Becton, Dickinson and Company (NYSE:BDX ) Q2 2022 Earnings Conference Call May 5, 2022 8:00 AM ET

Francesca DeMartino - SVP, IR

Tom Polen - President, CEO & Chairman

Christopher DelOrefice - EVP & CFO

Simon Campion - EVP & President, Interventional Segment

Vijay Kumar - Evercore ISI

Travis Steed - Bank of America

Lawrence Biegelsen - Wells Fargo Securities

Hello, and welcome to BD's Earnings Call for the Second Quarter of Fiscal 2022.

At the request of BD, today's call is being recorded and will be available for replay through May 12, 2022, on BD's Investor Relations website at bd.com or by phone at 866-342-8591 for domestic calls and list the 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. For today's call. All parties have been placed on a listen-only mode until the question-and-answer session.

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 second 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 updated outlook for fiscal 2022. The Q2 results, we'll be discussing today include the results of our former diabetes care business as a spin-off of embecta, that was completed on April 01, subsequent to quarter end. On April 14, an 8-K was filed to provide re-casted historical financial information reflecting the results of operations of our former diabetes care business as discontinued operations for the 2019, 2022 and 2021 fiscal years and the first quarter of fiscal 2022.

On today's call, we'll give an updated outlook for fiscal '22 for both legacy BD, which includes our former diabetes care business and BD RemainCo. We anticipate recasted financial information for the second quarter of FY '22 will be available by the end of May. In the meantime, to assist you with FY '22 RemainCo models, we're providing estimated impacts of excluding our former diabetes care business from our Q2 results. We don’t expect the Q2 recated financial information to differ material from the estimated impact nor affect the updated outlook for FY '22 that we're providing today. We also do not plan to comment on diabetes care after this quarter. In addition to our prepared remarks, you can find this information on our earnings presentation that is posted on our IR website.

Following the prepared remarks, Tom and Chris will be joined for 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 earnings 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 estimated COVID-only testing.

With that, I am very pleased to turn it over to Tom.

Thanks, Francesca, and good morning, everyone and thank you for joining us. We're very pleased with our strong performance in Q2 with revenues of $5 billion and base revenue growth of over 10%. These results reflect the continued focused execution of our BD 2025 strategy and another quarter of consistent strong growth in our base business.

We exceeded our revenue, margin and earnings goals while advancing our innovation pipeline and our tuck-in M&A strategy, and year-to-date, we generated $1.1 billion in operating cash flow. In addition, we successfully executed the spin of our diabetes care business on April 1, which is now a standalone and publicly traded company named Embecta. It trades on NASDAQ under the ticker EMBC.

I'm very pleased with how our strategy is progressing and coming to life. Through our efforts to grow, simplify and empower our company, we are creating an agile and resilient organization that is well positioned to deliver strong performance. Our durable core reflects our leadership position in areas of healthcare that remain in high demand. These are the products and solutions that form the backbone of healthcare around the world and create a very stable business, that weather storms and uncertainty.

Through the performance of our durable core and our cash flow initiatives, we are fuelling our growth strategy with investments in organic innovation and tuck-in M&A. The investments we are making are targeted toward higher growth spaces aligned to the irreversible forces that are transforming the future of global healthcare across smart connected care, a shift to alternative care settings and improving chronic disease outcomes. You are beginning to see the impacts of that shift in our growth.

Through the simplified pillar of our BD 2025 strategy, we are reducing complexity and driving excellence across supply chain operations, which delivers efficiencies and enhances our margin profile while improving customer satisfaction. And we're doing this by improving asset utilization and labor productivity while also enhancing our supply chain resilience, responsiveness and sustainability, all of which are more critical than ever in today's environment.

Our focused execution of our strategy is creating momentum and gives us confidence in our outlook, despite the challenging macro environment, which has evolved dramatically since our last earnings call. The conflict in Ukraine, increased supply chain challenges, energy price escalation, increased inflation and COVID-driven shutdowns in China are impacting nearly every company in the world.

And while BD is not immune to these challenges, we believe the actions we've taken to drive our growth and simplification initiatives and empower our talented organization of over 75,000 associates, uniquely position us to lead in this environment and give me continued confidence in our ability to execute during these times.

I'd like to take a few minutes to share some additional thoughts on the evolving macroeconomic environment. Starting with supply chain and inflation. Like most organizations across healthcare, BD has faced increased inflationary pressure and supply chain constraints. However, our simplification strategy is driving our ability to largely offset these pressures and enabling our associates to respond to these rising challenges.

An example is every year as part of our enterprise risk management process, we invest to systematically validate alternative suppliers for our most critical products and this isn't something we started this year. We've been doing this for a decade and it's showing benefits in this environment. More recently, we were able to, we've invested in additional inventory to secure access to scarce raw materials and electronic components such as semiconductor chips, and we've directly contracted for alternative transportation methods to ensure the continuity of supply for our customers.

In addition, we're investing in capacity expansion and regional sourcing to create an agile supply chain that will be more responsive to events around the world.

A key piece of our Simplify strategy is our ReCoDe effort, which includes a focus on portfolio simplification, including SKU rationalization. Our strong growth profile has enabled us to accelerate the elimination of lower margin SKUs and optimize our mix, which enables plant efficiency and for us to produce more of the products that are most critical to our customers. All of these strategic actions have helped us to move with speed and efficiency to mitigate the challenges of this environment. And we believe we are unique in our response.

Now regarding COVID, the global healthcare system continues to be more agile and better prepared, amid the emergence of new variants and spikes in COVID cases. And thus, while COVID 19 isn't behind us, healthcare utilization levels, deferrable procedure volumes and lab activities are consistently returning to pre-COVID levels in much of the world.

However, the medical industry continues to be impacted when new variants develop and waves of COVID emerge. As you know, this is currently happening in China, as the government takes meaningful steps to prevent the spread of new variants. These efforts have had an unexpected impact on healthcare procedures, lab testing and the supply chain as reflected in our second quarter China results.

And while this is continuing into the third quarter, we expect to mitigate most of the impact over the balance of the year assuming there isn't any additional extended waves that require more significant COVID prevention actions. We continue to monitor the situation very closely.

Despite the above complexities, the need for critical healthcare products and services has never proven to be more important and our portfolio is well positioned to support clinicians and patients around the world.

Moving on, I'll now provide more detail on the progress we're making on organic innovation, which is a key enabler to our growth strategy. As we shared in the November Investor Day, we've been focused on enhancing our R&D productivity, and it's having an impact. We significantly improved our on-time milestones and on-time launch metrics, which are both over 90% year-to-date.

