Becton Dickinson & Company (BDX) — Q1 2019 Earnings Call Transcript

Thank you, Crystal. Good morning, everyone, and thank you for joining us to review our first fiscal quarter results. As we referenced in our press release, we are presenting a set of slides to accompany our remarks on this call. The presentation is posted on the Investor Relations page of our website at bd.com. During today's call, we will make forward-looking statements, and it is possible that actual results could differ from our expectations. Factors that could cause such differences appear in our first fiscal quarter press release and in the MD&A sections of our recent SEC filings. We will also discuss some non-GAAP financial measures with respect to our performance. Reconciliations to GAAP measures can be found in our press release and its related financial schedules and in the slides. A copy of the release, including the financial schedules, is posted on the bd.com website. As a reminder, to provide additional revenue visibility into the new BD, inclusive of Bard, we will speak to our fiscal 2019 first quarter revenue results and fiscal 2019 revenue guidance on a comparable currency-neutral basis. The comparable basis includes BD and Bard in the current and prior year periods and excludes intercompany revenues and revenues associated with divestitures as detailed in the financial schedules and our press release. Leading the call this morning is Vince Forlenza, Chairman and Chief Executive Officer. Also joining us are Chris Reidy, Executive Vice President, Chief Financial Officer and Chief Administrative Officer; Tom Polen, President and Chief Operating Officer; Alberto Mas, Executive Vice President and President of the Medical segment; Simon Campion, Executive Vice President and President of the Interventional segment; and Patrick Kaltenbach, Executive Vice President and President of the Life Sciences segment. It is now my pleasure to turn the call over to Vince.

Thank you, Monique, and good morning, everyone. As many of you already know, in December, we celebrated the one year anniversary of the closing of the Bard transaction. Together with Bard, we accelerated our strategy to provide our customers and their patients with leading medical technologies and innovative solutions. We are extremely proud of our achievements over the past year. It is evident that the combination of BD and Bard is delivering value to our customers, patients, and shareholders. Turning to Slide 5 and our first quarter highlights. We are very pleased with the strong start to fiscal 2019. As we stated in our pre-announcement in mid-January, our first quarter results were ahead of our previous expectations, largely driven by the timing of certain tax items as well as better-than-expected performance across all three segments. Our results reflect continued momentum across our businesses and regions and strong margin expansion after a very strong Q4 in 2018. Our integration of Bard is on track, and we are continuing to realize cost and revenue synergies as expected. During the quarter, we held our first combined sales training meetings. In every region of the world, there was tremendous energy and excitement about the opportunity we have to make a difference in the lives of others. We are already seeing traction with our combined biosurgery and infection prevention sales force in Europe, which is evident in our financial results. We are also making good progress integrating and simplifying our systems and processes, which delivers cost savings and helps associates work more efficiently. We are leveraging BD shared service centers and the infrastructure investments we made during the CareFusion integration by bringing legacy Bard associates onto our IT, finance, and HR operating systems and technologies. We've also made progress with supply chain efficiencies and also with our real estate footprint, combining BD and Bard sites in several key locations, including our New Jersey headquarters. Looking forward to the total year, we expect continued momentum and are reaffirming our fiscal 2019 revenue and EPS guidance. I will now turn things over to Chris for more detailed discussion of our first quarter financial performance and our fiscal year 2019 guidance.

Thanks, Vince, and good morning, everyone. Moving on to Slide 7, I'll review our first quarter revenue and EPS results as well as the key financial highlights. As Vince mentioned, we are off to a strong start in fiscal 2019. First quarter revenues grew 5.2% on a comparable currency-neutral basis. This includes a pricing decline of about 20 basis points, which was in line with our expectations. First quarter revenue growth was driven by mid-single digit growth across all three segments. At the business unit level, there are some puts and takes, which are driven by year-over-year comparisons, along with timing within this fiscal year. When we adjust for these items, we still drove total company revenue growth of over 5% on an underlying basis. I'll provide more color on revenue growth in the quarter in a moment when I take you through the results by segment and geography. Adjusted EPS of $2.70 grew 8.9% or 14.9% on a currency-neutral basis. As we stated in our pre-announcement, this was ahead of our previous expectations, as the quarter benefited from some timing within the year related to certain tax items. In addition, performance was better than expected across all three segments. We also continued to delever during the first quarter, paying down approximately $400 million of debt. As a result, our gross leverage ratio declined to 3.8x as of December 31. We continued to be on target to achieve our commitment to deleverage to below 3x over three years. Now moving on to Slide 8. I'll review our Medical segment revenue growth.

Yes. So I'll start and then I'll turn it over to Chris for some more detail. Yes, we feel good about it. This is how we expected the year to play out with the exception, of course, of the tax item that occurred in the fourth quarter. But if I go to operating results, this is pretty much what we thought would happen. Of course, we knew we had the large flu coming up that we had to jump over in the second quarter. We did a little better in the first quarter than expected as you heard in our remarks, but we always knew that the back end of the year, the second half of the year, we were going to see higher growth and accelerating EPS. And that's driven by actually all three segments and improving performance across each. There was a bunch of timing things that happened in the first quarter that Chris will walk you through, but you're going to see strong performance across all three segments, the phasing of the cost synergies in the second half and then FX turns around as well.

