Becton Dickinson & Company (BDX) — Q4 2024 Earnings Call Transcript

Good morning and welcome to BD's earnings call. I'm Greg Rodetis, Senior Vice President, Treasurer and Head of Investor Relations. Thank you for joining us. This call is being made available via audio webcast at bd.com. Earlier this morning, BD released results for the fourth quarter and full year 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; Mike Feld, 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. 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 made 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. With that, I am very happy to turn it over to Tom.

Thanks, Greg, and good morning, everyone. First, I'd like to take a moment to welcome Mike Feld, President of our Life Science segment, who joined BD in August from Veralto. Mike is known for building innovative, high-performing teams, and his leadership principles are well aligned with BD's culture. Mike also brings deep experience in Shingijutsu Kaizen, which is the heartbeat behind BD Excellence. There is no individual more suited to lead the Life Sciences team as they continue to expand the value BD brings to our customers, and I look forward to Mike's partnership as we deliver on our strategy. Earlier today, we reported strong Q4 results with 7.4% revenue growth or 6.2% organic, 120 basis points of margin expansion, and adjusted diluted EPS up 11.4%. For the full year, we delivered solid organic revenue growth of 5%. Despite fiscal '24 revenue growth that was below our initial expectations, we are pleased with how we navigated complex market dynamics in China and Bioscience-Pharma. Breaking things down, our MedTech and Diagnostics businesses grew a strong 5.9% this year, inclusive of absorbing a decrease in China, while our Bioscience-Pharma businesses grew about 1%, roughly in line with the end markets. Over the long term, we see Bioscience-Pharma as a durable, higher growth contributor to our portfolio, and we remain confident in gradual market recovery, our competitive position, and the team's execution. We consistently executed on margin expansion in FY '24, increasing adjusted EPS guidance each quarter and delivering full-year EPS of $13.14, adjusted operating margin of 24.2%, and free cash flow of $3.1 billion, all ahead of our original plan and positioning us well moving into FY '25. I'd like to thank our global team of associates whose passionate commitment and focused execution of our strategy is making meaningful impacts for the customers and patients we serve. Reflecting more broadly on our strategic direction and progress this past year, we made important advancements on each of our top 3 priorities, which are: one, drive sustained topline growth through high-impact innovation and commercial excellence; two, execute on BD Excellence to drive operational performance; and three, effectively deploy capital. First, on growth. We advanced multiple new growth platforms that put BD in the middle of the most significant trends reshaping health care, including the use of AI and automation in connected care to transform efficiency and outcomes, the shift to new care settings, and the application of medical technology to improve treatment of chronic disease. Starting with our BD Medical segment, new biologic drugs promise to have the most significant impact on chronic disease in the history of modern medicine. In FY '24, we passed $1 billion of annual revenue in biologic drug delivery sales, driven by our leading prefillable devices and increased manufacturing capacity to serve growing GLP-1 demand. As the leader in biologics drug delivery and with a growing pipeline of targeted innovations such as our Libertas and Evolve wearable devices, we believe no company is better positioned than BD to capitalize on a significant growth opportunity. We continue to advance our platform for pharmacy robotics, which now ranks as one of the largest robotics businesses in med tech, and is enabling the transformation of retail, online, and hospital pharmacies with significant opportunity for future growth. We're also extremely pleased with the first year of the Alaris return to market and its role in our connected medication management strategy. We exited the year at our historical revenue run rate and continue to see strong customer preference for the Alaris Power of One. Our acquisition of advanced patient monitoring in FY '24 expands our connected care solutions in a high-growth market and enables future innovation opportunities in breakthrough closed-loop monitoring and treatment, which BD is uniquely positioned to deliver across our platforms. Integration is going as expected, and the commercial teams are fully engaged in maximizing the benefits of APM for our customers. In BD Interventional, we had a fantastic year advancing our PureWick urinary incontinence platform, launching our next-gen PureWick Flex and expanding PureWick Male into the home. In our advanced tissue regeneration portfolio, Phasix and GalaFLEX are additional examples of how our tuck-in M&A strategy is now driving strong organic growth. We continue to transform hernia surgery and are expanding this platform