Hello, and welcome to BD's Earnings Call for the First Quarter of Fiscal 2022. At the request of BD, today's call is being recorded and will be made available for replay through February 10, 2022, on BD's Investor Relations website at bd.com or by phone at 800-839-2461 for domestic calls and Area Code 1-402-220-7219 for international calls. The replay bridges are now dedicated so you no longer need a conference ID to hear the replay. [Operator Instructions]. I will now turn the call over to BD.

Good morning, and welcome to BD's earnings call. I'm Francesca DeMartino, Senior Vice President and Head of Investor Relations. On behalf of the BD team, thank you for joining us. This call is being made available via audio webcast at bd.com. Earlier this morning, BD released its results for the first quarter of fiscal 2022. We also posted an earnings presentation that provides additional details on our performance. The press release and presentation can be accessed on the Investor Relations 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. Tom will provide highlights of our performance and the continued progress we have made against our BD2025 strategy. He will then turn the call over to Chris for the financial review and our updated outlook for fiscal 2022. Following the prepared remarks, Tom and Chris will be joined for a Q&A session by our segment presidents, Alberto Mas, President of the Medical segment; Simon Campion, President of the Interventional segment; and Dave Hickey, President of the Life Sciences segment. Before we get started, I want to remind you that we will be making forward-looking statements today. I encourage you to read the disclaimers in today's presentation slides and the disclosures in our SEC filings, which are both available on the Investor Relations website. Unless otherwise specified, all comparisons will be on a year-over-year basis versus the relevant period. Revenue percentage changes are on an FX-neutral basis unless otherwise noted. When we refer to any given period, we are referring to the fiscal period unless we specifically note it as a calendar period. I would also call your attention to the basis of presentation slide, which defines term you'll hear today, such as base revenues and base margins, which refer to our results excluding COVID-only testing. With that, I am very pleased to turn it over to Tom.

Thanks, Francesca. Welcome aboard. We're very happy to have you on the team. Good morning, everyone, and thank you for joining us. We are very pleased with our strong performance in Q1. It reflects the continued execution of our BD2025 strategy and another quarter of consistent strong growth in our base business. We made meaningful progress and delivered on our revenue, margin, earnings and cash flow goals while advancing our innovation pipeline and our tuck-in M&A strategy. Our performance, along with the progress we are making delivering across our key priorities, gives us the confidence to increase our full year revenue and earnings guidance for both our base business and COVID testing. We were able to deliver these results in an uncertain market environment, demonstrating demand across our broad portfolio of products essential to patient care, along with BD's unique ability to deliver strong performance in the face of an ongoing global pandemic. The market impacts from COVID-19 dynamics continue to be in focus, particularly in the health care sector. However, we've witnessed a global health care system that's more agile and better prepared as each new variant has emerged. In Q1, health care utilization levels continued at rates similar to what we saw in the fourth quarter of fiscal '21, remaining slightly below pre-pandemic levels until mid-December, then only declining modestly as a result of Omicron. While we saw some slowdowns in deferrable procedures in the back half of December in certain regions due to hospital-imposed restrictions and staffing constraints, overall, our customers were able to continue to provide care to support patients and sustain a solid base of deferrable procedures. These challenges to procedure levels had minimal impact on our business in the first quarter. In addition, we saw routine lab testing returned to normal levels in Q1…