Sure. And I think Vince covered most of the points. I think it is in line with what we expected, with a couple of adjustments in terms of timing for Q1 to Q2. So for example, the higher tax rate in Q2 is to be expected considering the 11% tax rate in Q1. So there will be some catch-up there. FX will be a little bit worse in Q2 than we had originally expected, and we know there are some other offsets to that. But that will hit us mostly in the second quarter. And then Pharm Systems growing nearly 16% in the first quarter. There will be some bounce-back on that in the second quarter, but the first half of the year just about where we would have expected. In terms of the rest of the year ramping, we did expect that, and we're very confident in that. On the revenues side, we've got a lot of new product launches in the pipeline across the business. You've got WavelinQ product that we talked about from the TVA acquisition, Venovo, Covera and Lutonix 018 and even some BTK upside potential. Progel, as we said, is doing very well, and our reintroduction of that product is going very well. As you know, we have revenue synergies ramping in the back half of the year, and then on the P&L side, FX abates in the second half and you start getting the cost synergies ramping. And so all those things give us great confidence in the second half of the year, and we're very comfortable with the full year guidance. It is a little bit lumpy, and that's what we had expected.

Brian, just to add 1 or 2 more comments on the Life Science side. What you saw in the first quarter is a bunch of CD4 tenders that got shifted to later in the year, that's going to improve Life Sciences' growth. It also negatively impacted EMA in the first quarter. That's going to come back in the second part of the year as well. And then you saw some Kiestra timing that's going to help. So there's a whole bunch of things across the segments you're playing out that way. And then lastly on the Medical side, we're expecting continued strong growth in MMS as we do well, both in dispensing, but in -- particularly on the pump side of things. And Pharm Systems is going to continue to be strong for the year. It will be a lumpy next quarter, but then bounce back. So those are a whole bunch of things that are going on.

Yes, thanks. This is Alberto. Yes, we are feeling very pleased about the performance and very confident on the MMS side this quarter, in particular, and for the rest of the year. On the infusion side, we're seeing continued above-market growth. We do feel very confident that we are gaining category share in the infusion in the U.S. A lot of that has to do with great acceptance of our refreshed Alaris M2 pump with our complete focus on interoperability, where we are seeing now 350 live sites in interoperability, and that's a very difficult operational thing to pull off as we know by experience, and I think we've dialed in the process. And we're expanding interoperability beyond Cerner and Epic to new platforms as well, Meditech and Allscripts. And the last element that, I think, is driving the business as well is what I would call more horizontal interoperability as we've put into play all our platforms, and our HealthSight Analytics platform that leverages all our platforms together, not only the pumps, but gives really a lot of visibility across the different platforms, is really engaging our customers and providing us nice wins in the marketplace. So very pleased with the performance of that business.

Yes, thanks, Alberto, and of course, we grew 6.7% after we had such a strong quarter in the business. So last year, we were $50 million moved ahead and a bunch of that was pumps. So I think, overall, that should give you a good sense across the segments. Chris, do you have anything else you want to add?

No, I think that covers it.

I thought we could just start with the phasing throughout the year just trying to understand that a little bit better, first half versus second half. Is this any different than what you originally thought? And can you talk about your confidence on the acceleration that's needed? It looks like you have to do kind of mid- to high 6s in the back half of the year here to get to the midpoint of the revenue guidance. So can you talk about your confidence on the acceleration there and dig into the drivers a bit more, both on the top line as well as on the bottom line?

Yes. So I'll start and then I'll turn it over to Chris for some more detail. Yes, we feel good about it. This is how we expected the year to play out with the exception, of course, of the tax item that occurred in the fourth quarter. But if I go to operating results, this is pretty much what we thought would happen. Of course, we knew we had the large flu coming up that we had to jump over in the second quarter. We did a little better in the first quarter than expected as you heard in our remarks, but we always knew that the back end of the year, the second half of the year, we were going to see higher growth and accelerating EPS.

Sure. And I think Vince covered most of the points. I think it is in line with what we expected, with a couple of adjustments in terms of timing for Q1 to Q2.

Brian, just to add 1 or 2 more comments on the Life Science side. What you saw in the first quarter is a bunch of CD4 tenders that got shifted to later in the year, that's going to improve Life Sciences' growth.

Yes, thanks. This is Alberto. Yes, we are feeling very pleased about the performance and very confident on the MMS side this quarter, in particular, and for the rest of the year.

Yes. So Chris will talk first and then Simon will talk about the business question.

Good morning, David. Simon here. So just at a macro level, we do have a lot of confidence in our projections going forward for PI. We have several new product launches that are coming up, not least BTK, but also Venovo and the Covera Fisher indication.

So I just wanted to add a little bit too on the 0.6%. So obviously, the takeaway is that it had nothing to do with the paclitaxel. It was a tough compare to last year. We had 11% growth and that is, as you refer to the Boston Scientific distribution agreement, which is now ended. Basically that was a loading of the channel that we have to jump over.

One question on emerging markets, one question on -- one follow-up question on MMS.

Yes, sure. I'll talk to emerging markets. Yes, we're confident in emerging markets and what you actually saw was a decrease in EMA, which was actually two things, a strong comp, but also these tenders which have moved from the first quarter into the second, third, and fourth. And so we're going to see a very strong bounce-back in EMA.

Yes. In terms of the category shares, it's very consistent with what we've said before, which is slightly accelerating share gains, more toward 200 basis points in infusion and closer to the 100 basis points on the Pyxis side.

Okay. Great. So you get a sense that our new business model that we've put in place a year ago is really working for us. And Larry, thanks for the questions.

Just two questions for me. Vince, I appreciate the comments on the peripheral business this morning. But given the investor focus there, it sounds like most of the momentum deceleration there is really the distributor dynamic.

So Chris will talk first and then Simon will talk about the business question.

Okay, sure. For PI, we expect and have seen strong market growth rates. So we're feeling very confident. Our share position remains strong in that space as we move through that. And remember, DCBs are just one aspect of the overall peripheral solution. And I think it's very important that we don't isolate the DCBs in that space.

So we continue to have that momentum across the country here, and we’re starting to see that resonate, particularly with physicians in that segment. So it’s very exciting.

Thank you, Simon, and I appreciate everyone’s questions.