In addition to enhanced productivity, our increased investments in organic innovation are contributing to our performance. Some recent examples of how we're progressing our pipeline to drive future growth include BD Evolve, which is a fill at time of use, time delayed drug delivery system and was released for clinical trials in January. Multiple clinical trials are now underway by our pharmaceutical customers, and we see significant commercial interest with several signed development agreements.

We also launched new-to-world BD reagent technology in April, which was developed with novel dye technology and AI guidance. The new BD Horizon RealYellow 586 flow psychometry reagents are the first in the series and they have the potential to accelerate discovery and drug development by enabling greater insights from biological samples. And we received 510-K clearance of our TREK bone biopsy device that was submitted to the FDA last quarter with launch expected later this fiscal year. This device allows for faster sampling and is available on a broad range of sizes to accommodate variety of procedural needs.

Beyond these achievements, we also hit several key milestones across our pipeline this quarter. Consistent with our strategy to bring new transformative solutions to our portfolio that improved chronic disease outcomes, we released BD Libertas a pre-filled wearable injector that enables simple self-administration of larger volume doses for chronic disease. We've completed five clinical trials with our 5 ML product and are accelerating development of our 10 ML product with clinical release targeted in late FY '23, or early '24.

The BD Core MX module and the CTGCTV2 Assay on BD Core are now under FDA review. Already CE marked outside of the US clearance in the US will give BD access to the high volume sexually transmitted infections testing market on a fully automated and integrated platform. This assay already cleared on BD Max as the only FDA cleared triplex assay for the three most prevalent non-viral STIs.

The Aspirex mechanical aspiration thrombectomy system is also currently under FDA review and is expected to launch this fiscal year. Already CE marked outside the US, the system is uniquely designed with a three-in-one method of action that removes fresh thrombus and to our thromboembolic material and peripheral vasculature.

Also expanding our venous portfolio is the recent FDA approval of the Venovo venous stent. The relaunch of Venovo reflects strong execution by the team with shipments to customers already occurring this month. In addition to organic innovation, our strong cash flows are also enabling execution of our tuck-in M&A strategy. Fiscal year-to-date we've complete -- we've committed approximately $500 million through the completion of four acquisitions.

In addition to three acquisitions in the prior quarter, in Q2, we closed Cytognos, whose differentiated flow cytometry assays for the detection of minimal residual disease in cancer brings an important addition to our Biosciences business and accelerates our strategy to support chronic disease management. We believe that the current environment coupled with our strong cash flow and robust M&A funnel positions us well to create value through our tuck-in M&A strategy while remaining disciplined.

Beyond our investments in R&D and M&A, our discipline capital allocation framework gives us the flexibility to also return capital to shareholders through a competitive dividend and share purchases when appropriate. I'm excited by the significant progress we continue to make advancing our BD2025 innovation-driven growth strategy to deliver even more significant impact toward improving outcomes for patients and providers and in that spirit, we also recently announced the inaugural members of our external Scientific Advisory Board.

The SAB is comprised of top medical key opinion leaders, science and technology experts and experienced innovation leaders. The SAB is a new governance mechanism for BD, which will meet to review and advise on BD's technology capabilities, our innovation pipeline, tuck M&A opportunities and early stage investments.

Finally, I'd like to comment on the strong progress we're making, advancing our ESG strategy and goals. One of the actions we announced this quarter that I'm particularly pleased with is the formation of our sustainable medical technology institute. This is another step forward as we advance our 2030 ESG commitments and BD's focus on ensuring our portfolio leads the way on reducing the environment impacts of medical products.

We are proud to receive continued external recognitions for our ESG efforts, including recently being named Newsweek's inaugural list of America's most trusted companies and the Forbes 2022 list of best employers for diversity, as well as ranking number one in the healthcare equipment and services industry informs America's best large employers list.

In summary, I'm very pleased with the progress that we're making, advancing our BD 2025 strategy and our strong execution navigating a challenging environment, which is reflected in our strong Q2 performance. This performance gives us confidence in our updated guidance, which raises the midpoint of our revenue and EPS ranges. We remain well positioned to deliver consistent and sustainable growth and create value for all of our stakeholders.

With that, let me turn it over to Chris to review our financials and outlook.

Thanks Tom. So echoing Tom's comments, our Q2 results demonstrate the strength of our business and the momentum of our strategy. Additionally, we remain committed to supporting our customers and their patients and have made investments in many areas, including inventory, transportation, portfolio, simplification, and innovation, so that we can continue to do our best to ensure continuity of delivering critical healthcare offerings.

We are delivering strong performance while simultaneously managing the increasing macroeconomic pressures through our simplification and mitigation programs. This balanced approach is helping us make strong progress against both our short and longer term commitments.

Turning to our revenue performance, we delivered $5 billion in revenue in the second quarter, comprised of $4.8 billion in base business revenues, which had strong growth of 10.2% or 9.6% organic, which excludes the impact of acquisitions. Our revenue performance is supported by our durable core portfolio and an increasing contribution from the transformative solutions, we are bringing to the market through our innovation pipeline and tuck-in acquisitions.

Price contributed 180 basis points to growth in Q2. While this is well below inflationary levels, it is one of many factors that is enabling our investments to ensure we can continue to deliver our healthcare all offerings to our customers. COVID only testing revenues were $214 million, which is expected to decline from $474 million last year. BD's unique ability to continue to deliver strong performance during these uncertain times is reflected in the performance across our segments with medical growing 6.4%, life sciences base revenues growing 17.1% and interventional growing 11.2%.

Total company base business growth was also strong regionally with double-digit growth in the US and Europe, along with mid-single digit growth in Latin America, which helped to offset lower the normal mid-single digit growth in China, which was impacted by restrictions implemented to mitigate the spread of COVID late in the quarter.

Let me now provide some further insight into each segment's performance. Our medical segment delivered $2.4 billion in revenues in the second quarter growing 6.4%. Strong performance across our pharmaceutical systems, medication management solutions and medication delivery solutions businesses was partially offset by an expected decline in diabetes care. Excluding diabetes care, BD medical revenues grew 7.5%.

MDS revenues increased 5.3%, reflecting continued strong demand for our durable core products. Performance in MDS reflects execution of our comprehensive vascular access management strategy, including early momentum of our one stick hospital stay, which is driving competitive gains in catheters and vascular care devices, particularly in the US. Performance also reflects a tough comparison due to a decline in syringe utilization for vaccinations.

MMS revenues grew 7.8%. In our dispensing business, high single digit revenue growth was driven by continued strong worldwide demand for connected medication management solutions in both acute and non-acute care settings. Within our infusion business, revenue growth reflects strong performance in infusion sets driven by increased pump placements outside the US during the course of the COVID pandemic.