Thanks, Tom. Echoing Tom's comments, our Q1 results demonstrate the strength of our business and the momentum of our strategy. We are enhancing our growth profile through the portfolio and investment actions we are taking, while also executing on margin improvement and inflationary-mitigation programs to deliver our long-term margin expansion targets and double-digit earnings growth profile. To that end, I'd like to recognize our associates across supply chain for their contributions. We have an incredible team around the world that is not only addressing the challenges that all companies are facing in today's environment, but they are excelling and driving performance. Turning to our revenue performance. We delivered $5 billion in revenue in the first quarter comprised of $4.8 billion in base business revenues, which had strong growth of 8.3%, and 7.8% organic, which excludes the impact of acquisitions. COVID-only testing revenues were $185 million, which, as expected, declined from $866 million last year, as this was our highest revenue quarter for COVID testing last year given higher pricing and volumes. The year-over-year decline in total company revenues of 5.9% is entirely attributable to the decline in testing revenues. BD is uniquely positioned to deliver strong performance during these uncertain times. The breadth and diversification of the total BD portfolio, including COVID diagnostic testing, provides insulation against COVID-driven procedure fluctuations, as demonstrated by the revenue performance across our segments, with BD Medical growing 6%, Life Sciences based revenues growing over 17% and Interventional growing 3.8%. Total company base business growth was also strong regionally, with double-digit growth in the U.S., China and Latin America. Let me now provide some further insight into each segment's performance. Our Medical segment delivered $2.4 billion in revenues in the first quarter, growing 6%, led by our Medication Delivery Solutions and Pharmaceutical Systems businesses. MDS…

[Operator Instructions]. And our first question comes from Vijay Kumar with Evercore ISI.

Maybe my first question, some clarification on the Q1 numbers here. Can you quantify what the contribution from combo test. There's some confusion on whether it was an abnormal contribution. I think in the past you've said it's about $75 million to $100 million. So was it in line with expectations? Has anything changed on combo test? And this licensing fee, it looks like maybe it was $40 million or $50 million contribution from a dollar perspective. Is that the right way to think about it?

Vijay, this is Tom. Thanks for the good question. So on flu COVID combo, testing is very much in line with our expectations. The -- as you said, it was $70 million to $80 million or so is what we expected for the full year, and you would expect a portion of that to be in Q1, and it played out as such. Essentially, it's relatively immaterial to overall BD, as you can imagine, if you take the 75 80 and you spread it over a couple of quarters. So that's what was in our numbers. We have not seen any -- it's a normal to light flu season this year. It's certainly higher than it was last year when there was essentially no flu. But if you look at the CDC data, it is on track for a light to normal flu season. but nothing above our expectations at this point in time. I'll turn it over to Chris for the other question.

Yes. And just to confirm, on the licensing revenue, yes, so it was worth 40 basis points. You can do the math. It's roughly $50 million. We also had -- you heard me reference, we're actively driving our ReCoDe initiative and SKU productivity and have been very intentional about making choices there to enhance our profitability. Given the strong growth profile, this affords us the luxury of being able to absorb some headwinds as we simplify our portfolio. And primarily in the BDI business, there was some impact there as well, and that actually had a negative impact in the quarter of about 30 basis points.

That's extremely helpful, Chris. And maybe my follow-up on the guidance here. You guys [indiscernible] Q1 by about $250 million on the revenues versus street models, $0.60 on EPS. The guide raise was of a similar magnitude. When I look at your gross margin execution, ex licensing, it's well over 55%. It feels like perhaps the guidance is conservative, maybe talk about the assumptions that went into the 2Q to 4Q implied guide?

Yes, thanks for the question. Let me approach this 2 ways. So let me first talk about the quarter and how we delivered in the quarter maybe relative to what folks are seeing from kind of an external expectation standpoint. So obviously, we're very pleased with our Q1 results, clearly reflected strong base revenue growth which exceeded our expectations. As you noted, there was also a strong execution against our margin enhancement objectives, actually realizing benefit earlier in some areas, which will help us going forward because certainly we're seeing continued market-driven supply and inflation pressure as you look out into the back end of the year. Finally, we -- as you noted, we did realize incremental revenue from COVID-only testing. You can see that in our results. That actually had a strong margin as well in the first quarter. The good thing here is the strength is nicely balanced between our base and the increment from testing. There were a couple of timing items as we think comparing to, again, kind of more what I would frame as external expectations. First, we had signaled there was -- we had expected a discrete tax item in Q1, which did play out as expected. So we had a lower effective tax rate in the quarter. We're still confident in our full year expected tax rate. So thus, you would expect a slight increase over our full year average through the balance to go there. You had highlighted the licensing impact, which I don't think was contemplated in the external view. That was planned on our side. Those 2 items alone explain what I would call the delta you're seeing between our total results relative to the external view. I think the other 2 new considerations to think about that don't really…

And our next question comes from Robbie Marcus with JPMorgan.

