Hello, and welcome to BD's Fourth Quarter and Full Year Fiscal 2025 Earnings Call. At the request of BD, today's call is being recorded and will be available for replay on BD's Investor Relations website, investors.bd.com or by phone at (800) 839-2383 for domestic calls and area code +1 402 220-7202 for international calls. I will now turn the call over to Adam Reiffe, Vice President, Investor Relations.

Good morning, and welcome to BD's earnings call. I'm Adam Reiffe, Vice President of Investor Relations. Thank you for joining us. This call is being made available via audio webcast at bd.com. Earlier this morning, BD released its results for the fourth quarter and full year fiscal 2025. 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. Before we get started, I want to remind you that we will be making forward-looking statements. You can read the disclaimer in our earnings release and the disclosures in our SEC filings on our Investor Relations website. Unless otherwise specified, all comparisons will be made on a year-on-year basis versus the relevant fiscal period. Revenue percentage changes are on an adjusted FX neutral basis unless otherwise noted. Beginning October 1, we began operating under our previously disclosed new BD segment structure that includes Medical Essentials, Connected Care, BioPharma Systems and Interventional and a 5th Life Sciences segment comprised of Biosciences and Diagnostic solutions. Reconciliations between GAAP and non-GAAP measures are included in the appendices of the earnings release and presentation. With that, I am pleased to turn it over to Tom.

Thank you, Adam, and good morning, everyone. As you saw in our press release, our Q4 and full year performance was in line with the preliminary results we announced last month. During our prepared remarks today, Chris and I will provide additional context on the drivers of our performance. I'll also provide an update on the immediate steps we are taking to accelerate our strategy as we transition into new BD, and I'll conclude with our fiscal '26 guidance and outlook on Q1, after which we'll take your questions. With that, let's jump in. Q4 revenue of $5.9 billion increased 7% and 3.9% organic. New BD delivered strong organic growth of 4.9%, accelerating 90 basis points sequentially. For the full year, record revenue of $21.8 billion increased 7.7% and 2.9% organic. New BD grew 3.9% organic. We delivered adjusted diluted EPS of $3.96 for Q4 and a record $14.40 for the full year, which represents 9.6% earnings growth including a 2-point impact from tariffs. We also returned $2.2 billion to shareholders, inclusive of a $1 billion share buyback. Earlier this morning, we announced our 54th consecutive year of dividend increases. During the quarter, we had a greater-than-anticipated impact in macro areas we've been closely monitoring, specifically Pharm Systems vaccines in Biosciences academic and government research. Vaccines are approximately 20% of our Pharm Systems business. While we planned for a slowdown in Q4, further reductions in demand evolved rapidly late in the quarter as most Q4 vaccine demand typically occurs in September and continues into Q1 and Q2. In our biosciences business, research funding remains subdued, but sales in the U.S. and EMEA continued to improve sequentially, led by strong demand for our new FACSDiscover platform. In Diagnostic Solutions, the business returned to positive growth in the quarter as BD BACTEC utilization continued to recover. Together, Biosciences and Diagnostic Solutions delivered flat growth for the quarter, excluding the impact of discontinued platforms. Outside of these 2 areas, we delivered strong growth across a broad range of the portfolio, demonstrating new BD's attractive profile with over 90% consumables revenue and a strong cadence of new innovation. This includes high single-digit growth in BD Interventional driven by double-digit growth in PureWick and advanced tissue regeneration. We delivered double-digit pro forma growth in advanced patient monitoring, which in the first year of integration, performed well ahead of our deal model and is on track to continue this