Farm systems' revenue grew 12.2% driven by continued strong demand for prefill devices supported by our differentiated and expanding supply capacity. Demand for these devices continues to be aided by the fast-paced vial to pre-filled device conversion for biologics, vaccines and other injectable drugs. Growth was also aided by the expansion of services provided to small and mid-sized pharma customers through the recent acquisition of ZebraSci.

BD Life Sciences revenue totaled $1.5 billion in the second quarter. The decline of 4.2% year-over-year is solely due to the lower COVID-only testing revenues previously discussed. Excluding COVID-only testing, Life Sciences base revenues grew 17.1%. IDS revenues declined 6.8%, which reflects the decline in COVID-only testing partially offset by strong base business revenue growth of 21.8%.

Performance in our IDS base business includes sales of our new combination flu COVID assays for BD Veritor and BD MAX that were ahead of our expectations and also reflects the soft comparison to the prior year where the flu season was limited. Demand for our combination assays was driven by strong adoption of a broader respiratory panel in timing of dealer stocking.

IDS-base revenues were also driven by strong demand for specimen management products and strong performance in our molecular diagnostics portfolio, driven by growth in both BD Core and BD MAX reagents with increased utilization across our larger install base. Biosciences revenues increased 5.6% driven by continued strong demand for research reagents as a result of lab utilization, having returned to more normal pre-COVID levels and increasing adoption of our e-commerce platform.

Instrument production in the quarter was limited by supply challenges for electronic components and as a result, we ended the quarter with a record backlog. We expect to fulfil those orders over the balance of the year.

BD interventional revenues totalled $1.1 billion in the second quarter, growing 11.2%. This reflects strong performance across the segment with double-digit growth in the US and China. Our strong global performance is driving our ability to offset the impact of planned product line discontinuations, particularly in PI and UCC of lower margin and nonstrategic products as part of our portfolio simplification strategy. The segment's result also reflect the easier prior year comparison resulting from the Delta variant.

Revenues in surgery grew 17.5%. Again, as a reminder, Q2 reflects a soft comparison to the prior year when revenues declined 7.7%. Excluding the soft comparison, revenues grew in the high single digits driven by hernia, biosurgery and infection prevention including the recent acquisitions of Tepha and Tissuemed.

Revenues in peripheral intervention grew 8.5%. Performance was driven by double-digit growth in the US with strength across our peripheral vascular disease, end stage kidney disease and oncology platforms. We continue to expand our peripheral vascular innovations and are driving strong growth through share gains from our recent acquisition of Straub and Venclose.

Urology and critical care revenues grew 8.8% driven by continued strong demand for our PureWick chronic female incontinence platform in both acute and non-acute cares settings as we continue to expand our addressable market and deliver transformative solutions for alternate care settings. Also contributing to growth was continued back order recovery in acute urology and continued solid performance in targeted temperature management with our smart, connected care enabled Arctic Sun platform.

Now moving to our P&L. In Q2, we delivered adjusted net income and EPS above our expectations with adjusted net income of $937 million and adjusted diluted EPS of $3.18. We delivered base gross margin of 55.2% and base operating margin of 24% in Q2.

Key drivers of gross margin include a benefit from our strategic portfolio initiatives, including mixed optimization and increased volume utilization given our strong base revenue growth. And while inflation was broadly in line with our expectations, we did realize an escalating impact during the quarter that was largely offset by our simplification and inflation mitigation initiatives.

In addition, as expected, we had favorable FX that was recorded in inventory in 2021 that benefited our GP this quarter as a blow-through sales. We leveraged our base SSG&A as a percent of sales by over 200 basis points, driven by our focus on leveraging our base G&A expenses partially offset by inflationary impacts primarily in customer shipping. R&D of 6.4% of sales reflects some accelerated phasing of investments and planned increases year over year, consistent with our strategy to support our long-term growth outlook. Our tax rating Q2 was higher than anticipated due to the geographic mix of sales.

Regarding our cash and capital allocation, cash flows from operations totaled approximately $1.1 billion year to date. Q2 cash flow from operations reflects a higher than normal inventory balance as we may strategic investments to increase stocking of raw materials, such as electronic components, as part of our actions to optimize product delivery to meet customer demand in this uncertain environment.

We ended Q2 with a strong cash balance of $3.1 billion and a net leverage ratio of 2.8 times. Our cash balance includes the receipt of a cash distribution from embecta at the end of Q2. In accordance with the tax free nature of the spin and consistent with our capital allocation priorities, including our net leverage goals, we intend to utilize $1 billion of the embecta distribution over the coming quarters for debt pay-down.

The remaining $400 million of the distribution provides additional flexibility and will likely be deployed early in fiscal '23 with a bias towards share purchases, subject to market conditions and other strategic considerations.

With the spin of embecta now complete, we've achieved our targeted dividend payout ratio of about 30% as we've maintained our dividend. Our current cash and leverage position and continued focus on strong cash flows, provide us the flexibility to advance our balanced capital allocation framework and support our BD 2025 growth strategy through investments in R&D, capital and M&A.

As Francesca mentioned to assist you with your FY '22 models, we provided our best estimates of the impact of the spin on certain line items for Q2 in today's slide presentation. We estimate a $260 million impact to revenue, a 100 basis points to adjusted gross margin and 160 basis points to adjusted operating margin and $0.45 to adjusted EPS.

Turning to our fiscal '22 guidance assumptions; first, some macro considerations that support our guidance; while we still expect some global COVID-driven variability, our guidance assumes that continued easing of COVID 19 restrictions and no significant or lasting disruptions to deferrable procedure volumes.

Regarding China specifically, we expect to mitigate the impact from the current lockdowns over the balance of the fiscal year as we are assuming the restrictions will ease in May with recovery ramping up through fiscal Q3. In addition, our guidance assumes that the core congestion does begin to ease and will not have a lasting impact on our China business and other markets.

While there could be additional lockdowns in China and other markets, our guidance assumes countries continue to be more efficient in managing safety protocols and the containment of new COVID variants to allow continuity of care for patients.

Additionally, we anticipate continued inflationary and supply chain pressure over the balance of the year and into next fiscal year, but we are not planning for significant escalation of macro headwinds. While these pressures are meaningful, we believe we are on track with our margin recovery initiatives and will continue to proactively manage this. We expect to be able to largely offset these incremental inflationary impacts, given our strong performance in Q2, an increased focus in the back half of our fiscal year to execute our company-wide mitigation initiatives.