Yes. And congrats on a good quarter. Chris, maybe I could just follow up on that a little bit and get a little more from you. You raised EPS by less than the beat. Should we think of that as any changes to the inflationary environment? Or maybe what went into the view to not raise it as much? Was the licensing, did it come earlier than expected? Or just anything we can get and help us phase through the rest of the year versus where we were before.

Yes. Thanks, Robbie, for the question. I guess I'll reiterate some of the things that I just shared. To your point, extremely strong quarter. You saw the results relative to external expectations. There were 2 timing items. We had signaled tax in Q1, that was not contemplated in the external view. The licensing also wasn't contemplated in that external view. Those were both items that we had planned and we had communicated the tax. So when you think of those 2 items alone, we're actually giving more than, call it, an adjusted external view. And then I think the last piece that isn't being considered is, there are new items in the back half of the year. Again, FX, right, which is going to play out, there's $0.10 there that will play out post Q1. And in addition to that, we had highlighted the fact that we are going to do some reinvestment on some of the margin drop-through on the incremental testing that happened in Q1. So that kind of explains it. Again, I think the easiest way to think about it is, we delivered 8.3% growth in Q1. Our revenue guide has us holding the 8.3% and then actually holding the same guide on the balance to go, which means we're equally confident in our original guide despite the fact that everyone would acknowledge that there are more headwinds as it relates to Omicron, et cetera. It also implies at $0.50 on $250 million of sales an extremely strong drop-through to profit, right? It's highly variable. It's actually at a GP level or plus, which means all that revenue, we're fully leveraging our base and it only implies a strengthening perspective on our margin outlook. And again, we're extremely excited about the start of the year. I feel good about where we are. Obviously, we did talk about -- we do see continued inflation pressures as the year progresses. We're working really hard. The team is doing an outstanding job mitigating those. But it is certainly a unique environment. But I think a great start to the year. The guide increase signals more confidence than when we entered the year despite what I would argue is actually more complexity.

And Robbie, this is Tom. I think you've heard me used the word prudent pretty nonstop since the COVID pandemic hit. And so I would view our guide today is prudent with -- as the market continues to remain more stable, that there's opportunity for upside as we move through the year.

That's actually very helpful. So it sounds like there's an extra $0.20 or so of reinvestment going back into the business. How should we think about where that's going and when and where we might see that materialize?

Yes. Thanks, Robbie. Yes. Obviously, so one, as the CFO, of course, it's going to be contingent on there'll be strong value-creating opportunities. We've always looked to innovation, I think, first. I think also anything that we can do to accelerate the great programs that we have in place to build capability and execute against our Simplify agenda, which will lead to margin, I think, would be the 2 areas that we would continue to prioritize. I would likely see that kind of phase more second half. Certainly, with the new guide in our plan, some of that will happen in Q2, but it will probably be more kind of spread throughout the year is the way to think about that.

We'll take our next question from Matthew Mishan with KeyBanc.

Just first, could you go a little bit deeper on the Peripheral Intervention issues around the recall and supplier constraints and how long that's expected to last? And is there any way to quantify the magnitude? And was that originally contemplated in the guidance as well?

Matthew, this is Tom. I'll turn that over to Simon.