into new applications for plastic and reconstructive procedures, driven by trends in aging and GLP-1 weight loss, which increasingly call for soft tissue support to restore function and improve appearance. Across BD Life Sciences, we continue to reinvent the field of flow cytometry with the launch of the 3 in 4 laser FACSDiscover S8 Sorter and multiple new reagents using unique AI algorithms to optimize dye designs that are enabling new scientific insights. In Diagnostics, our new high-throughput molecular platform, BD COR and Onclarity HPV assay, continued to gain traction with self-collection and new care settings for cervical cancer screening now available in many countries around the world, representing a meaningful new growth opportunity for BD. While these and other new BD innovations are playing a key role in transforming care, most every significant healthcare procedure uses a BD COR device, whether robotic surgeries, valve transplants, new cancer treatments, or advanced vascular procedures. BD syringes, catheters, pumps, surgical prep, blood collection, and other products are there. In FY '24, we saw strong growth across our core devices, driven by share gains and procedural volumes. Turning to operational performance; we launched BD Excellence about 18 months ago, and it's been incredible to see the momentum behind simplifying our company, improving quality, and accelerating margin progression. Through BD Excellence, our team has made strong progress on network optimization, increasing plant productivity, and delivering double-digit improvements in waste and operating equipment efficiency or OEE. All of this drove margins, EPS, and cash flow above plan. We have much more headroom going forward through BD Excellence, and it positions us well to deliver on our goals for FY '25 and beyond. On our third priority of strong stewardship of value-creating capital deployment, our focus on cash generation enabled strong growth in free cash flow, increased free cash flow conversion, and allowed us to return capital to shareholders through dividends and share buybacks. Earlier this morning, we announced our 53rd consecutive year of dividend increases, extending our long-standing recognition as a member of the S&P 500 Dividend Aristocrats Index, a distinction that reflects the consistency and reliability of our dividend policy. Meaningful return of capital to shareholders will remain a key priority in our capital allocation strategy going forward. Beyond those priorities, in FY '24, we expanded our position as a leader in corporate responsibility, with significant progress toward our 2030 corporate sustainability goals. We became one of a handful of med tech companies to have near- and long-term greenhouse gas emissions reduction targets and net zero targets approved by the science-based target initiative. We surpassed both our Scope 1 and Scope 2 greenhouse gas emissions targets. And as part of our ongoing health equity strategy, we advanced partnerships around the world in areas such as improving access to cervical and breast cancer screening. We are pleased to be recognized for our efforts, most recently being named in 3BL's list of the 100 Best Corporate Citizens and ranking in the top 2 in health care. Looking ahead to FY '25, we will continue to execute in alignment with each of those 3 priorities. We have more than 25 planned new product launches this year and calling out just a few. In BD Medical, we're launching our next-generation Pyxis platform, which includes the cadence of hardware and software upgrades and releases which will begin to roll out by the end of calendar year '25 and continue for the next several years. This will be the first system to use BD's new advanced AI platform that will integrate data across BD smart devices. We have a number of new launches planned in our advanced patient monitoring business to revolutionize hemodynamic monitoring. The next-gen HemoSphere Alta Monitor will feature a full range of sensors enabled with predictive IQ algorithms that provide comprehensive pressure, flow, and tissue oxygenation insights for varying acuities. New Swan IQ and ForeSight IQ smart sensors will provide new patient insights, including new-to-world right heart pressures and cerebral oxygenation. In BD Life Sciences, we plan to launch the first BD FACSDiscover Analyzer, the A8, to provide customers with high-throughput sample analysis with the same innovative technologies as our breakthrough Cell Sorter. And lastly, in BD Interventional, in our PureWick platform, we're advancing the pivotal study for at-home reimbursement and expect to continue the cadence of innovation with the launch of PureWick Portable, a solution that restores mobility to people's lives. We look forward to sharing a full portfolio update at our Investor Day on February 26 at the New York Stock Exchange. We believe we are well positioned heading into FY '25, with the strength of our portfolio enabling us to effectively navigate market dynamics and the momentum of BD Excellence driving margin expansion to deliver a strong earnings and cash profile. I'll now turn it to Chris to provide further color on our financials and outlook.

