Hello, and welcome to BD's Earnings Call for the Third Quarter of Fiscal 2022. At the request of BD, today's call is being recorded and will be made available for replay through August 11, 2022 on BD's Investor Relations website on bd.com or by phone at 866-342-8591 for domestic calls and area code +1-203-518-9713 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 third 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 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. Tom will provide highlights of our performance and the continued execution of our BD2025 strategy. Chris will then provide a financial review and our increased revenue and EPS guidance for fiscal 2022. Following the prepared remarks, Tom and Chris will be joined for Q&A by our segment presidents, Simon Campion, President of the Medical 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. I encourage you to read the disclaimer in our earnings release and the disclosures in our SEC filings, which are both available on the Investor Relations website. Unless otherwise specified, all comparisons will be on a year-over-year basis versus the relevant period. Revenue percentage changes are on an FX-neutral basis unless otherwise noted. In addition, the results and guidance we are presenting today are on a continuing operations basis, which excludes the historical results of embecta, which are now accounted for as discontinued operations. When we refer to any given period, we're 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 terms you will hear today, such as base revenues and base margins, which refer to our results, excluding estimated COVID-only testing. With that, I'm very pleased to turn it over to Tom.

Thanks, Francesca. Good morning, everyone, and thank you for joining us. We are very pleased with our strong Q3 results. We exceeded our revenue, operating margin and earnings goals and delivered another quarter of consistent strong performance in our base business, with revenue growth of 9.3%. Our results continue to demonstrate the durability of BD's performance even during an uncertain market environment, with year-to-date base business growth of 9.6%. I want to thank our team of over 75,000 talented associates, who continue to deliver on the Growth, Simplify and Empower pillars of our BD2025 strategy. Our performance reflects the team's agility and strong execution, which puts us ahead of the curve in our ability to manage inflationary pressure, mitigate supply chain challenges and optimize supply for our customers. BD 2025 continues to serve as our true north and is proving to be the right strategy to reinvent and transform health care now and positions us to continue to deliver strong performance in the years to come. This is evident in our year-to-date results and the proof points of our performance, which include: one, a reliable and strengthened growth profile; two, our reshaped innovation and M&A strategy; three, an improving margin profile; four, disciplined capital deployment; and five, our continued execution during uncertain times. First, we've strengthened our growth profile as evidenced by our accelerating performance over the past 2 years. In part, this reflects the durability of our COR products as BD is often referred to as the backbone of health care. Our durable COR remains in high demand and creates a stable business, particularly in times of uncertainty. Second, we've been enhancing our growth by reshaping our portfolio through our innovation pipeline, tuck-in M&A and the embecta spin, all increasing BD's waiting in higher growth spaces. Our investments in…

Thanks, Tom. Echoing Tom's comments, our Q3 results demonstrate the strength of our business and the momentum of our strategy. Additionally, the investments we are making in inventory, transportation, portfolio simplification and innovation are also enabling our growth and our ability to deliver our critical health care offerings to our customers and their patients. We continue to deliver strong performance, while simultaneously managing the persistent macroeconomic pressures through our simplification and mitigation programs. Through this balanced approach and the effectiveness of our BD2025 strategy, we're making strong progress against both our short- and long-term commitments. So turning to our revenue performance. We delivered $4.6 billion in revenue in the third quarter, with strong base business growth of 9.3% or 8.8% organic, which excludes the impact of acquisitions. Importantly, however, we are benefiting from the organic contribution from tuck-in acquisitions we anniversaried, which was about 30 basis points this quarter. Our revenue performance continues to be supported by our durable COR portfolio and an increasing contribution from the transformative solutions we're bringing to the market through our innovation pipeline and tuck-in acquisitions. Price contributed 190 basis points to growth year-to-date. While this continues to be well below inflationary levels, it's one of many factors that is ensuring we can deliver our health care offerings to our customers. COVID-only testing revenues were $76 million, which is expected to decline from $300 million last year. Year-to-date, COVID-only testing revenues were $475 million. BD's unique ability to continue to deliver strong performance during this uncertain environment is reflected in the performance across our segments with both Medical and Interventional growing 7.9% and Life Sciences base revenues growing 13.2%. Total company base business growth was also strong regionally with double-digit growth in the U.S., Greater Asia, excluding China, and Latin America, along with high single-digit…