As our first half results include diabetes care, we are providing guidance today on a legacy BD basis that includes diabetes care. So you have a like-for-like comparison versus our February guidance. Then we are also providing remain guidance for the full fiscal year, which excludes diabetes care in all four quarters, along with the spin impact for each guidance metric. This is also laid out on the FY '22 guidance summary slide in the guidance section in our RemainCo earnings presentation.

As a reminder, going forward, our first half diabetes care results will be reflected as discontinued operations, and we will only be discussing RemainCo performance.

Now moving to our updated guidance for are fiscal '22. We are well positioned for strong growth across our three segments, given our performance and momentum in our base business and thus on a legacy BD basis, before adjusting for the diabetes care spin, we are increasing our base revenue guidance. We now expect legacy BD base news to grow 6.75% to 7.75% on an FX neutral basis from $18.3 billion in fiscal '21. This is an increase of a 100 basis points from our previous guidance of 5.75% to 6.75% growth.

On a RemainCo basis, we expect base revenues to grow 7.25% to 8.25% on an FX neutral basis. This is an acceleration of approximately 50 basis points over BD legacy growth as our diabetes care business was a negative contributor to growth rates. The spin impact also includes a small contribution of revenues BD will earn in connection with agreements with embecta.

For COVID-only testing, we continue to assume approximately $450 million in revenue. As expected, testing demand has slowed and our full-year COVID-only revenue expectations are waited to the first half of the year. Based on current spot rates for illustrative purposes, currency is now estimated to be a headwind of approximately 200 basis points or about $400 million to total company revenues on both a BD Legacy and RemainCo basis on a full year basis.

This is an incremental impact of 75 basis points or $150 million compared to our prior guidance and is driven by of the strengthening of the US dollar. So all in, we are increasing our legacy BD total reported revenue guidance by $50 million to a range of $19.6 billion to $19.8 billion. On a RemainCo basis, we expect total revenues of $18.5 billion to $18.7 billion.

On a Legacy BD basis, we still expect base operating margins to improve by approximately 200 basis points over 21.7% in fiscal '21. Despite a more challenging macro environment anticipated over the back half of the year, our focused execution on driving profitable revenue growth, combined with our simplified programs, gives us the competence that we will be able to offset the incremental inflationary pressures.

On a RemainCo basis, the embecta spin enhances our anticipated base margin expansion by approximately 50 basis points. And as a result, we expect base operating margins to improve by approximately 250 basis points in comparison to 19.6% in FY '21 as recasted. We also still expect operating margin on COVID-only testing to be modestly above our base business margins.

A few additional items for your models; on a RemainCo basis, we expect $60 million to $75 million in year-over-year improvement in interest other which reflects a minimal benefit from the use of embecta proceeds compared to our legacy BD expectation of $50 million to $75 million.

On a Legacy BD basis, we now expect an effective tax rate of 13% to 14% for the full year compared to 12.5% to 13.5% previously due to geographic mix as reflected in our revised guidance. For RemainCo, we anticipate an effective tax rate of 13.5% to 14.5%, which reflects the tax rate, excluding our diabetes care business.

Our updated guidance still assume share purchases that at a minimum offset, any dilution from share-based compensation and thus does not assume material change in shares outstanding. All in on a Legacy BD basis, we expect adjusted EPS to be between $12.85 and $13 compared to $12.80 to $13 previously, which reflects an increase of $0.025 at the midpoint. The core drivers of the increase include $0.125 [ph] driven by the momentum and strength in our base business with the series of strategic mitigation actions we discussed earlier expected the largely offset increased inflationary pressures and a $0.05 headwind from a higher effective tax rate. So operationally, this is an increase of $0.750.

We expect an estimated incremental negative impact from currency of about $0.05 resulting in a $0.025 increase to our adjusted reported earnings guidance at the midpoint. On a RemainCo basis, we anticipate adjusted EPS of $11.15 to $11.30 cents. This reflects an adjustment from the embecta spin of about a $1.70. This accounts for a half year of TSA income of about $35 million that will be realized in the second half of the fiscal year and recorded in other operating income on an adjusted basis and it includes the contribution from supply agreements, with embecta and the benefit from financing, which are both expected to be minimal.

As you think about the TSA income next year for your models, it would not be accurate to double the half year of TSA income as the services provided and income received will decline over time. As a reminder, BD shareholders received embecta shares upon completion of the spin.

As you think of the commitments we made during our Investor Day on a BD RemainCo basis, our long-term targeted growth profile has been enhanced and increases our confidence in our ability to deliver our 5.5% plus base revenue growth target. Additionally, we are now targeting more than 400 basis points of base operating margin expansion through fiscal year '25 against the re-casted fiscal year '21 margin.

And notably, based on what we know today, all things being equal, we think BD RemainCo can deliver the absolute pre-pandemic operating margin level of legacy BD, which was about 25% by the end of that same time period. As we previously shared, this will lend itself nicely to double-digit EPS growth and a strong value proposition.

As you think about phasing for the balance of the year, the following are a few key considerations as you think of your RemainCo base revenue and earnings. We continue to expect base revenue growth to be fairly rateable in the back half of the year.

Regarding our margins and P&L, first on a year-over-year basis for Q3, we expect significant improvement in base operating margin compared the re-casted 17.7% in the prior year. Additionally, we expect the Q3 year-over-year improvement to be larger than what we delivered in Q2. Sequentially from Q2 to Q3, we expect a modest step down due to a stronger Q2, primarily driven by product mix most notably our flu COVID combo test and increased inflationary pressures in the second half. As a result, Q3 is now projected to be the low watermark for the year.

In Q4, we expect the impact of increased inflation on our business to continue. However, we see a larger benefit from our offsetting initiatives flowing through. In addition, we continue to see our SSG&A and RD dollars relatively evenly spread over the remainder of the year, which will drive strong operating leverage on Q4's higher revenue dollars. At the midpoint of our full year guidance range, our average tax rate for the balance of the year is about 14.5%, which is best to apply for the subsequent quarters.

So in summary, we are advancing our BD 2025 strategic objectives. Our underlying business is strong as evidenced by our strong base revenue and earnings performance. We remain focused on execution and our confident in delivering against our performance goals, despite navigating a complex macro environment as evidenced by our updated guidance, which increases the midpoint of both our reported revenue and adjusted EPS. Further, we are well positioned to deliver consistent and sustainable value with our long-term commitments enhancing with the completion of the spin.

I'll now turn the call back to the operator to open the line for Q&A.

[Operator instructions] We will take our first question from Vijay Kumar with Evercore ISI. Your line is now active.