Thanks, Tom, and good morning, everyone. As Tom noted, we delivered competitive organic revenue growth for the fourth quarter and full year even while navigating market dynamics in China and Bioscience-Pharma. Importantly, with strong execution of our BD Excellence programs, we exceeded our full-year margin, earnings, and cash flow goals. I'll now provide some further insight into our Q4 revenue performance. BD Medical organic growth was led by MMS, with another quarter of exceptional performance in infusion systems, driven by the BD Alaris return to market. Higher pull-through and utilization of infusion sets also contributed to MMS growth. The unit's performance was partially offset by a tough prior year comparison in dispensing. Our MDS consumable portfolio also contributed to the segment's Q4 growth. We continue to advance our position in the U.S. with broad volume growth and share gains, particularly in our hypodermic and vascular access management portfolios, where our quality and agility to meet increased demand has positively benefited healthcare delivery across our markets. Pharm systems performance reflects another quarter of double-digit growth in prefilled devices for biologic drugs, primarily GLP-1s, which was partially offset by market dynamics across the industry, including expected customer inventory destocking. Rounding out the BD Medical segment, in early September, we closed the acquisition of Edwards Critical Care, now Advanced Patient Monitoring or APM, which contributed $74 million to BD Medical revenue. BD Life Sciences performance was led by IDS. Strong mid-single-digit growth in specimen management was driven by volume growth as investment in our U.S. direct sales team drove increased demand and customer upgrades to higher-value products to provide an enhanced patient experience. Within our Diagnostics business, our results reflect some tough prior-year comparisons in lab automation and ID/AST. Offsetting these impacts was good traction leveraging our molecular platform installed base with double-digit growth in both BD MAX and BD COR. BD Life Sciences growth was partially offset by transitory market dynamics in Biosciences that resulted in lower market demand for research instruments and reagents. Clinical Solutions grew double digits, led by our FACSLyric cell analyzer and cancer reagents. We continue to outperform our life science peers given our portfolio mix of leading instruments, including the BD FACSDiscover, antibodies, dyes, and software. We remain excited about the growth opportunities in BDB as a number of new innovations are driving share gains. Strong organic growth in BD Interventional was led by double-digit growth in UCC with continued momentum in our PureWick franchise. PureWick Female grew double digits, and PureWick Male delivered its strongest quarter since its launch in acute care. We are also very pleased with the male direct-to-consumer launch, where the first few months of revenues exceeded our expectations. Surgery delivered another quarter of above-market growth. Within advanced repair and reconstruction, continued strong market adoption of Phasix hernia resorbable scaffold drove double-digit growth. This was partially offset by a tough comparison to the prior year in synthetic mesh. Performance in Surgery was also driven by double-digit growth in infection prevention due to increased demand for ChloraPrep related to strong procedural volumes. BDI performance was also supported by peripheral intervention with double-digit growth in peripheral vascular disease and high single-digit growth in end-stage kidney disease. PI growth was partially offset by a decrease in oncology due to prior year distributor inventory stocking in the U.S. Now, moving to our P&L. Q4 adjusted diluted EPS of $3.81 reflects double-digit growth of 11.4%. Consistent with our commitments, we delivered strong margin progression in Q4 with adjusted gross margin up 30 basis points sequentially and 200 basis points year-over-year to 54.6% and adjusted operating margin up 140 basis points sequentially and 120 basis points year-over-year to 26.6%. Margin expansion was driven by strong leverage on our revenue performance and simplification and efficiencies from BD Excellence. For the full year, we delivered adjusted diluted EPS of $13.14, which represents growth of 7.6%. Adjusted gross margin of 53.3% was in line with our expectations. As planned, strong execution of BD Excellence enabled us to absorb outsized inflation, transactional FX, and about 50 basis points from inventory optimization carryover that supported strong fiscal year '24 cash flow. Adjusted operating margin expanded 70 basis points to 24.2%, exceeding our margin goal for the year, driven by shipping and SG&A leverage. While delivering strong margin performance, we also invested $1.1 billion in R&D to advance our pipeline of innovative programs that will support future growth. Regarding our cash and capital allocation, our strategic choices of strong execution on cash flow optimization drove a $1 billion or 47% increase in free cash flow to $3.1 billion and a larger-than-expected improvement in free cash flow conversion by 22 percentage points to 82%. Broad-based improvements in working capital, including our strategic choice to optimize inventory levels, continued expense management, and our ability to leverage capital expenditures from BD Excellence productivity gains were all key factors driving strong execution this year. We also benefited from