momentum in fiscal '26 and beyond. In Pharm Systems, Biologics grew high single digits, driven by GLP-1s, and MMS had a record quarter for Alaris pump installations, including several new competitive wins, solidifying our leadership position now and for years to come as we complete our fleet upgrade in FY '26. Our BD Excellence operating model helped to drive strong P&L leverage throughout the year with adjusted gross margin up 140 basis points, fueling 80 basis points of adjusted operating margin expansion, while we invested in selling and innovation which will continue to be our engine for growth in the New BD. This supported robust 9.6% adjusted diluted EPS growth, inclusive of tariffs while we also delivered on our full year goal to reach a record 25% adjusted operating margin. While we are navigating specific transitory market dynamics that are expected to continue into fiscal 2026, we have strong business fundamentals, high confidence in our continued long-term mid-single-digit growth profile and a proven track record of delivering value through periods such as this. We are acting with speed to optimize our performance during this time and emerge stronger. We've already begun implementing decisive actions to accelerate our strategy as we create the New BD with a focus on boldly advancing BD Excellence across our commercial and innovation organizations while identifying cost optimization opportunities to reinforce our commitment to long-term profitable growth. Let me highlight 3 specific initiatives underway. First, as part of accelerating our focus on commercial excellence, we're rearchitecting our operating model to build a more focused, agile vertical organization. This includes commercial teams directly aligned with each business unit to best support customer needs, drive share gains and accelerate growth. We're also taking immediate action to expand our sales force in targeted high-growth markets, investing an incremental $30 million to capitalize in areas that either are or have the potential to grow in the high single digits or double digits. These areas include opportunities such as the recent VA reimbursement for PureWick at home and new surgery innovations launching in Europe and a 15% increase in both the PI and APM sales forces. Finally, we've announced that Mike Feld's role has been expanded to include the newly created position of Chief Revenue Officer. Michael will apply his expertise in BD Excellence to accelerate our initiatives to become a best-in-class commercial organization to deliver incremental growth. Michael will remain President of Life Sciences until the close of the RMT with Waters. Second, over the last several years, we've built positions in multiple attractive markets and are investing to capture opportunities in new product innovation. Going into FY '26, we've moved nearly $50 million of corporate costs into R&D and the businesses to fuel future innovation and growth in attractive high-growth markets, such as tissue regeneration, PureWick adjacent markets, Biologic Drug Delivery and Connected Care. Additionally, we focused investments behind planned new product launches, including our recently launched BD Incada AI-enabled platform that unifies BD device data into one intelligent ecosystem, and our next-generation BD Pyxis Pro medication dispensing platform as well as new planned launches in APM, MDS, UCC, Surgery and MMS. We are pleased we also recently received 510(k) clearance for HemoSphere Stream, our continuous noninvasive blood pressure monitoring module, an impressive clearance in less than 30 days paves the way for commercial launch in 2026. Third and finally, we initiated a 2-year $200 million cost-out program, proactively addressing stranded corporate costs with approximately half expected this year. Before I turn it over to Chris to provide additional color on our performance. On behalf of the leadership team, I want to take a moment to thank Chris for his leadership, hard work and dedication to BD over the past 4 years. I'm confident the CFO transition ahead will be seamless and wish Chris well in his new endeavors. With that, I'll turn it to Chris.