Thanks, Chris. Our BD2025 strategy is proving to be an effective winning strategy as reflected in the proof points of our execution and our continued strong performance. We expect continued momentum and remain well positioned to drive long-term growth and value for all stakeholders. I'd like to thank our associates worldwide once again for their tireless commitment to our purpose of advancing the world of health. Before we turn to Q&A, I want to officially congratulate and welcome Simon in his new role as the Head of the Medical segment and thank Alberto Mas for an exemplary nearly 30-year career at BD. We expect to announce Simon's successor in BD Interventional soon. I'd also like to welcome Rishi Grover, our new EVP and Chief Integrated Supply Chain Officer. Rishi brings more than 20 years of experience in manufacturing and supply chain roles, and we're thrilled to have him join our executive leadership team. Rishi succeeds Alex Conroy, who will be retiring after more than 30 years at BD. I'd like to thank Alex for his contributions to BD throughout his career that include a vast array of roles and responsibilities. Most notably and recently, Alex led the organization through unprecedented challenges, including the COVID-19 pandemic and global supply chain crisis. For the purpose of today's Q&A session, Chris will take financials, Dave will answer life science questions, Simon will address BDI, and I will take BD Medical. With that, let's start the Q&A session. Operator, can you assemble our queue?

[Operator Instructions]. And our first question comes from Larry Biegelsen with Wells Fargo.

Congratulations on another strong quarter here. So Tom and Chris, I wanted to just ask about 2023, a couple of follow-up questions and one on pricing. So Chris, on 2023, could you just talk about, is that base sales growth of 5.5% plus, is that organic? How much do you think at this current rates FX would impact sales and EPS? And what's assumed for Alaris returning to the market? And I just had one follow-up on pricing.

Let me -- maybe why don't we first start just with a quick comment on the Alaris, which we'll do one upfront and then I can walk you through the 2023.

Larry, this is Tom. Thanks for the good questions. So first off, just overall on '23, as you heard from Chris, we feel really good about our overall position for '23. And obviously, Chris gave some very specific color on that today. It is still early though, and we're not going to get into any specific product assumptions today. We'll click down into that level on our regular Q4 guidance call. But specific to Alaris, really no change to what we've shared before. Alaris remains our #1 priority. We're confident in the resources that we've invested in our submission and the team and the leadership that we have working on this. And we're focused on making sure that we get all the information to the FDA that's required to get clearance on that product. And so no change from that as -- again, as we think about the Q4 and guide for '23, we'll share more, but we're not going to get any product line details at this time.

Yes. And so I'll build on some of the comments that we made in the opening comments. So first, as we think of 2023, we certainly know there's still a lot of uncertainty that remains in the marketplace. We actually wanted to try and get some context because we know there's questions out there. One, obviously, we have significantly strong growth profile in '22, right? Our guide would apply on an organic basis about 8.25% growth when you strip out Parata. So folks, we knew there was questions about how you're going to cycle over that growth? Can you still deliver at your 5.5% plus? In addition to that, we knew there was sort of the open question as it related to COVID testing? And how do you think of that dynamic? And what it may do in terms of your earnings profile? So I think with that as a backdrop, we wanted to just reaffirm. We're extremely confident in our 5.5% plus growth profile that we outlined. Actually, I think an interesting way to think of that is if you do kind of 2-year math, it would imply a growth rate of about 7% '22 to '23. So any way you look at that, it's a really strong base growth profile. We do see the impact of COVID-only testing dropping significantly as we said. We're planning for roughly $25 million kind of this quarter based on what we said and kind of see that more as a more normalized run rate. Obviously, if there's upside to that, it provides that embedded hedge to our portfolio that we've always talked about. So that will be a headwind that gets contemplated. With that said, you see the power of our capital allocation strategy going to work. We're pleased to announce the…

Right. That's super helpful. Given the time here, I'll drop there. I appreciate the comprehensive answer, guys.