the timing of certain discrete cash items. Our strong cash position supported our acquisition of APM while also returning $1.6 billion of capital to shareholders through dividends and share repurchases. Cash and short-term investments on September 30 totaled $2.2 billion, inclusive of about $900 million in proceeds from February's debt refinancing. After closing the Advanced Patient Monitoring acquisition, we ended the year with net leverage of 3x, which was in line with our expectations. We believe we are well positioned to deleverage to our 2.5x target over the next 12 to 18 months. We remain focused on underlying cash flow improvements. Despite the timing impact of some discrete cash items, we expect next year's organic free cash flow conversion to be consistent with this year due to strong execution in working capital. As expected, due to integration-related investments for APM, we anticipate a moderate step back in free cash flow conversion to around 75%. However, we expect this will still result in another strong year of free cash flow dollars which will support investments in growth, debt repayment, and returning capital to shareholders. Given the outperformance this year and our confidence in next year's plans, we believe we are in a strong position to execute our net leverage commitments and plan to deploy about $1 billion towards share repurchases over the next 12 to 18 months while still delivering on our deleveraging target of about 2.5x within this time frame. We see this as a value-creating opportunity based on our view of BD's intrinsic value. Moving to our guidance for fiscal year '25. Our initial fiscal year '25 guidance is anchored on high single-digit revenue growth driven by the contribution from APM and a broad-based competitive organic revenue growth profile that captures a prudent view of market dynamics in China and Bioscience-Pharma. We expect increasing momentum from BD Excellence to drive significant margin expansion, which will enable delivery of strong adjusted EPS growth of about 10% at the midpoint. This growth includes increased acquisition-related interest expense and a higher tax rate inclusive of Pillar 2. We expect to deliver total revenues in the range of $21.9 billion to $22.1 billion in fiscal year '25, which reflects a modest foreign currency translation impact of 25 basis points and currency-neutral adjusted revenue growth of 8.8% to 9.3%. This includes strong performance from our newly acquired APM business, consistent with what we previously shared, plus organic revenue growth of 4% to 4.5%. This includes absorbing about 125 basis points impact from China and Bioscience-Pharma, with China expected to decrease by mid-single digits. Across the balance of our portfolio, which represents about 75% of our total organic revenue, we expect to deliver mid-single-digit growth around our 5.5% plus growth profile. Moving to margins and earnings. We are confident in delivering another year of strong operational performance, particularly our ability to expand adjusted operating margin by about 100 basis points and exceed our 25% margin goal we set over 2 years ago. The primary driver of margin expansion in fiscal year '25 is expected to come from gross margin with an increasing benefit from accelerating BD Excellence momentum. Below gross margin, we expect some leverage primarily in shipping and G&A, offset by increasing investments in selling and R&D to further support our growth profile. We expect interest and other to be up year-over-year, primarily due to the debt issued in connection with the Advanced Patient Monitoring acquisition. For tax, we expect our adjusted effective tax rate to be between 14% and 15.5%, which includes the impact of Pillar 2. As a reminder, it would not be unusual for our tax rate to fluctuate on a quarterly basis given the timing of discrete items. Given these considerations, we expect to deliver adjusted diluted EPS of $14.25 to $14.60, inclusive of a modest foreign currency translation headwind. As you think about fiscal 2025 phasing, we expect first half revenue growth to be modestly below the low end of our total revenue guidance and the second half to be modestly above the high end. This includes our expectation of a heavier impact to first half revenue growth from the expected decrease in China revenues, a larger impact from Bioscience-Pharma dynamics in Q1 and the comparison to prior year licensing revenue in Q2. As revenue dollars increase sequentially throughout the year, we expect the benefit from BD Excellence and strong OpEx leverage to result in increasing adjusted gross and operating margins throughout the year. This results in strong year-over-year growth in OIBT each quarter. Based on a ratable tax rate, we expect first half and second half adjusted EPS growth rates to be ratable, which implies about 10% growth at the midpoint of our full year guidance range and is a nicely balanced phasing profile. In closing, our strategy is demonstrating positive momentum. We expect to deliver competitive growth that appropriately plans for market dynamics in China and bioscience pharma. Accelerating momentum in BD Excellence is supporting strong margin expansion, enabling investment in R&D to support further growth. This, coupled with strong cash generation and a disciplined approach to capital allocation, is expected to drive continued value creation for all of our stakeholders. With that, let's start the Q&A session. Operator, can you please assemble our queue?