Thanks, Tom. Before I begin, I want to take a moment to thank the entire team at BD. It has been a privilege and a career highlight to serve as the CFO of this company and getting to work hand-in-hand with our talented and committed colleagues to advance the world of health. I am proud of the accomplishments we achieved together that enabled us to deliver against our BD 2025 strategy, including the meaningful work to advance the margin profile of BD while simultaneously transforming our portfolio that has us well positioned for the future. I look forward to partnering with the entire leadership team to ensure a seamless transition as BD enters its next phase of value creation. Let's pivot to our performance results, starting with revenue. Organic growth was led by high single-digit growth in BD Interventional with strong performance across our growth platforms. This includes double-digit growth in UCC driven by PureWick and high single-digit growth in Surgery led by our advanced tissue regeneration platform, including continued strong adoption of Phasix resorbable mesh. Growth in PI reflects strength across the oncology portfolio and Rotarex. In BD Medical, mid-single-digit organic growth was led by APM, which grew double digits on a pro forma basis with strong growth across all product lines. We feel really good about the momentum in APM continuing into FY '26, which will be further supported by significant sales force expansion currently underway. MDS also delivered a strong quarter with solid mid-single-digit growth in our Vascular Access Management portfolio. In MMS, we achieved a record sales quarter for our Alaris pump installations and we feel good about our strong backlog of committed contracts in dispensing. Lastly, in Pharm Systems, strong performance in Biologics continued with high single-digit growth driven by GLP-1s, this was offset by lower demand for vaccine products. In BD Life Sciences, DS returned positive growth in the quarter with a greater than 300 basis point improvement in growth sequentially, driven by our molecular platforms and continued recovery in BD BACTEC utilization, which exceeded 85% of historical levels in the U.S. In BDB, as Tom shared, research spending remains subdued, but sales continue to improve sequentially in the U.S. and EMEA led by demand for our new FACSDiscover platform. As a combined unit, BDB and DS increased approximately low single digits on a reported basis and was approximately flat on a currency-neutral basis, excluding the impact of discontinued platforms. Rounding out the Life Sciences segment, solid growth in specimen management was driven by the BD Vacutainer portfolio, partially offset by China market dynamics. Turning to the P&L. In Q4, as Tom shared, we continued strong execution down the P&L with momentum from BD Excellence while investing in key growth areas. We delivered adjusted gross margin of 54.2% and adjusted operating margin of 25.8%, including an impact from tariffs of about 140 basis points. Adjusted diluted EPS of $3.96 grew 3.9%, including a 6-point tariff impact. For the full year, adjusted gross margin of 54.7% and adjusted operating margin of 25% increased by 140 and 80 basis points year-over-year, respectively, inclusive of absorbing about a 40 basis point impact from tariffs. We delivered adjusted diluted EPS of $14.40, which represents strong growth of 9.6%, including a 2-point tariff headwind. We continue to execute against our cash flow and capital allocation strategy with fiscal '25 free cash flows of $2.7 billion. Underlying free cash flow was strong overall and in line with our long-term target and inclusive of Alaris remediation, tariffs and other discrete payments, free cash flow conversion was 64%. We ended the fiscal year with net leverage of 2.8x and made progress towards our net leverage target of 2.5x. With that, I'll turn it back to Tom.