We'll take our next question from Vijay Kumar with Evercore ISI.

I'll limit myself to just one question, maybe a two-parter. One, on fiscal '23, the 5.5% organic, that does not include Parata, correct? And Chris, when you said double-digit EPS, that's on a reported basis? I just want to confirm. When you look at free cash flows year-to-date, it's been trending in below. I know there's some inventory buildup. Anything else that's going on in the free cash line item?

Yes. Thanks for the question. Yes, just to confirm, the 5.5% plus does not include Parata. Our commitment that we outlined in Investor Day, again, you always run the business on an operational basis and think of operational commitments. So both a double-digit commitment on base revenues and then what we just shared here despite the COVID only grow over, given the drop in COVID-only revenue, we're confident in right about a double-digit growth profile on an all-in basis as well, which is a great signal on the strength of our total business and the continued momentum we have as it relates to margin improvement that we've committed to as well. If you remember, we committed to about 25% through the 2025 period. We shared that last quarter. As it relates to FX, again, this is going to apply to any company. Actually, we've been absorbing currency this year, but those commitments we make are always on an FX-neutral basis. You will have to adjust for revenue, and there will be some translational drop-through on that, that would have to be contemplated as you think of the final growth rate. But we need to wait and see where FX lands. But again, that's not different from anyone, and it doesn't impact your -- it's certainly not reflective of your underlying business. And it doesn't impact the underlying cash that you've earned locally. And we have a capital deployment model that we'll continue to put that to work to continue to drive our strategy as it relates to tuck-in M&A and other things. So we're feeling really good about that growth profile. Regarding free cash flow, there's been a -- there's really 3 big dynamics. We remain extremely focused on cash. Remember, there's a few ways to look at us. One,…

And Vijay, this is Tom. Just to add to Chris' comment on that. We view that increase in the inventory levels impact on cash flow. We call it transitory in nature. That's a strategic investment. But as we see supply chain stabilize, we can back off on that additional inventory. As shipping times, transit times, get back to a more normalized level, right, it's going to be more than a month additional nowadays. To get product, let's say, from Asia to the U.S., right, as that normalizes, that will naturally pull back inventory levels as well. And so we see that just as a temporary investment to help navigate the very dynamic circumstance that exists today. But we already have the plans on starting to pull that down as we look ahead.

That's helpful, Tom. Congrats on the [indiscernible].

Thanks, Vijay.

We'll take our next question from Robbie Marcus with JPMorgan.

Great. Congrats on a good quarter. Maybe to start, Chris, just maybe walk us through some of the drivers of operating margin expansion next year. I realize you're not giving exact numbers. But the base business has been sequentially down just a little bit each quarter in fiscal '22. With next year, how do we think about the drivers of that margin expansion?

Yes. Thanks, Robbie. So first, as it relates to this year, the margin has played out exactly as planned. As a matter of fact, year-to-date, we're sitting at basically 80% of our full year goal, that 250 basis points where we actually increased our margin improvement more to account for, call it, an accounting dynamic and reclass of line related to employee benefits. But we remain well on track. We did explain at this quarter as it relates to GP specifically, would be the low watermark as you think of timing dynamics, in particular, the outsized inflation that started at the beginning of the year, how that rolls through inventory. And then from the time we started the year, things have only gotten a lot more complex. Inflation increased and supply chain complexity increased, which also increased things such as transportation, et cetera. So as we've come into the year, just to maybe give you a little bit of context on margin, there's probably been about 100 basis points of -- to our P&L as it relates to outsized inflation above what we contemplated coming into the year given the additional complexity. It's about a 50% increase from what we originally planned. Despite all that, we're still holding our margin commitment for the year, which is really strong. As you think of the components this year, and I share that because it will play into next year as well, our volume leverage we talked about coming into the year was supposed to be about 100 basis points. Given the strong revenue growth profile, we've done stronger there. That's been part of navigating the outsized inflation on the other end that I just articulated. And then really beyond that, it's been cost improvement programs that we've dug into and enhanced. We've…

That's really helpful. And maybe just a quick follow-up. Your pricing, I think you said 190 bps positive is one of the best, if not the best, in large-cap med tech. How sustainable is that? Do we think of that as you're able to take that as a onetime? Or is this the new normal on pricing as we move forward into subsequent years?