Hey guys. Congrats in a good print here and thanks for taking my question. My first one maybe on the updated guidance here. We did close to 9% organic for first half and I'm looking at the legacy BD [rate] (ph). The midpoint of 7.25%, which implies mid-single 5.5-ish for the back half. I just want to make sure this is a comp issue or is there any timing impact first half versus the second half? Any change in first half or second half organic cadence on an underlying basis?

I appreciate the question. It's Chris. Hope you're well. Your math is correct. So again, our first half growth extremely strong here at about 9% on a year-to-date basis. Obviously we had benefited from some one-time items, but we also overcome some headwinds in that period too.

I think when we talked last quarter and we would frame this quarter as probably from call it underlying adjusting for some of those puts and takes around seven-ish percent growth, the back half, you're right, 5.5% growth. I think there's a couple things to contemplate there. Of course, China, there will be a pretty significant impact in Q3 as they recover. We expect that recovery -- the recovery started in May. We expect that to ramp through June and we expect to make the majority of that up in the back half.

Additionally, we do have some comps as you think of the back half of the year in particular our life sciences business. We did have our Triplex launch there. So if you look at Q4 that was a peak performance period for that business. So there's a couple kind of comps along with the China situation that will cycle through Q3 into Q4 to consider there in the back half, but 5.5% growth is consistent with our long-term outlook of 5.5-plus on top of a front half of 9%. So all in a really strong year.

I think the other thing I would point to, if you look at the quarter performance from a top line standpoint, we actually increased our organic guide more than the beep on the base business in Q2. So it actually implies stronger second half performance. So we actually did strengthen our second half outlook, despite some of those headwinds that I noted. So hopefully that helps.

Yeah. That was helpful for us. And maybe one on the longer-term LRP guidance that you laid out at the Analyst Day. Appreciate all the details in the earning deck and making comparison easier. The longer term 5.5 on top $400 plus and margins in double-ish earnings. Are there any cadence issues when we think Chris for fiscal '23, and I'm not asking for a specific '23 guidance,

I know it's early for that, but just thinking about any moving pieces here, I think FX, COVID diagnostic testing drop off, comes to my mind. So when you think about the base of $11.15 to $11.30 in fiscal '22, should we still expect that LRP to be intact for fiscal '23 over the base?

Yeah, it's a great question. Obviously, to your point, there's a lot of moving parts and one, if you remember our Investor Day guide, we actually stripped out testing. We see testing as something that'll move more to kind of the endemic opportunity here that gets more embedded in the base. So we need to see how that plays out this year.

Obviously I think an important caveat just to see how COVID dynamics, the macro-inflationary environment plays out as well. So I think some big considerations, but what I would point you to over the long term horizon, definitely over the long term horizon, obviously there's can be fluctuations year-to-year, but you're seeing it play out this year. One definitely the enhanced growth profile, the five-five plus we're well north of that this year, given our strong focus on innovation and R&D, the benefit we're getting from tuck in acquisitions.

As a matter of fact, just as a reminder, you'll see that we did provide the one-time lift associated with the tuck-in acquisitions, which was roughly 60 basis points. That was never part of our five, five plus. What was part of our five, five plus was taking those acquisitions and growing them. These are profitable double-digit growth opportunities.

They're actually enhancing our growth profile on a year-to-date basis by about 30 basis points above that 60 basis points. So true organic growth once we've cycled over the anniversary. So I think we're going to continue to focus on our growth strategy. We remain confident in the five, five plus the spin of diabetes certainly enhances that confidence. You did see a 50 basis point lift here, just in this year alone, as a result of that. As we've talked about, that was a drag on growth.

As you think of operating margin, I shared a couple key things. One, this was a very important year for us is when we had committed the 400 basis points, we were going to deliver half of that in one year. So doing that in the face of the inflationary environment we're in with inflation, normal inflation being 2%, we're talking about 8%, 4X inflation happening is quite a testament to cost improvement.

I don’t know if you picked up in the talk track, but we did commit that we are going to do better than 400 basis points over that timeframe. Not only that, we think that by 2025, we can get back to the legacy operating margin of about 25%. And if you ask how we're going to do that, if you think of all the structural change we've made this year, it's a compensating for the inflation.

We've actually done more cost improvement and enhancement through our simplification programs. That are actually creating more underlying value that we expect to carry over the long term. So definitely we feel really good about our long-term Investor Day outlook, of course, assuming this environment that we're in at some point kind of settles back to more normal here, hopefully as we exit this year into next year. There may be a little bit of typical choppiness from year-to-year within that. But we certainly expect to deliver continued strong growth in each year and strong margin improvement this year.

That's helpful, Chris. And thanks for taking my questions.

We'll take our next question from Travis Steed with Bank of America. Your line is now open.

Hi, thanks for taking the question and congrats on a great quarter. Chris, I'd just love to get a little bit more color on some of the operating margin bridge. I see you have 19.6% as the base for FY '21, 250 basis points on top of that gets you to kind of the low 22% range. When I'm thinking about '23, it sounds like you're comfortable somewhere around 50 basis points to 75 basis points of operating margin expansion in '23. Just love to see if that's how we should be thinking about it, which gets me to like a low $12 range for earning next year. If you have any early comments to that.

Yeah, no, thanks. I appreciate the question. Look, again, I think as it relates to '23 it's a little premature to give specifics at this stage. I think certainly though with, call it my 200 basis points delivered this year, 250 basis points, if you adjust for Embecta. And with -- to get to what I said by the end of 2025, to get back to the 25% operating margin legacy, you're going to expect kind of a relatively ratable call it glide path to get there.

The only thing I would point out is I do think '23 will be a transition period, because you're still going to have the structural impact of inflation that's been ongoing, that'll carry over into '23. So I do view that a little bit as a transition year and you'll get more lift as the environment normalizes over that time is how I would probably think of a ramp curve if that makes sense.

Yeah, it does. Thank you for that. I appreciate the extra color. And then when we look at some of the incremental inflation impacts that that you're offsetting pretty much essentially all the way offsetting, love to get a little bit more color on some of the pressures that you've seen and also when you think about pricing, it was 1.1% last quarter, 1.8% this quarter. Is that how we should be thinking about it going forward, kind of the high 1% to 2% range, into '23 as well?

Hey Travis, this is Tom and good morning, I'll start in and turn it over to Chris. I think in terms of what we're seeing on the inflation side, we saw earlier on quite sometime early last year, we recognized obviously the impacts of inflation as well as supply chain challenges. And we made a very clear statement that while there is going to be no company that would -- was going to avoid inflation and supply chain challenges, that we were very committed to looking to be the best in our industry at navigating those.

And that's been the mindset that our entire team has approached this environment over the last two years. And I think you can see the commitment and actions of our team coming through in our performance from as well. And so I've got our team empowered and focused on executing our strategy.