Thanks, Chris. As we look ahead, we remain focused on executing the Waters transaction. The combination of our Biosciences and Diagnostic Systems business with Waters continues to be a significant strategic and financial opportunity to unlock value for our investors. Our teams are partnering exceptionally well to set up a successful combination and momentum for the new company. Last month, we received FTC clearance and remain on track to close around the end of the first quarter of calendar year 2026, subject to obtaining required regulatory approvals and customary closing conditions. We've begun executing our new BD strategy and the work we've done since establishing BD 2025 has set the foundation for the long-term sustainable success of the New BD. During this period of strategic progress, we delivered $5.4 billion of organic growth, the most substantive period of organic growth in BD's history. We created multiple new growth platforms, achieved best-in-class adjusted gross and operating margin expansion near the top of our peer group and increased adjusted operating margin to 25% in FY '25, a record level for BD with more room ahead. We see a clear opportunity to drive further commercial momentum. New BD will be a pure-play MedTech company with a deep innovation pipeline in attractive markets and a best-in-class consumables revenue profile of over 90%. Our growth strategy is supported by BD Excellence, a differentiated capability we've created that is driving gross margin improvement, operating effectiveness, cash generation and fueling reinvestment in innovation and commercial capabilities. To give some color on the benefits we're seeing, in fiscal 2025, consumables quality hit record highs with a 50% reduction in manufacturing nonconformances. Further, we delivered world-class gross productivity improvements of over 8% in our plants this past year. These productivity gains enabled more production with less CapEx achieving the lowest CapEx to revenue ratio in over a decade. We expect momentum to continue in FY '26. We also plan to deliver an enhanced capital allocation strategy that prioritizes internal investment, share repurchases and a reliable and increasing dividend with focused tuck-in M&A in targeted high-growth markets, all with the focus on steadily increasing ROIC. We expect to significantly improve free cash flow conversion, excluding one-time impacts resulting from the Waters transaction. We continue to see share repurchases as a value-creating opportunity given our view of the intrinsic value of BD. We plan to execute another $250 million share buyback this quarter in addition to using at least half of the $4 billion in cash proceeds from the Waters transaction following the closing with the balance for debt repayment. In summary, we see New BD delivering consistent mid-single-digit revenue growth over the long term with margin expansion driven primarily by gross margin fueled by our BD Excellence business system. Moving to our fiscal '26 guide. I'll start with our guidance for WholeCo BD and then provide color on our expectations for New BD post the Waters transaction. We're taking a prudent and transparent approach with our guidance framework. This includes low single-digit revenue growth as our starting point for the year and includes the following assumptions: First, regarding Alaris capital installations. Fiscal '26 is the last year of our 3-year remediation commitment. We expect sales to remain strong and above our historical run rate. However, compared to FY '25's record install levels, this creates a headwind to growth of over 100 basis points. Second, we expect China to decline in the mid-teens. As government policies, including volume-based procurement continue, which will impact growth by about 100 basis points. Our assumptions include China VoBP reaching 80% coverage of our portfolio by the end of FY '26. Third, we are assuming reductions in vaccination rates will continue to drive conservative ordering patterns in Pharm Systems Vaccines. As we've said, vaccines are about 20% of Pharm Systems revenue and our guidance assumes a decline of approximately 25%, which is an impact to growth of about 50 basis points. Excluding vaccines, we expect Pharm Systems to grow mid- to high single digits supported by continued strong growth in Biologics. As you can tell, our guidance includes a thoughtful approach to the macro environment. The combined headwinds from these 3 factors impacts about 10% of BD revenue. Across the remaining 90% of the portfolio, we expect to drive mid-single-digit growth, including continued strength across our BDI, Connected Care and Medical Essentials portfolios fueled by commercial investments and our strong innovation pipeline. We're confident in delivering overall mid-single-digit growth over the long term as these dynamics exit, and we continue to advance our strong core business fundamentals. Based on current spot rates, currency is estimated to be a tailwind to revenue of about 90 basis points. Moving down the P&L. We expect continued strong adjusted operating margin consistent with FY '25 of about 25%. This includes absorbing an incremental $185 million or 80 basis points year-over-year headwind from tariffs, in line with what we've previously communicated. Excluding tariffs, the primary driver of margin expansion is expected to continue to come from gross margin, powered by BD Excellence along with some leverage in shipping and G&A. For tax, we expect our adjusted effective tax rate to be between 14% and 15%. Given these considerations, we are setting our initial adjusted diluted EPS guidance in a range of $14.75 to $15.05. Excluding the year-over-year tariff headwind, we expect EPS growth at the midpoint to be high single digits, which is the right way to think about our business longer term. As you think about fiscal 2026 phasing, we expect Q1 revenue to be down low single digits due to the items we covered. This includes a tough year-over-year comparison Biosciences, which also reflects prior year licensing revenue dynamics before we move to easier comparison periods beginning in Q2 and order timing in our Medical essentials portfolio. We expect Q1 adjusted diluted EPS to be in the range of $2.75 to $2.85, inclusive of tariffs, which we anticipate will be most prominent in Q1 and continue through Q3, and about a 5-point headwind to the tax rate due to a prior year comparison. I'll now provide some context for how to think about New BD for the full fiscal year following the deal closing, which is expected to be around the end of the first quarter of calendar year 2026, subject to obtaining required regulatory approvals and customary closing conditions. We expect New BD's FY '26 revenue growth and margin profiles to be similar to WholeCo. This includes BDB and DS revenue and operating income moving to Waters along with conveyed costs, and a half a year of TSA income. Below operating income on a pro forma basis, we expect NewCo's tax rate will be about 200 basis points higher, driven largely by mix. Collectively, including the use of the cash distribution proceeds associated with the transaction and a higher tax profile, based upon projected close timing, we expected New BD pro forma adjusted EPS growth to be over 200 basis points higher than WholeCo. In summary, as we close out fiscal 2025, we are excited to start the next chapter of BD. As we navigate transitory headwinds in contained areas, our broader portfolio is doing well, and we are actively investing in high-growth, high-margin areas. Combined with actions underway to unlock the untapped commercial potential in the New BD portfolio and reallocate resources, we are building the mechanisms to emerge stronger. We are confident in our long-term mid-single-digit growth profile and our ability to outperform our served markets. With the upcoming combination of Biosciences and Diagnostic Solutions with Waters as a near-term catalyst, and an attractive capital allocation strategy, we are well positioned to deliver value for our shareholders, both in the near and long term. With that, let's start the Q&A session. Operator, can you please assemble our queue.