I'll take that, Robbie. So just as we think about inflation, and Chris hit a lot of the things that we do to offset that pricing just being one and the last thing that we look at. We put an inflation task force in well over a year ago, recognizing what we saw was going to be inflation this year, and we expect to continue to be inflation in '23. And so just to make that clear, we've done a ton looking at and taking action around improving our own internal continuous improvement within our plants, restructuring our organization, getting costs out within that, looking at our supply chain and how we get costs out there and taking action, and we're seeing those things come through. It's helping our margin. And we are -- as part of that, where we can offset those internally, we do pass on pricing. We do expect to continue to drive very large significant actions within BD to offset inflation as we look ahead. But we'll continue also where we can't fully offset that to continue to pass that through in price. And we do that in all markets around the world and across all business areas.

We'll take our next question from Travis Steed with Bank of America.

Great quarter. I did want to put a finer point on '23 [indiscernible] margin around [indiscernible]...

Travis, you're breaking up. We can't hear you very well.

All right. Can you hear me now? Is that better?

Yes, keep speaking.

Okay. Sure. Sorry about that. So just put a finer point on some of the FY '23 comments. I was getting around $12 in earnings for FY '23, just to make sure that's the right ballpark. And on the 100 basis points inflation versus prior expectations, talk a little bit about what's changed there. And to think through like the total inflation impact you're absorbing this year, is that closer to 150 to 200 basis points, $400 million to $500 million? Just trying to think about if there is some relief what the opportunity could be on that front.

Maybe we want to start with the $12 commentary. Chris, I'll turn that to you.

Yes. I think as it relates to kind of sharing any specifics on a number, we wouldn't do that for sure. I think we laid out the framework that's pretty clear. We did say that we, of course, look and are aware of kind of external thinking and the time coming into this print, it seemed reasonable knowing that folks would not have contemplated the carryover on currency. Anyway, that's -- I don't think there's much more to add there. I would just go back to, again, the commitment on the 5.5% plus growth profile, double-digit adjusted EPS growth on the base and even having confidence of right around double-digit growth, adjusting for the drop-down of the COVID-only testing.

And Travis, on your comment around what changed as we went through the year. I think very similar to what probably every business around the world and particularly in the U.S. would have seen we recognized and we took the position very early on well over a year ago, again, that there was going to be no company that escapes inflation and no company that escapes supply chain challenges, and we've been taking action to that extent. Those challenges, labor became more expensive as you went through the year, right, particularly in areas, like manufacturing, where there were shortages and you had to pay more to get talent to run plants. Think about as you saw low watermarks for unemployment, trying to staff, for example, overnight shift. When now there's tons of jobs for people to work day shift, having to change that in all of our plants, which we pretty much run most of our plants 24/7. Shipping continued to increase as we went through the year, and you saw that as well. Things like power significantly, as you can imagine, we use tons of power in our manufacturing plants running large presses, et cetera. Those costs went up as well. And so those were general inflationary pressures that you saw across the country, very much in line with inflation continued to go up as we went through the year just versus everyone's expectations, and that certainly we didn't escape any business. And so what was maybe starting the year towards that 150, 200 basis point headwind ended up being more of a 250 or so as Chris mentioned. And again, we are really pleased with the team's work to overcome all of that and still deliver on our expectations that we set at the beginning of the year. I think that really speaks to the power of the strategic planning that the team has done, the strong execution and the foresight to make investments in areas like the strategic inventory builds that we did and navigate a very challenging environment.