And as part of that, they're navigating this complex environment and we're pulling a number of levers to overcome what are shipping chips, resin, just general raw material and inflation points that we see and those levers that the teams are pulling range from continuous improvement being notably increased in our plants in this environment. We're taking additional cost containment actions across all areas of the business. We're driving an acceleration of our portfolio optimization and product mix. That's always been part of our recode simplification initiative.

We saw this as an opportunity, particularly with the strong revenue growth that we're seeing to accelerate, exiting lower margin products and products that are adding complexity in our plants, that when we move those out, we can actually run our plants more efficiently and get out more of the products that our customers need most, which is really important in this environment.

And then lastly, we looked at as a last resort. We are taking pricing actions as well and as you can see, we're able to to get those, which are just a portion of the overall inflationary costs that people are seeing in this environment. So all of that's being done to ensure that we're positioned to best serve our customers and our patients and really proud of the team's work there, Chris, any additional comments?

I think the only build is just to reinforce I think the strong underlying growth profile is really creating opportunities to drive some of that simplification. For example, the strategic skew rationalization efforts, right? We're absorbing that within our growth rate. It unlocks value in the form of margin, drives enhanced mix, new product innovation launches is a way that will more look to create value in the marketplace and get value back for that versus thinking of things just as price. It's really a bigger picture though. The price is actually extremely modest relative to the level of inflation but thanks.

We will take our next question from Robbie Marcus with JPMorgan. Your line is open.

Oh, great. Thanks for taking the question and congrats on a nice quarter. Sorry to kind of follow up here, but maybe if I, I focus in on the second half implied guide here, it looks like there's something like $0.30 benefit from FX. And I was wondering if we're going to start to see, it sounds like, you're adding more into inventories. I would imagine it's at a slightly higher cost than previously. If we're going to start to see the impact of that flow through in fiscal second half, or if that's more a '23 impact. I'm just really trying to get to sort of the normalized earnings power going forward. Thanks.

I would just say, maybe I'll make a comment, Robbie, this is Tom good morning. On the inventory situation, that's a very strategic investment that we're making to increase inventory on what I would describe a scarce raw materials. So think about raw materials like semiconductors and chips or other components that are difficult to get.

You can see companies across the industry running into challenges on those. We have a very systematic approach to secure those assets and we'll take the higher impact in our inventory to be able to best serve our customers. And that's a commitment that we make.

I don't think that -- we'll end up taking that down as situations stabilize over time. So we don't see that as a long term, we've been very, very focused on our cash flow as, you know, moving that from 75% free cash flow conversion to 90% as an ongoing 90% plus as an ongoing target.

We're not changing that at all. And we continue to have a very strong focus on inventory. We just see this as a transient and strategic investment that's paying off for us and it's paying off for our customers.

Yeah. Thanks Robbie, for the question, let me let me, let me just anchor on kind of the full year and then I'll provide you some set. I can second half context, and of course as always we can engage further in the discussion. But in terms of the guide adjustment, the best way to think of it is sort of the a 100 basis points of organic growth.

We actually increased our top line by about $180 million at the midpoint. If you look at the EPS walk that we had provided, we're dropping about just under $0.13 through, which is basically at a BD margin drop through with that raise. So nothing's changed. We've actually reconfirmed our margin profile as a result, we've taken the guide up for the, the stronger growth profile above actually what was delivered in Q2. So from a full year standpoint everything remains intact.

There there's no currency really just drops through it at a margin rate. The margin obviously fluctuates based on currency mix dynamics and/or margin mix in those respective markets. I don't think there's anything unexpected there. As a matter of fact, the currency that we talked about that was a carryover benefit into the year has played out as expected.

So I don't think there's anything there to contemplate and then I think as you think of second half margins what you can expect to see there will be a small sequential decline on Op margin from Q2 to Q3 is really primarily driven by the fact that last year Q2 to Q3, you had nearly a 250 basis point decline from Q2 to Q3, and it was our low watermark, and we're actually going to be increasing the improvement in operating margin in the quarter year-over-year, versus what we did this quarter.

We did 180 basis points this quarter. We will have a step increase there. So you'll see it relatively stable, but a small dropdown accounting for that low point base that we're jumping off of from last year. And then we'll continue to increase from there is sort of the glide as you think of the second half.

But again, so if I tie this into your question about going forward, I think the important way to think about this is on track for the 200 basis point of margin improvement for the full year 250 basis points adjusted when you do the pro forma for embecta, which was half of what we said as part of our full year Investor Day commitment. Quite a big progression in one year, especially in phase of the inflationary pressures, which should set us up nicely over the long term.

Great. And maybe just sneak in two very quick questions here, one what was the size of the combo flu COVID 19 testing revenues in quarter, and should we assume going forward that there's no revenue from the cannula agreement with embecta, or was this more just a timing issue? Thanks.

Yeah, I can, I can take the second one maybe holistically. There will be, as, as noted in some of the public documents there will be various third party agree between Veta and BD. There will be a small contribution to top line, which would contemplate more supply agreements. We highlighted that as part of the 50 basis points lift. There was a small contribution. There there'll be a full year benefit next year.

Obviously, but again, it was, it was not substantive. We had the TSA we said it was worth $35 million this year. It won't quite double next year because what's typical in the spin. Really the spirit of the TSA is to support and beta standing up as a standalone public company. And it gives us an opportunity to support them. We leverage our, our stranded costs to do that.

So basically it keeps us whole from a supporting BECTA stranded cost standpoint. And then we, we shed those down as the TSA goes down in parallel. So there's no impact on a net basis from an income. So you should expect the 35 to lift next year, but not quite double,

Maybe just we could turn it over to Dave's answer, not just the, the COVID combo test question, but maybe just give some overall color and what was a, a strong momentum in life sciences across both IDs and, and significant demand we're seeing in BDB as well. So, Dave?

Yeah. Thank, thank you Tom. Robbie, thanks for the question. I mean, just pulling back a little bit, I mean, just want to recognize the life science segment colleagues around the world for just a tremendous quarter. And that's two successive quarters now, 17% growth excluding testing. If I talk about the test, just the overall testing dynamics at that highest level, so, you remember that we have the COVID testing piece, which is like the single antigen and molecular tests.

And you hear Chris talk about, that was 214 million for us in the quarter 400 million year to date. I think you'll recall that we'd also said that, we were biasing our sort of all COVID performance to the, to the first half of the year because we are seeing Moderate some moderation in testing.

We expect that moderation to continue through the balance of the year. So that overall testing dynamics are playing out with what we said. I mean, we're very close to 90% of the full year testing expectation for the combo. This is obviously the flu and COVID assay both on our max and our veal platforms. We've not given that number specifically because that's, that's in a mix of a lot of puts and takes in the overall base business.