Thank you for the detailed guidance. Regarding the 125 basis points of headwinds in pharma and biosciences in China, it seems you're assuming those three segments will remain mostly stable for the year. While I understand China is down, do you see those segments as flat? The reason I ask is that it appears these segments might have experienced slight growth in Q4. Also, when comparing to some of your peers in life science tools, they are experiencing declines in the mid to high singles due to various factors. I want to clarify whether your trends in these three segments match those of your peers, as the guidance seems conservative. Additionally, is Q1 still expected to be within the 4% to 4.5% range, and will there be any impact from hurricanes or IV fluids?

Sure, I appreciate your comments, Vijay. I'll begin with some thoughts on our assumptions for the year before handing it over to Chris to discuss the phasing. Looking at the life science and bioscience sectors, we had to adjust our midyear forecast to align with market dynamics. While Q4 saw strong performance, it was slightly below street expectations. Overall, we grew 5% this fiscal year, with 5.9% growth in our med tech diagnostics and about 1% in the biosciences-pharma segment. In Q4 specifically, med tech diagnostics grew by 7.5% while biosciences-pharma saw a 1.3% increase, showing a slight uptick in the latter compared to the full year. We are satisfied with our team’s performance and portfolio. Regarding China, I've consistently taken a cautious short-term view, but remain optimistic long-term due to significant unmet healthcare needs and our ability to address them. Though we expect strong volume growth in China, value-based procurement is impacting prices. For FY '25, we've factored in a mid-single-digit decline in our guidance, despite the anticipated strong volume growth. In the bioscience-pharma area, there's been some positive movement in Q4, but predicting a recovery curve is challenging at this point, so we've adopted a conservative position in our guidance similar to FY '24. Both sectors have been among our fastest-growing areas, and we anticipate they'll return to strong growth in the mid- to long term. Given the current dynamics, we believe our cautious approach is wise. As for the hurricane, we haven’t observed any impact so far and will continue to monitor any effects on procedure volumes. There is a slight increase in the use of larger volume syringes as substitutes, but overall, we remain focused on supporting our customers without seeing a significant disruption to our business.

Vijay, it's Chris. On the phasing, just so a couple of things. One, relative to where we were last year, like to Tom's point, we've taken a very prudent posture as it relates to the market dynamics that are real. We're not alone there, to your point. We have businesses competing there. As you think of our total phasing and balance across the year, it's actually pretty balanced, certainly on earnings, first of all. I shared in the script, first half, second half, very balanced relative to the midpoint of the growth rate of our guide at about 10%. So you don't see a lot of fluctuation there. You're going to see a strong starting gross margin as you think of Q1 and a steady kind of normalized increase as we move through the year sequentially there. So I think as it relates to kind of P&L dynamics, very strong. On revenue, we did share that you're going to have a first half and second half dynamic where the growth rate will be below the low end of the total guide range for the first half. It will be above for the second half. One way to think of it, though, is maybe look at the dollar phasing as a percent of dollars by quarter as we move through the year. We tend to have a lower first half versus second half. We're about 48%, 52% when you think of dollars as a percent of total, with Q1 being lower than the average of the 48%. You're going to see some nuances with the growth rate in Q1 that will be low. Remember, the market dynamics will be most prominent in Q1. Last year, both BDB and pharm systems, where we had these businesses, we're still at about mid-single digits if you go back and look at their performance. So you actually also have a comp in the quarter that's impacting us.

