 1 and 2 greenhouse gas emissions, 18% versus our FY ’19 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 health care, positioning us well in FY ’25 and beyond. I’ll now turn it over to Chris to review our financials and outlook.

Chris DelOrefice: 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 3 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 year comparison in dispensing.

Broad volume growth and share gains across our MDS consumable portfolio in developed markets also contributed to the segment’s growth. Pharm Systems had another quarter of increasing demand with double-digit growth in prefilled 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 to 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 3 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% and adjusted operating margin of 25.2%, 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 increase in 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, planned phasing 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 2.4x 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 $0.05 at the midpoint and $0.10 at the bottom of the range. We believe we are well positioned to achieve our updated adjusted operating margin guidance of 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 overdelivering on our margin expectations. And as a result, as we enter 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 increase 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?

Operator: [Operator Instructions] Our first question will come from Robbie Marcus with JPMorgan.

Robbie Marcus: Great, 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 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.

Tom Polen: Robbie, thanks for the question. 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 many areas of almost 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 a strong volume performance. And even in markets that are undergoing transitory market dynamics, specifically the BDB research market environment and the destocking in Pharm systems. 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. Pretty straightforward.

Chris DelOrefice: Yes. Thanks, Tom. Thanks, Robbie, for the question. Yes, 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 a 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 of that because now we’re 3 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 we’re 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 assume similar performance. So 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 I 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, it 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 a natural leverage there that will flow through and we feel really good about that. I think importantly and we can talk more about this, pretends well for ’25 as we think of margins.

Robbie Marcus: Well, that’s a perfect segue to my follow-up question on fiscal ’25. You gave color about 10% EPS growth, I want to make sure that’s reported, I think I heard. And there’s a lot of moving parts, timing of when Critical Care closes, the accretion that could add, China versus Alaris. 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.

Chris DelOrefice: Yes. Thanks, Robbie. Yes. Look, we’re excited about ’25. It’s setting up nicely to deliver strong performance. 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, Pharm 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 from a margin standpoint, I shared that on the momentum we have this year, we expect to now exceed 25%. I think importantly, what you’ll see different in ’25 going forward is the significant majority of 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 I 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 headwinds from Pillar 2. So still more to come on that. 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, to your point, I think what I see externally where the Street is, we would see that more in the low end of the range and it would be 10% and that is on a reported basis.

So 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 derisk transactional FX. But we are active with now cash flow hedges that gives us another lever just to help solidify that performance.

Operator: Our next question will come from Travis Steed with Bank of America.

Travis Steed: 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 you lowered the revenue guide this quarter. But it sounded like things were all on kind of track over the course of the quarter. So just curious like what changed, what kind of surprised you, when it happened. And I thought you didn’t assume those markets to get better. So I was just kind of curious if there’s — are you changing your assumptions on when those things get better kind of going forward?

Tom Polen: Travis, this is Tom. Thanks for the question. Yes, so as we mentioned before, we feel really good about the performance across the different businesses. Of course, 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 has played out as we look at Q3 and into Q4. So MDS, BDB 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 anticorruption 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, right? 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 are some onetime dynamics there. But nevertheless, particularly on the bioscience side, we expect that dynamic to continue through the year. That’s really it, Travis.

Travis Steed: Okay. And then I guess the follow-up question is more into next year, kind of 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 ex-Alaris, looks like the growth is close to looking at 3.5% to 4%. I just wanted to see how to think about the next year revenue growth.

Tom Polen: We’re not going to give revenue guidance on this call, Travis. But 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 Pharm Systems is probably easier to predict on recovery timing. Just given it’s — you can’t destock forever, right? 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 — 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 FY ’25.

Chris DelOrefice: Travis, just maybe one other — just 2 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 2 areas alone are worth more than Alaris benefit, right? You’ve got high single-digit growth businesses that are nearly $4 billion, Pharm Systems used to be consistent double-digit grower. We’re still seeing that strong biologics performance. That’s a significant headwind 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 and we feel good about that. So I’d just add to consensus, what that means is — the rest of our portfolio, look at — BDI across the board was really strong, MDS performing well, specimen management performing, there is strong growth throughout our portfolio.

Tom Polen: Yes. Maybe just a couple of other bits of color is, as we look at kind of our core business, the durable portfolio is high-volume products. 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 health care automation and AI informatics, 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 3 to 6 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 health care 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 continues to really resonate very well with customers. Products like PureWick that are targeting new care settings, we’ve got not only the new PureWick female launch happening but we also have the mobile PureWick launch happening next year which we’re really excited about.

And then in that chronic disease management space, you heard us talk about — in Pharm Systems, double-digit biologics growth. We expect that to continue very strongly into ’25. And then as destocking on the vaccine and the anti-coag side starts to alleviate, right, that will 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 we’re at the point now where we’re — we’ve seen us be flat. The market has 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 is being flat. We are seeing — if we look at quarter-on-quarter instrument purchases, we’re seeing them up a bit sequentially quarter-on-quarter.

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 ’25, it’s expected. But again, as we get into guidance and more specifics there on the November call. I would expect there’ll 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, 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 maybe were 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.

Operator: Our next question will come from David Roman with Goldman Sachs.

David Roman: 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 than 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 Pyxis platform launching. You have some of the pharmacy automation products starting to pick up steam. Maybe sort of contextualize the growth in that business beyond just the Alaris boost that we should see for the next 5 quarters?