Just one other frame for everyone because I know you're all navigating. Things have changed a lot from the start of the year to where we are. And when you think of that through the lens of BD, there's really been 2 key things that have changed, one kind of a macro factor, right? When we started our initial guide and talked about what the year would be like we were contemplating pretty significant outsized inflation. As the year progressed, whether it be the conflict in Ukraine and Russia, the COVID China shutdown, the complexity only grew. Inflation grew, as I noted earlier on the call. And the supply chain complexity increased. So again, about a 50% increase on what we originally contemplated about a 100 basis point headwind. Then when you think of what's happened from BD. Our initial guide, when you kind of restate everything for embecta, we were at 6%. We're sitting here at 9% at the midpoint, right? That's 300 basis points or about $0.5 billion. So with more complexity, we've actually strengthened our growth profile and overcome all of those headwinds. And then I know there's a lot of puts and takes quarter-to-quarter. Obviously, there was also on the revenue side. Outsized COVID testing, we benefited from. That took our number up $300 million. But when you look at the EPS drop-through, it was north of $0.60 from the beginning of the year, inclusive of absorbing FX headwinds. And when you look at that then and think of what we've done from a margin standpoint, we've delivered exactly what we can actually slightly above our commitment. So we absorbed $100 million -- 100 basis points of headwind on the cost side, delivered outside performance as we've headed through the year on top line and fully held our margin commitment both on the base and EPS. So I know there's lots of puts and takes as you go through the quarter. Even tax as an example, when you restate our guide for the initial tax, it would have been 13% to 14% ex embecta. We're now 13.5% to 14%. So we know we had some onetime timing items in this quarter, but we're actually absorbing tax pressure as well in those numbers. So you'll have a Q4 true-up, of course, given the timing here. But we're not even benefiting there as you think of kind of updating. So it's been a very strong year. We're really proud of what everyone has done, our 75,000 employees navigating the complexity during this time and feel good about the momentum we have going into next year.

No, that's great. And maybe just one follow-up on the overall hospital environment. You just talk about utilization trends, hospital staffing, capital spending and also the China recovery. Does China return to double-digit growth in FY '23.

And just to clarify, great question. We're expecting China, and I think this is really impressive and reflects on the strength of our China team, to still deliver right around double-digit growth this year despite the Shanghai shutdown. And even despite the Shanghai shutdown, we delivered -- we still delivered growth this quarter in China, which I think is an exceptional achievement of our team there. And to reflect on how dynamic of a year there's been for them to still be on track to deliver right around double-digit growth for this full year, again, really reflects a lot of great planning and execution on behalf of our China team. Why don't I turn it to Simon and Dave to make some colors on utilization kind of on the procedure side and then what we're seeing in the lab side. So we'll start with Simon.

So for sure, you mentioned labor. We definitely saw some pressure on labor in Q3. I think it was particularly relevant in the Peripheral Intervention space. But despite that, we still posted really, really robust growth in BDI and PI, in particular, both domestically and internationally. And then just to follow up on Tom's comment on China, we posted in BDI another quarter of double-digit growth. We continue to invest there in Surgery with the Tissuemed acquisition in PI with the recently approved Venovo venous stent in China, which is -- which we've done cases already, and it's gone tremendously well. And we just also recently got approval on the Covera covered stent graft. So anytime we put anything into China, we get a really robust return. And as we've noted before, it's doubled since Bard is acquired by BD, and we look forward to continued robust growth there.

Great, Simon.

Yes. Thanks, Tom. And for Life Sciences, similar theme. I mean again, another great quarter for us in terms of double-digit growth. The team continues to execute extremely well both in IDS and BDB. If I think about IDS, one of the best bellwethers or measures we have for utilization is the specimen management business. That was a big growth driver for us in the quarter. So that's a really good indication. On the BDB side, which I think, as you know, is split into both clinical and research businesses on the -- as Tom mentioned, the Life Science research reagents and instruments and the clinical reagents growth above expectation for us. So just solid returns overall in terms of utilization and growth levers. On labor, it's interesting. As you sensor some of the labor shortages and challenges within our health care customers might be going, that's where I think we're very well positioned with some of our automation platforms when you think about the slide we had in the back on innovation relative to BD COR that just got approved or the molecular module got approved here in the U.S. I think if our customers do see headwind with labor shortages, we have fully automated, connected, integrated automated solutions, both for clinical microbiology, the molecular testing that we're just ready and continue to deploy to help our customers address those headwinds.