Matthew, Simon. Yes, I'd be happy to provide that information, but before I do so, I think it's fair to say we're reasonably happy with the performance of BDI in the quarter. And with respect to PI, we're happy with the position of that portfolio. We're happy with our competitiveness. We're happy with our ability to continue to strengthen that portfolio as you've seen the acquisition of Venclose during the quarter. So the issues we face are -- I would classify them as extremely acute in nature and I feel time-bound. Three issues generally have been the source of the majority of the problem today. But this time last year, we recalled the Venovo venous stent and so we've got a headwind for 4 quarters at this point in time. We expect 2 things from that. Number one, it's almost annualized. And number two, we do expect it to be back in the market in the second half of this financial year. And just to reiterate, that is not an implant issue. In fact, in September of last year, we published 3-year data from the [indiscernible] study on Venovo, which showed 84% [indiscernible] and 0 fractures and 0 migration. So we are very confident that this is going to have an impact on the market again. Second issue was the backorder and supplier challenges in the NPI. PI does have the most complex portfolio, the most complex products and the most complex supply chain certainly within BDI. And we've experienced headwinds from raw material capacity to COVID impact in supplier sites to sterilization capacity in the past number of quarters. We do see light at the end of the tunnel on a number of those issues, particularly in relation to sterilization. And we expect to begin to see material improvements in our performance with respect to back order by the end of this quarter. And then finally, as Chris and Tom have remarked, SKU rationalization has impacted PI more so than any other business this past quarter. And as we discussed in other fora, these product discontinuations are being done strategically with a view to enhancing margins and increasing efficiencies across our entire cycle from manufacturing to sales rep time allocation.

I think just to add, Simon, those strategic product exits that we've been doing in PI, but also in other areas of the company as part of our ReCoDe initiative, across the board, those -- with the strength of our revenue, we've been in a position to accelerate that strategy in a number of ways. And those products that we're discontinuing typically always have growth rates that are far below the company average and margins that are far below the company average. And so it's addition by subtraction as we think about that long term, as we simplify our portfolio and focus in those higher-growth spaces that are going to be driving the future of the company. So thank you, Matthew, for the question.

Okay. And just lastly on Alaris. And I'm sorry if I missed it in the prepared remarks. I know it wasn't previously assumed in guidance, but it says that FDA clearance of Alaris is not expected now in FY '22. Did something change in the conversations with the FDA?

No, Matthew. That's very -- that's exactly what we said when we gave guidance. That's no change at all. We continue to be focused on advancing Alaris and there's no updates.

[Operator Instructions]. We'll take our next question from Larry Biegelsen with Wells Fargo.

Congrats on the nice start to the fiscal year. I'll ask both my questions upfront. I heard pricing a lot so far on this call. Where do you guys see opportunity to take price? And what's embedded in the guidance for net price change year-over-year? And second, Chris, the guidance for the base business implies second half growth is below the range, I believe, based on your quarterly phasing, by our math, maybe 4%. Is that conservatism? And what does it imply about your ability to grow 5%, 5.5% plus beyond fiscal 2022?

Okay. Thank you for the question, Larry. Why don't we start with the last question first. I'll turn it to Chris on the growth pretty clear answer.

Yes, Larry, thanks for the question. Yes, the full balance to go is actually equal to our guide. What we did signal though was Q2, we're still navigating through kind of a recovery period, if you remember the resurgence last year. So it's really more I would think of it as kind of outsized on the BDI side of the business, in particular. There are a couple of small comp dynamics in Q4 as well, right? We had some new product launches. So if you look at the comp from last year, it's very strong. So it's really just more comp dynamics, I think, as it relates to 5 5 plus for the long term, that this more than validates that we're well on track and strong there. As a matter of fact, our continuing to look at growth versus '19 as an example, too, is extremely strong, actually moving to over 5% with -- and that's -- and considering the fact that you have a year of COVID in there, that's a strong signal for the trajectory of the business.