Our first question will come from Travis Steed with Bank of America.

I guess I'll start with, first of all, kind of bigger picture, this guidance for New BD here. Just how does that reflect the conservatism you've kind of put in place. You can have confidence that this is a year that you can deliver on the initial guide and is that going to be the same for EPS and margins as well that you have the same confidence to deliver on this guidance?

Thank you for the question, Travis. As you mentioned, our goal is to thoroughly evaluate the macro dynamics and take a cautious approach to our guidance as we enter the New BD. We're adjusting our view on the operating environment, particularly focusing on specific areas of our portfolio, especially vaccines based on current trends. The success of Alaris over the past year has been notable, but it presents a natural challenge as we move into '26. We anticipate a strong year in '26, with continued market share growth factored into our plans, yet we also recognize the impact of our prior success and commitment to the FDA regarding remediation. We've adopted a cautious stance regarding China, factoring in what we've observed with VoBP. Importantly, we haven't included any potential improvements in the macro environment into our outlook, as we believe that's the most responsible approach. If conditions do improve, we could see that as an opportunity. However, it's crucial to incorporate those macro dynamics thoughtfully into our plans as we launch the New BD. Our track record of margin expansion remains strong, and we continue to build on that momentum into FY '26. We've seen margin improvement in '25, and we're confident that strong margin growth will persist into '26, fully offsetting tariffs. This will drive our EPS performance largely through continued gross margin growth from BD Excellence.

Great. I don't know if there's anything you want to point out on kind of the Q1 guide versus the full year and how to get confidence that this is not a ramp year and Q1 is kind of fully baked as well?

Yes, good question. As we consider the factors I've mentioned, we're incorporating Alaris Vaccines and China into our Q1 guidance. The Q1 forecast reflects the headwinds for the entire year, in addition to the BDB comparison and the timing of Med Essentials that we previously discussed. Specifically, vaccines will have a significant impact in Q1, making that quarter particularly critical. We anticipate growth will pick up in Q2 and Q3, which are likely to be our strongest quarters this year. Notably, the timing of this growth does not depend on any expectations for returns on invested capital in the latter half of the year, nor are we counting on any macroeconomic relief. We are confident in these anticipated growth steps. Additionally, we expect comparisons to ease in Q2 and Q3 while we maintain strong momentum in areas like APM, Advanced Tissue Regeneration, and PureWick Dispensing Biologics. Around 90% of our portfolio is still showing robust mid-single-digit growth, and we've announced further investments to support these high-growth, high-margin segments, which aligns with our overall strategy. Thank you for the question, Travis.

Our next question will come from Patrick Wood with Morgan Stanley.

Tom, in the remarks you guys were opening where you mentioned capital allocation a bunch of times and incremental investment in the base business as well. Given where your stock is, I appreciate the extra being done in Q4 of the buybacks and things like that. Is there not a temptation just to get off to the RMT even more aggressive in returning capital to shareholders, just given where the yield on the stock is and the fact that you guys get swung around so much by small differentials in organic growth. Why not just get extra aggressive even beyond what you're suggesting now and just buy back a ton of stock. Is there any reason not? Is it just the payback on the base business is critical? Help us understand that capital allocation framework?

Patrick, it's Chris. Thanks for the question. Look, what we've said is we're going to continue to focus on cash generation. And as we generate cash above our plan, we're going to be in the market based on what we see as the intrinsic value of the stock and be aggressive with share buybacks. Thus, the incremental $250 million. It's important to note that we're trying to be disciplined around kind of a net leverage ratio. We did show progress through the year. We went from 3x down to 2.8x. I think importantly, the Waters transaction here is a huge value creation unlock. And as you know, there's $4 billion of proceeds there, of which we said at least half of those will go to the share buybacks, that actually creates an opportunity post spin, where you're going to see our earnings profile increase in terms of the growth rate by over 200 basis points. I think importantly, the value that BD shareholders will get on the earnings that moves to Waters as part of the spin is coming at a significant premium multiple, almost 2x where it's trading at BDX approaching 20x. And then I think importantly, when you look at kind of New BD and the EPS, it would imply a trading multiple of about 10x against an extremely attractive financial profile when you think of the leadership positions we have, a mid-20% margin profile and earnings profile that's going to be high single digits, right? We're having the impact of tariffs this year. If you extract that, our guide implies high single digits, plus it's going to improve by 200 basis points, strong cash generation. So we're definitely going to be in the market with those cash proceeds and see this as a significant value creation opportunity.