There was growth there as, as Chris had said, if you think about that as a, as a compared to the prior to the same period prior year, that's where we saw some of the growth come from. We do expect from a strategy perspective going forward, we do see value in the overall COVID combo portfolio.

As we think Colby will move to more of an endemic situation. It's just too early to call out as to what that number would be for the, for the full year, even getting into early Q1 '23 when nobody knows what the dynamics of the flu are going to be right now. Yeah.

Thanks David and Robbie, maybe just a couple other small things to just give you a little color in terms of what would've comprised the, the revenue there, obviously there was almost no flu season last year, so you kind of got back to flu season. Additionally obviously the combo has a slightly higher value proposition. You benefited from that.

Additionally there was a little bit of stocking giving. It was, it was new and you did have a lot of testing demand in that period where it was hard to get access to tests. So those were sort of the factors that, that played into where we were. But again, adjusting for that really strong underlying, especially in the back of still having back water in, in certain areas, both in life sciences and total.

And Robbie, this is Tom, as, as Dave said, I think we've said from the moment we launched the test that the combo test will be the go to kind of replacement for the base flu test. And so we, we do think flu testing, which was as, as Chris mentioned, was base was completely absent last year that this year we did see flu back as something that was causing infections, we expect that that would continue going forward.

Of course, the rate at which that, and the size of that market every year varies each year. But we do believe that that combo test now back in our, our revenue will continue to be persistent as the go-to product for flu test.

Yeah. And Rob, we just one just on strategy piece, just one more piece, there would be, we're very committed to just looking at what, what are the unmet needs for, our patients around the world on a go forward basis. So we, we are committed to, developing more combo tests and we talk to the analyst day around the potential for an at home combo test, using the, the platform that we acquired in, in December.

So the innovation piece of the strategy still continues and, and obviously as timelines firm up on that, we'll commune as it gets better though.

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

Good morning guys. Thanks for taking the question and congrats on nice quarter here. Tom, on Alaris any update on the timing is it is fiscal 2023, reasonable assumption for, for when that's back in the us and at the investor last year, you talked about a new pump launching outside the us in fiscal 2022, I believe. Sorry if I'm wrong on the date. I can't remember if it was '22 or three, but any update on that? Thank you.

Yeah. Thank you, Larry, for the question. We've mentioned on several occasions that getting Alaris back on the mark, it is our number one priority. And while we're not providing any updates on, on timing, as, as we had had shared before, we are confident in the resources that we're investing in our submission and the team and the leadership that's tasked to make that happen. And so, we, we still think it's not prudent to predict the timeline given just how inherently complex these submissions are. And particularly that, that certainly applies to our filing.

So as we had said, we don't expect clearance in '22, therefore any of our guidance doesn't factor that in, into our numbers for 20 gone what's in medical necessity and we'll continue to provide an update as, as that progresses, but we continue to remain focused on making sure that the FDA has the proper information for us to get clearance on that. And that will remain our focus in terms of the new pump for Europe. No, we remain very excited on that product and it is launching later this, later this year. So absolutely, Yeah.

And then thank you. Thank you for that just quickly, the supply constraint in Biosciences. Can you quantify that and, were there other supply constraints that hurt you this quarter? Thanks for taking the questions.

Yeah. Larry, let me make a, maybe a comment overall on supply constraints and then ask Dave to comment on, on Biosciences. We certainly saw record backlogs across the company. So demand was even much higher than what you saw as post in our revenue. And that's across every one of the segments. We saw demand in a number of categories, outstrip our ability to supply, even though we were producing at record levels. And, that's part of what gives us confidence as we look ahead you, we are working each and every day to, to get more out of our plants.

We certainly see shortages in longer transit times for raw materials. We see shortages from certain suppliers. We work very aggressively with suppliers to help them secure raw materials. We even go so far as to put our own folks to help run supplier factories in certain cases, but we take, we take that part, those partnerships very seriously to optimize getting product to our customers, but we did end with a, a record backlog across each of the segments. And specifically to Biosciences turn to Dave. Yeah.

Larry, thanks for the question. So we, we've got, I mean, when you look at the backlog overall, we, we've not quantified it in terms of, the absolute number of instruments. This is, this is an instrument topic for us. It primarily sort of relates to the clinical side of the business. But as Chris had said in his in remarks, we anticipate with the supply with some of the supply securements that we've done the procurement leverage that we've been able to get. We expect this to clear up over the course of the year. So it just becomes a timing topic for us in the year.

And the team is very confident about that. What we are doing to sort of mitigate any short term is we're obviously working on an allocation strategy. the research instrument base is, is still very strong. So we're prioritizing what we have to get everything out. And then we're just driving hard and aggressive on procurements

Of those chips and those electronic components. We have a lot of the instruments sort of ready, built, ready to go. So as those things come in, we'll just execute and chip in the back half of the year.

We'll take our next question from Rick Wise with Stifel your line is now open.

Hi Tom. Hi, Chris. Let's start off perhaps with BD interventional, we haven't had a chance to dive into that strong quarter. Clearly comps helped a couple things. Maybe you could comment on and, and more expansively. I was a little surprised by that China double digits help us understand, what's happening there and how sustainable that performance is. And curious in general, are you all seeing the electric procedure volume recovery continue into April and maybe last on interventional help us think about the key drivers beyond recovery, beyond comps as we look at not just the next quarter, but the next sort of year ahead. Is, is it product, is it execution? Is it pipeline, help us think through the, the drivers there? Thank you.

Good morning, Rick. Listen, fir firstly again, just reflection on the quarter really solid quarter across all, all three of our business units and, and, the soft compare in, in some areas certainly helped helped us, but I'm still, very proud of the team for executing across are broad and complex and clinically relevant portfolio.

And then you might recall from, from analyst day all the plans that we had and please to say that all, all those, you know programs that we that we shared with the broad community at analyst day, that they, they are all on track now specifically about perform in, in the quarter in China, in particular the peripheral inter intervention business is extremely strong in China.

And you, you you'll have heard us say in the past that BDI in China has doubled in, in revenue since since bar was acquired by BDI. And that has been led by, by peripheral intervention and the oncology business in particular. We, we had some background challenges with Encore probes over the past several months, and that's, that's begun to alleviate, we had a, a backlog in, in sterilization and that's begun to alleviate and that has certainly helped drive our business forward.

But even in, in ESKD and [indiscernible] in China they, they performed a extra ordinary well in the last quarter as they do as they do very, very frequently and that performance NPI was also reflected in surgery. And, and to a lesser extent in, in UCC as well now, moving forward our, our outlook for the future, as, as we're, we're focused on, on innovation and trying to out execute the competition.