Tom Polen: Yes. I’ll start off, David, 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 3 or 4 categories. One is the consumables space, let’s just start off with that. We see really strong growth in overall procedure volumes driving strong growth in the consumables of IV sets, etcetera, that fit along with Alaris. So 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 Pyxis 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 are ideally suited to address and are by far the market leader in each of those spaces when it comes to those customer needs. So maybe, Mike, some more details on what we’re seeing there.

Mike Garrison: Sure. So in addition to the next-gen Pyxis 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 the core pharmacy, the acquisition of MedKeeper which is growing very nicely, some additions to that portfolio. Our MedBank 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 from an innovation there. Growth in that market is cyclical. So it goes sort of with the book of business as capital would happen. But we do have a very strong service model there. And also, we offer a very flexible set of financing terms around capital and 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 Parata and ROA and our RapidRx acquisition, we sort of built a fairly significant — I think the largest pharmacy automation robotics company in the world. And the customer interest in that is very, very strong. It’s been — there’s 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 health care, in the retail sector, in the long-term care sector and as hospitals start to reinvent their pharmacy. So I think in both areas, there are areas that augment and underscore — while Alaris is obviously coming back very strong, it’s just the 1-year anniversary on this call last year is where we announced that we had got 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.

Tom Polen: Thanks for the question, David.

David Roman: Sorry, I assume — can I ask a follow-up here?

Tom Polen: Go ahead, David.

David Roman: 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. 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?

Chris DelOrefice: Yes. Thanks, David. It’s Chris. Yes, I think 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 FY ’25. So it implies north of 100 basis points of improvement. The significant majority of that is 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, etcetera. 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 will be a minor catalyst in ’25. The leverage will be there but it is 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.

Tom Polen: Yes. David, maybe just one other thing to add to Chris’ 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 immersed 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 folded up under our excellence initiative now which is the consolidation of over 20% of our manufacturing plants, right? That starts kicking in ’25 as well which at a scale level. We got a bit of it in ’24 but we really see that ramping up in ’25 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 as 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 and those as well. We think — as we think about technology, around AI, predictive analytics, companion robotics, etcetera, 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 on 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 at GP [ph] 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 our [indiscernible] margin focus over the next phase post-BD 2025.

Operator: Our next question will come from Patrick Wood with Morgan Stanley.

Patrick Wood: 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, obviously, the VBP [ph] 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 MDS vol 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 are these genuinely transitory dynamics?

Tom Polen: Yes. 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 [ph] has been playing out in MDS as expected. Just as a note there, our volumes in MDS China are actually up very nicely. So if you look at the — even the categories where we’re seeing VBP [ph], 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 and 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 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 anticorruption and some of the actions that distributors take when there’s uncertainty and they’ll pause to pull inventories down a bit, those dynamics, I think, will evolve as just clarity in the economy and those processes end up coming into light.

So — 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 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.

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

Larry Biegelsen: Two quick ones for me and I’ll ask them both upfront. On Alaris, the $350 million in fiscal ’24 sales implies about a $600 million annual run rate using the implied Q4 sales of about $150 million, if I’m doing the math right, is that the right way to think about fiscal ’25 Alaris [ph] sales, about $600 million? And just lastly, Chris, the last two years, growth in margins have been very back-end weighted. And obviously, it’s caused a lot of investor anxiety, is there any way or do you expect fiscal ’25 to look different from a cadence standpoint?

Chris DelOrefice: Larry, thanks for the question. Yes, 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. 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 few 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 tough.

Tom Polen: But 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 at 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; 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. Cannot [ph] 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.

Operator: Our next question will come from Rick Wise with Stifel.

Rick Wise: Maybe 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. The 25% EPS growth commentary and the operating margin for over 25% clearly includes Critical Care, if I understand correctly. But to make sure it — 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. Are you — does that imply you’re being conservative or careful in this initial commentary? Just to make sure we’re thinking about it correctly.

Chris DelOrefice: Yes. Thanks for the question, Rick. Yes. I mean, look, ’25 is — 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, 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 is 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, our goal is to continue to create opportunity to 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.

Operator: Our last question will come from Vijay Kumar with Evercore ISI.

Vijay Kumar: Just one for me. Some of these issues you have mentioned, right, I think on the pharma side, some of your close 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, like China, bioscience and pharma destocking, it looks like biosciences should — certainly headwind should continue. I think most of tools companies have been cautious about first half of ’25. How should we think about China? Is that should that get back to growth? Or is this VBP [ph] headwinds, could that last for a while?

Tom Polen: Yes, it’s a great question, Vijay. So let me start with maybe the bioscience and then touch base on Pharm Systems and then touch base on China. So on Pharm 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 make — 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 FACSDiscover and the continued cadence of new innovations not only with sorters but next year, launching our first analyzer in that segment, continued innovation with dies 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 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 it’s 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 with the whole market. On Pharm 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 spec-ed 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 is seeing across that the sector, has really been focused on the anticoagulant and vaccine segment for us. And I think broadly for others and that can’t continue forever. So we would expect that as we move into FY ’25 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 be — start coming, 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 monitoring — modeling on that. And we’ll continue to watch that market play out as we go forward but we’ve taken a conservative stance on our own internal modeling there as we look at and build our plan for the 10% EPS growth number. So we still see — and again, that will 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 recovery — 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 [ph] starting to decline. We’ve seen 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 [ph] 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 shared the number on EPS for next year.

Operator: Thank you. That concludes today’s question-and-answer session. At this time, I’d like to turn the floor back over to Tom Polen for any additional or closing remarks.

Tom Polen: 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 FY ’24 earnings guidance. As we look ahead to FY ’25, 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.

Operator: 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.