Patrick, I’d like to add to Chris' insightful comments. As you mentioned, we believe the intrinsic value of the company is significantly higher than its current trading value, highlighting a substantial value disconnect. This is why we announced an additional $250 million share buyback, effective immediately this quarter. We plan to execute at least half of the $4 billion share buyback as we finalize the transaction, which is expected to boost EPS growth for New BD by at least 200 basis points compared to our initial WholeCo guidance. To expand on Chris' remarks, we're very satisfied with the transaction involving Waters. Both teams are collaborating exceptionally well. We have obtained FTC clearance for the transaction and are proceeding according to our timeline, keeping the separation and integration processes on track. Currently, Waters' share price and our ownership interest amount to around $50 per BD share embedded in our current share price. This indicates that if you isolate that $50 value, the remaining business is trading at a 10x multiple. Considering New BD, we are well-positioned across multiple attractive markets, and while 10% of our portfolio is facing some cyclical dynamics, these are contained issues. The remaining 90% continues to exhibit solid mid-single-digit growth. We lead in 90% of the markets we operate in, and our profit margins are in the mid to high 20s, with continued expansion expected and a strong cash flow profile complemented by a shareholder-friendly capital allocation strategy. Therefore, we don’t believe we should be valued at a 10x multiple, which is why we are actively buying back shares this quarter and will continue as cash proceeds come in, prioritizing this in our capital allocation strategy. From a BDX shareholder perspective, New BD's EPS, share buyback benefits, interest advantages, and the accretive nature of our Waters ownership all contribute to enhancing strategic clarity, effective capital allocation, and long-term value creation for our shareholders. Thank you for the question, and I'm happy to provide more details.

Our next question will come from Larry Biegelsen with Wells Fargo.

One on China, the expectation that fiscal '26 is down mid-teens was a little bit weaker than I would have expected. Just remind us of what China was in Q4 on an organic basis and full year '25? I apologize if I missed it in the slides.

Thanks, Larry, for the question. We were down high single digits organic in the quarter in Q4. And again, we want to take a prudent approach to our guide going forward as we think about where VoBP could play out, continued primarily in the BD Interventional segment, as we've described before. And I think really that just continuing to watch that and recognizing it is difficult to really call China and how that market will evolve. And so we also still believe that it will have progressed through at least 80% of our portfolio will have gone through VoBP in '26. We also recognize that post-separation China will be about 4% of our revenue, which sets us up in future years for an easier base compare there. So that's what we've built in, again, to our assumptions and haven't included any improvements in that macro environment in our prudent guide.

One follow-up and also, I'd be remiss if I didn't say, Chris, congratulations on the new role. I enjoyed working with you and good luck. Tom, I'd love to hear your updated thoughts on the New BD strategy and the earnings algorithm because I think it's unique in MedTech. You talked a lot about it in the conference season in September. About the mid-single-digit growth, some leverage and at least 50% of free cash flow going to share buybacks, which I think is unique. Talk about the rationale and if the New BD can grow EPS double digits, you talked about 200 basis points faster than the current BD?

Thank you, Larry. That's a really good question. As I mentioned earlier in Patrick's response, we are very enthusiastic about the New BD as a focused leader in MedTech, with a presence in a variety of attractive markets that we are actively engaging with. We are enhancing our commercial strategies to improve performance in these areas, supported by increased sales force investments. We are also reallocating costs from corporate to business sectors, research and development, and high-growth, high-margin areas such as urinary incontinence and Connected Care, as well as Tissue Reconstruction and Biologic Drug Delivery, all of which are promising markets where we hold leading positions. We are very confident in our long-term mid-single-digit growth outlook, which we have consistently emphasized during this call. We are currently seeing this growth in 90% of our business, although a part of it is facing some challenges, which are partly due to our own success with Alaris. We are also working to enhance our free cash flow conversion, as Chris noted. We believe this is a unique opportunity within the MedTech sector to leverage our profile and turn it into a consistent growth trajectory, using our cash generation for share buybacks and to foster compounding earnings growth. Additionally, our BD Excellence business system, developed over recent years, is helping us achieve record productivity and performance metrics at 8%. We are optimizing our capital investments, reaching a ten-year high in capital as a percentage of revenue this past year, along with record levels of safety, quality, and service, all thanks to BD Excellence. We think we are still in the early stages of margin expansion, which supports our growth profile. Thus, we have a thoughtful approach to creating value moving forward that aligns well with BD's identity, focusing on margin and cash flow generation to maximize value for our shareholders in a sustainable way.

Our next question comes from Robbie Marcus with JPMorgan.

I wanted to ask on Alaris. It's set to be over a 100 basis point headwind in fiscal '26. How should we think about what kind of benefit it was in fiscal '25? Were there any quarters that it really benefited? And I remember $400 million to $450 million is the normal run rate. So is that still a good normalized run rate now that the installed base has pretty much been upgraded after the relaunch? And then I have a follow-up.