Congrats on a nice quarter here. I wanted to just ask one question on Alaris, Tom. Did Alaris meet your goal of $350 million for fiscal '24? It sounds like Q4 was about $100 million or slightly below, I think, your expectation for $150 million in Q4. And how are you thinking about Alaris sales in fiscal '25 relative to fiscal '24?

Yes. Thanks for the question, Larry. I'll start off and maybe turn it to Mike here in a moment. But we're really pleased with the first full year of Alaris launches. As we had shared midyear as we updated our outlook for Alaris, we expected Alaris to be back at the historical run rate within the first year of launch. And in fact, we saw that come through as expected. And so we feel good as we go into FY '25, also with having built a backlog of committed contracts, which is something that we're also focused on rebuilding as we relaunched here this year. Maybe, Mike, any additional comments on that?

No, we're really proud of the performance. I can confirm that we exceeded the $350 million mark. The medical segment, particularly MMS, performed very positively this quarter. However, there is a challenging comparison to last year's dispensing numbers, which were exceptionally strong. We successfully gained position and executed implementation throughout last year. This has created a slight offset in the year-on-year quarter-to-quarter comparisons. Nevertheless, Alaris performed well this quarter, and we're optimistic about the upcoming year, feeling that operations will return to normal as we continue to serve our customers. We're also confident in the committed contract backlog we've built over the year and how customers are progressing in our sales funnel, which allows us to enhance our services and manufacturing capabilities.

We want to acknowledge the team's excellent work on the remediation efforts. We are on track and anticipate continued strong growth in Alaris as we enter FY '25. Thank you for the question, Larry.

I just wanted to push a little bit on the phasing for '25 and especially Q1 kind of being sub the guide for the full year, sub 4% with Alaris so strong. You think you'd have a pretty easy Alaris comp. I don't know maybe there's some conservatism built in there. And then understanding like the comps get tougher throughout the year but it's another year of accelerating revenue guide. So just anything you can provide on confidence that you can still accelerate revenue growth over the course of the year against tougher comps?

Yes. Thanks, Travis. It's Chris. I'll try and give a little extra color. I think consistent with what I've said, again, the BD profile in terms of how revenue ramps on an absolute dollar basis, it's actually pretty consistent with what you typically see. This is really all about, again, Q1, these market dynamics. You have 2 businesses that were growing mid-single digits last year. So you actually have a headwind in our comp. I know our growth rate looked low last year. But if you recall, we were cycling through moving respiratory into our base business, and there was a big respiratory comp in Q1 which has no effect on this year as you think of growth rate. So really, you have a headwind when you think of year-over-year growth rates. We feel good. So we're not reflecting substantial improvement in market dynamics as we move through the year. Q1 is the biggest. And then I would say we continue to see what I would call certainly well below our kind of normal growth rate on top-line for those businesses that are market impacted. Like I said, more importantly, on earnings, we have a super balanced earnings per share growth profile with about right around the midpoint of our guide for first half, second half, and you're going to see strong margins out of the gate with Q1 year-over-year margin improvement and then what I would call just a nice glide path of sequential margin improvement throughout the year.

I wanted to ask about your fiscal '25 guidance. As we consider the macro dynamics mentioned in the guidance, many of us might see Alaris as a one-time growth factor until the business returns to a steady run rate, likely next year. How are you assessing the underlying growth of the business through '25 and into '26, and what is your outlook on its sustainability?