Great. And maybe just to give just a couple of other statistics that we look at, at a macro level and utilization. As we think about Q3 and what we saw versus last year in the U.S. acute care sector, the average trend we saw over -- was about 100% of pre-COVID levels in Q3. That was up just a little bit versus Q2, where we were at -- we saw 98% to 99% of pre-COVID level, so it went up a tick in Q3. In the non-acute sector, we saw Q3 rates in the non-acute sector, we're slightly over 100% versus pre-COVID, which was also similar to what we saw in the prior quarter of Q2. And then as mentioned, we do see sequential improvements continue to occur as we look ahead. We do see in certain areas impacts of labor shortages certainly impacting certain procedures. I think the procedures that tend to be in BDI business are less impacted by them. It can be more acute in nature, let's say, putting in a fistula for someone to get dialysis that really becomes a prioritized procedure or getting your vasculature open to prevent an amputation of your leg as another example where that's a priority procedure. And at the same time as well, David mentioned a lot of fantastic automation solutions in the Life Science sector, but we have the same in BD Medical. And I think a great example of that is the Parata Solution. And if anything, that's become more attractive since we've acquired that. That is the answer to pharmacy labor shortages, and, it is the answer to higher labor costs. It automates routine tasks that can be done by robots and software. And we're seeing really strong demand on that herein as its early days in our hands. So we're really excited to have that as part of BD.

And we'll take our final question from Rick Wise with Stifel.

It's hard to not ask a question about your capital priority thinking updated thoughts from two perspectives, both on the M&A side and the portfolio side. I mean Chris and his team are clearly doing a brilliant job in, I think, driving even more financial flexibility for you to make decisions. And I'm sort of curious, do you feel bolder about thinking about portfolio addition and subtraction generally now given that financial flexibility? And maybe talk about your thoughts, do you feel like, given the current environment and the market and valuations, are there more opportunities? Could we see your tuck-in strategy accelerate here?

Thanks for the good question, Rick. So I just -- I'm going to step back a little bit as we think about our portfolio strategy. And as you mentioned, we've been very active in executing our portfolio strategy, shifting BD into those higher-growth spaces, those 3 transformative solution spaces that you've heard us talk so much about, a smart connected care enabling new care settings and improving outcomes in patients with chronic disease, all high-growth markets that are reshaping the future of health care and where BD will be at the forefront of. And so some of those portfolio actions that we've been doing over the last couple of years include the spin-off embecta. It also includes 19 tuck-in acquisitions over the last few years. And these are all going very well. I think that's important to also hover up and look at. You heard Chris discuss that those that have already anniversary-ed are adding 30 basis points to our underlying growth today because they're doing well. They're in high-growth markets and they're driving BD's growth rate up. Of course, the spin-off embecta also adds to that growth further. 90% of the M&A that we've done to date, of those 19 deals, 90% of it of the spend has been in transformative solutions spaces, those higher-growth spaces that are reshaping our pipeline. And so as we look ahead, we're certainly going to continue to be very disciplined and focused on executing tuck-in M&A in line with our strategy. And that's doing M&A that's strategically aligned in advancing our leadership and expanding our position in those prioritized high-growth transformative solution spaces that I talked about. Those are deals that are accretive and meet rigorous financial metrics that we have. We've walked away from a lot of deals that don't meet those…

There are no further questions. We'll now turn the floor back over to Tom Polen for closing remarks.

Okay. Well, I'm going to keep this very brief. It was a great discussion. Thank all of you for the very good questions. We wish you a great rest of the day and a wonderful summer. Thank you.

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