Yes, it's Chris. Thanks for your question. As you consider 2026 compared to 2025, I have two comments. Firstly, regarding the relaunch of Alaris, it has been very successful and allowed us to strengthen our leadership position in the market, and I'm really proud of the team. The relaunch gained momentum throughout 2025, particularly at the beginning of the year, which presents a tougher growth comparison when looking at contributions from 2024, but this moderates as we move towards the end of 2025. This dynamic is part of the Q1 situation. Alaris will be one of the higher comparisons we face in terms of growth contributions for 2026, as we had a favorable comparison in 2025. From a full year perspective, we expect a headwind of about 100 basis points for 2026, which is similar to what we experienced in 2025. That said, while considering Alaris’s impact on our performance in 2025, the market headwinds we encountered were slightly greater than the total benefits we received from Alaris. Hopefully, this provides clarity on how Q1 and 2026 will be the most challenging comparison with Alaris regarding growth contributions and the overall year’s impact.

Yes. Robbie, let me provide some insight into our future outlook. Firstly, we are very pleased with how our team has performed. They have done an excellent job addressing our commitments on a large scale. We have secured our installed base and leadership for years to come, which allows us to focus on gaining market share and pursuing growth opportunities, particularly with Alaris. While the remaining market is smaller, we are committed to increasing our share there and leveraging our MMS sales team to drive growth in other areas of our portfolio. The launch of Pyxis Pro is perfectly timed for this effort. We are also introducing several new products, including Incada, which will help us pivot our focus. Although we anticipate a headwind of about 100 basis points in '26, we expect that after the last year of remediation, we will see a headwind of around 200 basis points for Alaris in the subsequent year. Looking longer term, we will reach a normalized run rate, and the fleet replacement cycle will eventually provide a tailwind as we approach the 2030s. The recently installed fleet will begin to enter an approximately eight-year replacement cycle, leading to a more stable situation thereafter.

A quick follow-up. And Chris, I'll also wish you the best at your new role. But I wanted to ask on margins, and I appreciate the slide and the bridge you got there. Historically, it's been difficult for medical device companies to show positive operating margin expansion when they're kind of 3% or below on organic growth. Just walk us through some of the levers you can pull to drive what feels like underlying operating margin expansion offsetting tariffs given there's not a lot of revenue growth to offset it?

Yes. Thanks, Robbie. I appreciate that. Look, this is the power of BD Excellence, right? I mean we just executed FY '25. We had 140 basis points improvement in gross margin, 80 basis points on operating margin, that included absorbing 40 basis points of tariffs. So this is what exactly we said would happen, it started at the end of '24 into '25. Importantly, that becomes an opportunity for us to compound earnings at an attractive rate, right? We almost delivered double-digit growth in '25, despite the absorbing the tariff impact, which was 2 points but most importantly, reinvest back in the business, right, and drive incremental investment in selling most notably, which we did delever in the back half of '25. You saw that. So as you think of '26, we're basically going to have 3 quarters of the year with a tariff impact in there. Despite that, we are still going to be about flat, it implies basically an 80 basis point improvement in operating margin. The significant majority of that is going to play out exactly the same way. It's coming from gross margin. And we're doing the same thing. We're going to invest. We're starting these investments, building on what we did in Q4. You're going to see selling deleverage in the first quarter, most notably and slowly moderate throughout the year as we cycle the investments we put in Q4. We will get a little bit of leverage in G&A and shipping is something that we consistently strive for with the incremental cost-out program that we announced as well, that will start in the front end of the year. But as we build through the year, that will become more prominent as we move through the back half of the year. So I do think you can look at this as a very attractive profile. The power of BD Excellence reinvesting back of the business. If you look at the midpoint of our EPS growth rate of our guide and take the 3.5 point plus tariff impact, the midpoint is basically high single digits, right, just about 7%. And so even as you think of '27, as we shared in the script, right, high single digit is the profile of earnings you should think about. And so we think this is one of the exciting things. It goes back to Tom's point around a great opportunity to invest in a company that can compound earnings despite macro environment.

We'll take our last question from Rick Wise with Stifel.

Chris, as I listened to you and Tom, I realized that I've been following Becton for around 30 years now. Becton has consistently excelled at reducing costs, as highlighted by the $200 million savings this year. However, I'm particularly interested in the three major initiatives: the change in the operating model, the realignment of the commercial team, and the targeted focus of the sales team, along with Mike Feld's new role. Could you elaborate on these comments? Beyond cost reductions, these actions appear significant and may have long-term consequences. What impact do you foresee for New BD as a whole? When can we expect to see the benefits of these initiatives? Additionally, could you discuss any implications for divisional growth or margins? Please provide insights into this, and let me know if I'm accurately capturing the essence of your points.