And, I've heard Tom mention in his, in his prepared remarks about the relaunch of the, of Ben Novo. So we've just brought that back into the market in the last in the last two weeks. And, and that's supported by the three year vernacular data which, which I think is unparalleled data in the in the Venus space. We're super pleased with the response from our sales team and our customers to the relaunch of that product.

And that will certainly be a driver this year and next year, particularly when we couple that with the with the expected clearance anticipated clearance of the thrombectomy catheter which we hope to receive this quarter or, or next quarter. And that will put us in a very, very strong position in the venous space the track biopsy device, the Tom refer to as well, that's, that's due for launch imminently.

And then in our UCC business the puric platform continues to, to, I would say, exceed our expectations and in late Q3, early Q4 we do expect to launch the mail version of puric, which we hold will be a, a driver of growth. And then finally a comment on our, our acquisitions NAFA acquisition has really performed very, very well.

The tissue made acquisition, which was a acquisition for the China biosurgery market that we hope to bring to other geographies, but the Chinese team again, has executed on that. And then and then van close as well has performed very, very well in in the PI space.

And just referring back to TIFA and, and the plans that we shared with you about our, our, our anticipated expansion to the breast space over the next several, several years now, we do expect to begin enrolling patients in a pilot study here in Q4 in one of the categories that we're investigating for breast. So a lot of, a lot of momentum behind the PDI team across all businesses and in the usual ways innovation in organic M&A and executing the field.

Great. if I could follow up Tom you highlight, and I love your language, you're investing in three irreversible forces. That sounds great. So my question is just reflecting on Chris's commentary about your cash position and your priorities. I was a little surprised that you're going to deploy the 2 billion more towards share repo as opposed to M&A clearly it's going so well.

So just wondering if you could put all that in perspective, help us think about your priorities and maybe on the M&A side. Okay. Is it AI informatics, robotics, new care? What's top of mind for you. Thank you.

Sure. Yeah. Thank you for the question, Rick, and, and I'll, I'll start off and then I'll turn it to Chris. So, as we had described that at, at analyst day, we've really rethought how we view our portfolio and our approach to growth. And we, are looking at how we invest in our, in our large essential to healthcare durable core portfolio and fast growing transformative solutions.

And those three areas that you mentioned, smart, connected care, new care settings, chronic disease outcomes. And we're, we're really pleased with the performance of both.

Hopefully there's something I said in the in my prepared remarks that, that I think is an important takeaway for everyone, which is our for we've had a focus over the last several years of increasing BDS R&D execution capabilities. And you may have heard me say that we reached a peak performance past actually year to date where over 90% on time milestone deliveries and on time launches, that's absolutely top quartile in the industry and something that we're really proud of, the momentum that we've had there.

If you look at the pipeline that we shared at analyst day as well, all very much on track, and you're seeing a us announce those executions. And as we look at milestones for those things also very much on track, which is giving us a lot of confidence as we look out over the LRP and the years ahead to your point, we've been, we're really pleased with how we're executing that tuck and M&A strategy, right?

We've got very strong core growth. We're staying very disciplined to making sure that we're creating value for our shareholders through the, in the acquisitions that we're doing. We don't have to go out and buy growth. We've got strong growth in our core, and we're adding value on top of that with 80% of those tuck and M&A focused in those high growth transformative solutionaries.

And you heard Chris describe that. So we're gonna continue there. We have a very strong, robust pipeline. We think that actually this men, if anything, is creating incremental opportunities for us as we look ahead, and so we're gonna stay active and disciplined in there, but we do see the opportunity for that to continue to shift BDS growth rate upward. As we look ahead over the next coming years in terms of our decision and how we're using the cash from the, the spin. Let me turn it over to Chris on that.

Yeah. Thanks, Tom. Yeah. Rick, thanks for the question. So first of all, the, the tax free nature of the spin requires you to think about allocating between either debt and or share purchase. What we actually outlined in the script was we're going to prioritize a billion dollars of debt. Paydown, that's very consistent actually with our capital allocation strategy, maintaining a strong net leverage ratio, which gives us a lot of financial flex to actually support the strategy that, that Tom just outlined the, the balance of about 400 million plus will be opportunistic about.

We do have a bias for that smaller remaining portion towards Sherry purchase, but of course will be dependent on market conditions and, and other strategic considerations. And then just to double down a little bit on, so that that's discreet and separate decision that, that we're taking associated with the spin beyond that our capital allocation strategy remains exactly intact as, as Tom articulated the most important thing.

Actually that I think he shared is we're doing all this from a position of strength, underlying strength. It allows us to be extremely disciplined and identify S that have strong margin profile, strong growth profiles strategically fit against those three irreversible forces drive transformative solutions. So we will look to continue to drive strong cash flow with, by the way, higher R&D investments.

We of course have continued to prioritize our, our dividend which actually the payout ratio know increased post spin another value to BD shareholders. And then we expected about one and a half to 2 billion of excess cash after doing all of those things where tuck in M&A would continue to absolutely be our, our priority. But importantly, we did agree that we would make sure at minimum we would do repurchases that avoid any dilution from share base comp. So that's the capital allocation strategy that we're, we're executing now. Thanks.

We have no further questions on the line at this time. I will turn the program back over to Tom Polen for any additional or closing remarks.

Okay. Thank you operator. And thank you today for, for joining our call and for all of the questions. I hope everyone took away a couple key points from our discussion today. BD is very well positioned to continue to deliver value in uncertain times. And we're seeing that driven by the execution of our BD 2025 strategy, which has led by our innovation driven growth strategy. This is we had strong base business performance across all three segments. We're continuing execution, delivering enhanced margin profile, amidst macroeconomic pressures.

We've now successfully completed the spinoff of our diabetes care business as part of our simplification strategy. And today we further increased revenue and EPS guidance on strong results. Despite continued market uncertainty. As we wrap up today's call, I want to just take a moment to thank the 75,000 members of the BD team and those listening today who are working around the clock to ensure production and availability of essential products for patients and providers and who are going above and beyond to support our customers.

I want to thank our teams who are working to bring new innovations to market that improve outcomes for patients and providers, and that are reshaping the future of healthcare through both our durable core and transformative solutions. And I want to thank our teams who are working to make BD stronger by simplifying our network, our portfolio, and our processes, as I've said many times while every company is navigating macro challenges, we're focused on being the best in our industry at doing so and to approach every challenge and every opportunity with a growth mindset. And we're doing exactly that. So thank all of you for attending today and be well,

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