And on pricing, Larry, so as you know, as you know BD very, very well, we've been focused on pricing for many years and had begun the journey with putting in resources in every business that are dedicated to pricing, pricing leadership at the company level as well. And obviously, in an environment where there's record levels of inflation, it's been an area that has been ever more important. And so we began our journey of working on pricing in an inflationary environment last year and began taking actions. And you're starting to see and will continue to see the impacts of that flow through in the year. We take those actions very serious in discussions with our customers. We understand they work in a reimbursement-constrained environment. And so if you look at where we are implementing price most significantly, it is -- and we're very transparent with our customers, by the way, on where we're raising price and why we're raising price and the impacts of inflation as the driver of that. But where you see it most is in those products that we're selling for a dime, a quarter or low dollars, where BD over decades has invested billions of dollars of capital in creating extremely efficient, fully automated manufacturing facilities that allow us to be one of the only companies on the planet who can sell billions of devices at dimes and quarters and dollars. And because of the way that we've just continued to refine our manufacturing capabilities over the year in a best-in-class ways, any increases in variable costs like resins, as an example, or chips, et cetera, they tend to flow right through and directly impact product margins and profitability. And so we can share what those impacts are on those raw material increases with our customers, and we have those discussions, and we've been raising price actively, particularly in those product categories. And so while we're not giving out -- not sharing a specific number on price through the year, we are -- have been very, very active on that. And it's -- we're doing it in every region around the world, it's not a U.S. or Europe thing, it's equal across all geographies and directly related to passing through a portion of the inflationary impacts that we're getting on raw materials. Of course, at the same time, we're taking a number of actions beyond pricing, passing it all through to our customers, and that includes us taking cost actions within the company, continuing to drive significant continuous improvement in our manufacturing plants and always look at ways to be more efficient and look at prices, that last resort. But we have certainly been doing more price this year than we have seen historically.

Larry, just one other quick thing. I don't know if this helps, I wasn't sure if your comment was operational. But obviously, the FX phasing will be certainly more back-end loaded in terms of the negative currency impact, maybe another consideration. And then further to just Tom's comment on pricing from a progress standpoint, I think what I can share, we did not split out the dynamic, but it's part of our plan as it relates to -- we talked about an inflation impact and then cost improvement programs and price. Cost improvement is actually a large portion of it, to Tom's point, where we're getting a net 50 basis points improvement for the full year of the 200 basis points. The other 150 is coming from volume and strong growth and some FX benefit that carried over from last year. And on pricing, we entered the year with plans, with 80%, 90% of firm plans in place and 50% of that action. We now have 100% plans fully identified and 7% of it is already fully executed, with the balance really more timing tied to triggers and other events. So really good progress there.

We'll take our next question from Matt Taylor with UBS.

I just had a follow-up on the thread on all the supply chain inflation issues and your ability to mitigate them. So wanted to understand better the forecast and what you're assuming for the second half of the year in terms of some of those headwinds abating. And Tom, I appreciate your comments on the nickel, dime and quarters, the lower-cost products. I was wondering specifically if you could also raise price on reagents or anywhere else in the portfolio?

Thank you for the question, Matt. So on the supply chain and inflation perspective, we don't have -- there's not assumptions that there's any major material reversal of the cost. There are some areas where we expect continued trending. Resins, for example, have been heading in a moderately to minorly favorable direction, as an example. We expect that to continue. But overall, we don't see major abatements in areas like shipping, as an example, or chips. That's -- we bake that into our outlook as we go forward. We do think those supply chain dynamics will continue certainly longer than most of the world thought at this time last year, and we see them -- many of them continuing through '22. So we have that built into our considerations and outlook. The other question was.

Just on reagents or any other areas...

Yes. Thanks, Matt. Certainly, we do look at those, and we have raised price in a number of areas as appropriate across the portfolio. There are a few products, of course, in today's environment that aren't impacted by inflation in areas such as shipping or computer chips, et cetera. Instrumentation will be a good example of electromechanical inflation that we see and we raised costs there in areas such as service, where spare parts, certainly, the cost of those go up. And we do share the increases of those as well. So the answer is yes. But by far and away, the most significant increases would be on those products that we are just extremely efficient at producing and where the percentage of COGS made up of raw materials are disproportionately high.

Just one small add that may help you think about how this sort of could play out through the year. Inflationary impacts kind of started more in the second half of last year, right? So as you go through this year, what you're going to see in the first half is kind of a full impact of continued inflation. As you get to the back half, you'll see some stabilization to some continuous increases, but to a smaller degree. And then think of the opposite as it relates to kind of the offsets that will drive, call it, the net, right? That will ramp a little bit slower, although we were -- we actually exceeded our expectations for Q1, but you have just sort of the natural ramp that happens as you put actions into place throughout the year. So that may help you as you sort of think of the timing dynamics. We did talk about GP or GP operating margin, Q2 kind of being the low watermark as it relates to the full impact of inflation flowing through. And that is GP and up margin because a lot of the inflation is also in the area of shipping. So you should think of both line items in that regard.