Thank you for the question, Robbie. We are optimistic about our progress in moving BD into higher growth areas, which has been evident over the last several years. Our underlying topline growth, excluding COVID testing, has been robust, exceeding 6% for our core business. We acknowledge that there are some temporary factors currently impacting two of our fastest-growing sectors, specifically biologic drug delivery and life science research focused on cell analysis, both of which are well-positioned in expanding markets. Looking ahead, we maintain our overall WAMGR for these sectors at around 5%, unaffected by short-term fluctuations in destocking within pharma or life science research. Our BD 2025 strategy has seen significant advancements, with multiple growth platforms and opportunities that were not in place at the program's inception. For example, our biologics and GLP-1s segment has recently surpassed $1 billion in revenue, making it the largest in its field. Additionally, our pharmacy automation and advanced patient monitoring businesses are showing strong growth, along with innovations in tissue reconstruction and infection prevention. We have a solid pipeline, including the PureWick platform, which we anticipate will reach a $1 billion business opportunity by 2030, along with advancements in high throughput molecular diagnostics. We are confident in our position and will continue to develop our portfolio to seize the opportunities we have created. Thank you again for your question, Robbie.

Just given it's kind of topical at the moment, question around potential tariffs, supply chain impacts. Do you benefit from onshoring relative to any potential paths to go in? And how are you thinking about pricing as it interrelates within all of that?

Thank you for the question, Patrick. Regarding tariffs, we didn't experience significant impacts from previous changes. Our strategy in relation to China has been to focus on strong local manufacturing for the Chinese market. Currently, we export only one minor product from China, which is not significant in the broader scope of our business. Moving forward, we will closely monitor the situation, but our overall approach has consistently involved extensive local manufacturing, especially since we handle billions of units. Our infrastructure is designed to support local markets with robust domestic manufacturing in the U.S. and operations in Europe as well. We will keep an eye on developments in this area, but we've managed well in similar situations before. Thank you for your question, Patrick.

I wanted to just to dig in a little bit more here on the P&L. And as we look at FY '25, there are some sort of discrete items here. You have a year-over-year kind of gross margin normalization as well as accretion from M&A, offset by tax headwinds and higher interest expense. And at the same time, as we look at Q4, we did see a churn in operating expense growth after kind of many quarters of year-over-year declines. So can you maybe just help us think about the construct of the P&L here both in FY '25 and how we should think about it beyond that point in terms of normalized growth drivers across the various line items?

Yes. Thanks for the question. I appreciate it. So we couldn't be more excited about kind of how we're shaping the P&L. The focus on BD Excellence. You saw it in the back half of FY '24, all the progress we're making on gross margin. So we talked about year-over-year delivering about 100 basis points of operating margin improvement. However, this will be the first year that is predominantly coming from gross margin, allowing us to kind of reshape the P&L. We have differentiated levels that will enable growth as you think of selling specifically and R&D, so both shorter term and long term. And so we view this as a very healthy P&L. Obviously, if you go back to BD 2025 when we first rolled that out, at the time, the market complexity and significant outsized inflation was not there. So we've been doing great things in gross margin, but a lot of it has been covering those headwinds. Now you're seeing that play out. '25 is the first year that shows up, as we talk more in our upcoming Investor Day. That strategy will certainly continue and we see that as a key value driver on a go-forward basis.

Tom, I wanted to follow up on your comments. Congratulations on a strong quarter and the well-prepared guidance. I found your consideration of market dynamics very helpful. For my question, I would like to delve deeper into your efforts in AI. You mentioned the rollout of a series of products or technologies. Could you provide more details about your strategy in this area and how you're leveraging the data generated at BD to support these strategies?

Thank you for the question, Matt. You're setting us up nicely for our Investor Day on February 26, where we'll showcase and demonstrate some of our current projects, which we are very enthusiastic about. BD has been active in this area for several years. We have multiple products available that employ AI technology. This includes algorithms that automate microbiology processes, such as software that analyzes petri dishes to identify bacterial growth. We've integrated this technology into our platform. Additionally, we have collaborated with Microsoft to analyze data across our platforms to detect potential narcotic diversion in healthcare. This involves identifying clinicians who may be at risk and providing support to hospital systems to address these issues. Our new advanced patient monitoring division is also effectively utilizing AI in their algorithms to predict future hemodynamic changes. We are eager about integrating this technology with our infusion pump systems, aiming to develop closed-loop systems that employ AI to enhance patient care by predicting future events, adjusting therapies, and preventing complications. We also mentioned the integration of AI in a new initiative that will be relevant to all BD devices, with further details to be shared at our Investor Day. The initial launch will be with our Pyxis platform, introducing a new series of AI-enabled BD devices connected to a cloud-based platform that will leverage data from various devices to improve outcomes and enhance efficiency for clinicians and staff tasked with data analysis. We see considerable potential in innovation, especially since we have approximately 3 million smart devices generating data. Leveraging this data can lead to new developments and positive outcomes. We believe we are ideally situated to take advantage of these opportunities. Some of the increased R&D investment that Chris referenced earlier is directed towards AI in our products. We are also creating a new incubator focused on AI. Furthermore, we are applying AI in our operations, particularly in forecasting and optimizing efficiency in our large operational footprint. Thank you again for the question.