I appreciate the question, Rick. I'd like to share some insights on this topic. We're really focused on accelerating the launch of New BD and taking advantage of the opportunities ahead of us. We have a strong foundation, having developed multiple growth platforms and implemented BD Excellence in our operations while executing our 2025 strategy. Our goal is to extend this excellence into our commercial efforts and innovation initiatives. We are actively taking steps to make this happen. Post the Waters transaction, we are ramping up New BD, accelerating our strategy, and reinforcing our commitment to long-term profitable growth. We're building on the momentum of BD Excellence and success in our operations and extending these capabilities to the commercial side. This begins with enhancing Mike Feld's role as we approach the Waters deal close; he will take on the position of Chief Revenue Officer, a first for our company. Mike has extensive experience in Kaizen, lean practices, and BD Excellence, which he will apply to our commercial organization to expedite our initiatives. While we have a good organization in place, we believe we can elevate it to a world-class level, similar to what we've achieved in operations. Mike will work with our segments and businesses to enhance our commercial rigor and speed, equipping our teams with the latest tools and analytics to achieve top-tier performance. We're also restructuring our commercial operating model to create a direct sales connection to our businesses. Additionally, we are investing more than $30 million above our regular budget to support targeted high-growth and high-margin markets. For instance, markets like PI and APM are performing significantly above our expectations for 2025, and we're increasing the sales force by 15% in those areas. Our recent win with the Veterans Administration for full reimbursement of PureWick at home is significant, and we're dedicating sales resources to help veterans access this technology. We're also seeing strong growth in our Surgery segment in Europe, and we're further investing in those successful areas. As for our cost structure, we evaluated our spending to ensure the best returns and have decided to allocate $50 million of corporate costs to support innovation in exciting new areas. This investment will back various product launches and the next phases of innovation, particularly adjacent opportunities to PureWick and advancements in tissue regeneration and Biologic Drug Delivery. With Bilal now leading our software development, we’re excited about the series of innovations he plans to support. While most R&D investments take a few years to yield products, we expect to see the benefits of our commercial investments starting this year and growing in the following years. Our approach balances immediate performance goals with longer-term strategic growth, ensuring we emerge from this environment stronger and foster sustainable growth through commercial excellence and innovation, as we've outlined in today's call.

That's a great answer. I'll just say a quick follow-up. When you mentioned the 25% operating margin targets, you're not very far from reaching them. You also said that you believe there's more potential for improvement. Could you elaborate on your long-term vision for the next three to five years?

Thank you for the question. While we won’t provide a specific number for our operating margin goals, I can share that we ended the year at 25%, which aligns with our commitment made during the Analyst Day in 2021. We are pleased to have achieved this target by the end of 2025, especially given we faced a last-minute 40 basis point challenge from tariffs and still managed to deliver on our goal. Our team did an outstanding job, and BD Excellence played a crucial role in this achievement. Going forward, BD Excellence will continue to be a key driver of our margin expansion strategy. We believe there is more potential for operating margin improvement, which we expect to be supported by gross margin growth. Our ongoing efforts in consolidating our manufacturing network, enhancing operational excellence, and boosting productivity will contribute to this, along with our innovation pipeline and the markets we are focusing on. We are emphasizing investments in higher growth and higher margin areas, including additional resources in channels and R&D funding. We view the mix of our product offerings as a significant factor in our margin progression moving forward, presenting a genuine opportunity for us in terms of gross margin. Compared to our peers, our portfolio typically has a lower gross margin profile, but we maintain a highly efficient cost structure and see ways to enhance our gross margin. We have successfully improved it over the past two years, and we believe we have substantial potential for growth in this area. Thank you again for your question.

That does conclude today's question-and-answer session. At this time, I'd like to turn the floor back over to Tom Polen for any additional or closing remarks.

Thank you, operator, and thank you, everyone, for your questions and for joining us today. We look forward to updating you on our progress next quarter.

Thank you, ladies and gentlemen. This does conclude today's audio webcast. On behalf of BD, thank you for joining today. Please disconnect your lines at this time, and have a wonderful day.