And Matt, just maybe one other item to add is we have been very active and we put this in place last year. We have a formal inflation task force that we've established, with multiple different pillars within that and dedicated groups, working on everything from rethinking our logistics chain, and that includes looking at alternative shipping partners in a number of areas. For example, how can you ship from Asia to the U.S. or from Europe, U.S. to Europe in more efficient ways? What parts of our supply chain have traditionally used airfreight, as an example, that we can move on to rail or boats? We've been taking actions and rethinking that, both how we get products to customers, but also from raw material suppliers into our plants. And of course, looking at the materials themselves, where there's alternative vendors and working with existing vendors on different technologies that could be more cost effective for us to use. All of those are different components within our inflation task force, it's been very active, and we're seeing the impacts of that as well.

We will take our final question from Rick Wise with Stifel.

Tom, Chris. Tom, just this excellent quarter, just the superb margin performance, et cetera, makes me think back actually to our December -- mid-December 2019 meeting as you were about to step into the CEO role. And I'm curious about 2 aspects of your comments back then. One, you highlighted your growth-focused priorities, particularly inorganically. I'd be curious to hear just maybe update -- your updated thinking on M&A and opportunities for the rest of the year, how aggressive you hope to be or what the opportunities are. But the second part, and even more particularly, today, we've heard again and again about the clear path to that 400 basis of operating margin improvement. I was hoping you could be a little more granular about the 3 things you highlighted back in December 2019. You said we're going to reduce the manufacturing footprint. You're going to unify the end-to-end operational processes. And we've heard Chris highlighted the SKU rationalization reduction. Where are we on those initiatives? How much more is there to go? Sorry for the long question. Appreciate any color.

Thank you, Rick, for the question. And hopefully, get to see you again soon in person. As the pandemic here, it's been a while since we were able to connect live, which I always enjoy. So I appreciate it. It's a great, great question. Certainly, as we look back and we laid out the BD2025 strategy, I do see that we're beginning to transition from how we view the first phase of that strategy into the second. The first phase of that strategy, and I remember our discussion well, we talked about an initial focus on, including strengthening our balance sheet and cash flows to increase flexibility. And you've seen really pleased with the team's work around accounts receivable, payables, inventory. You've seen our free cash flow conversion moved up meaningfully. over that period of time. And that's allowed us to have flexibility to do what you just mentioned, M&A opportunities. And I think we are among, if not the highest, number of acquisitions within med tech this -- over the past 2 years. We clearly demonstrated our interest there. We've also spent a lot of time accelerating innovation and reshaping our portfolio and driving strong execution in that portfolio. If you recall very early on, we jump-started that with the Growth and Innovation Fund. We gave that strategy a further boost by reinvesting a portion of the COVID testing proceeds last year. And we're beginning to see the results of that work. And the energy across the organization as our mindset is very strongly pivoted to growth. And I am pleased with the cadence of the company M&A and how we've built those capabilities as a new lever for the organization. Obviously, just this quarter and the first few weeks of Q2, we've done 4 acquisitions. This year, I…

And at this time, I'll turn the call back over to Tom Polen for any closing remarks.

Okay. Thank you, and thanks, everyone, for your questions. Before we sign off, I just want to thank BD's 75,000 associates around the globe who live our purpose every day to advance the world of health, who are working tirelessly to support our customers and frontline health care workers around the world and are committed to executing our strategy. I'm proud of how we've started fiscal '22. I'm looking forward to continuing to deliver on our goals and making meaningful impacts for our customers and their patients around the world. On behalf of the entire executive team, thank you for your efforts and sacrifices. And operator, with that, we will end today's call.

Thank you. And this does conclude today's audio webcast. Please disconnect your lines at this time, and have a wonderful day.