I was wondering now that you've closed APM, if you could give us some additional thoughts on how you think that segment could grow over time and just how it's going to contribute to the margins going forward? And you were just talking about your connected strategy. So I was wondering if you had additional thoughts on how you could develop that and perhaps integrate it with some of the other segments there that are smart and connected and generating the data?

Thank you for the question, Matt. We are very excited about the integration of APM into BD and we're pleased to have Katie leading the team. The integration process is going well, with a strong cultural alignment and a focus on delivering value to our customers while maintaining their innovative momentum. We recently highlighted some upcoming product launches that we believe will contribute significantly to our growth, which we project to be at least 6% to 7% in the long term, and the transition has not disrupted their performance in this initial month. One of our main reasons for the merger was to enhance our medication management capabilities, particularly in understanding the vital measurements of our critically ill patients, like their hemodynamics, and how those relate to their medication. By integrating data from Alaris regarding what is administered to patients and how it affects their condition, we can optimize treatment through advanced algorithms and informatics to improve patient stability and outcomes. Our customers have emphasized this need, and as Chris noted, we are making additional investments in selling and R&D this year, with projects funded for 2025 led by our APM business. Although it's early in the process, our teams are enthusiastic about the opportunities to innovate in this area. Thank you again for your question.

Let's discuss capital allocation. Your announcement of a $1 billion share repurchase over the next 12 to 18 months seems like a positive move and indicates your belief in the stock's value. Should we view this as Becton potentially stepping back from its tuck-in acquisition strategy for the time being as you integrate APM? Is this related to a lack of valuable candidates, or do you have other considerations concerning capital allocation related to dividends or anything else you'd like to address?

Yes, Rick. Thanks, it's Chris. I appreciate the question. I guess first, before we get into capital allocation, it starts obviously with strong margins and healthy cash flow. We've been extremely focused on cash flow progression. We had a really strong year in FY '24. We grew our free cash flow by $1 billion and exceeded our goal of free cash flow conversion, ending at about 82%. This gives us more financial flexibility is the way I would think of it. Our capital allocation priorities are largely unchanged. You did see us announce a dividend increase at 9.5%. That's something that's reliable that you can continue to rely on. We've always said that we're going to prioritize remaining free cash flow for tuck-in M&A. But we're in a position where we just digested over a $4 billion acquisition. We're focused on capitalizing the value out of APM. It's an extremely exciting opportunity, a durable high single-digit grower. So we're very excited about that. We want to remain disciplined about our net leverage glide path down to 2.5x, which we'll do in 12 to 18 months. With that said, with the stronger cash flow position we have and continued momentum in driving a strong cash flow position in '25, we just felt like given what we see as the strong intrinsic value of BD, we could kind of step up the level of share repurchases to about $1 billion over that same time frame while still consistently executing against the 2.5x net leverage. So, I think it's another important part. I appreciate you asking the question. We've been very focused on cash flow, and we'll continue to do so.

Thanks for the question, Rick.

Well, thank you for joining us on our call today. I'd like to take a moment and again, thank our global team of associates who are advancing our strategy, supporting our customers, and improving the lives of the patients we serve. We believe we are well positioned heading into FY '25 with multiple growth drivers across our portfolio enabling us to effectively navigate market dynamics and the momentum in BD Excellence driving margin expansion to deliver a strong earnings and cash profile. We look forward to connecting with everyone on our Q1 call in February, and again at our Investor Day. Thank you for your continued support of BD.