Earnings Call Transcript - BDX Q2 2025

Operator, Operator

Hello, and welcome to BD's Second Fiscal Quarter 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) 839-2385 for domestic calls and area code +1-402-220-7203 for international calls. For today's call, all parties have been placed in a listen-only mode until the question-and-answer session. I will now turn the call over to Greg Rodetis, Senior Vice President, Treasurer and Head of Investor Relations.

Greg Rodetis, Senior Vice President, Treasurer and Head of Investor Relations

Good morning, and welcome to BD's earnings call. I'm Greg Rodetis, Senior Vice President, Treasurer and Head of Investor Relations. Thank you for joining us. This call is being made available via audio webcast at bd.com. Earlier this morning, BD released its results for the second quarter of 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. Following this morning's prepared remarks, Tom and Chris will be joined for Q&A by our segment presidents. Mike Garrison, President of the Medical segment; Mike Feld, President of the Life Sciences segment and Rick Byrd, President of the Interventional segment. Before we get started, I want to remind you that, we will be making forward-looking statements. You can read the disclaimer in our earnings release and the disclosures in our SEC filings available on the Investor Relations website. Unless otherwise specified, all comparisons will be made on a year-over-year basis versus the relevant fiscal period. Revenue percentage changes are on an FX-neutral basis unless otherwise noted. Tariff commentary is based on tariff policies as of April 30th and does not include any of the tariffs that have been announced, but currently are delayed or threatened. And we note that, international trade policies, trade restrictions and tariffs are rapidly evolving and there can be no assurance as to how the landscape may change and what the ultimate impact on our guidance and results of operations will be. 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.

Tom Polen, Chairman, Chief Executive Officer and President

Thank you, Greg, and good morning, everyone. My comments this morning will focus on our Q2 results and the strategic actions we are taking to not only navigate the near-term environment with agility but to ensure BD is best positioned to deliver long-term value. Starting with our Q2 results, revenues came in below our expectations, growing 6% or 0.9% organic. This performance was largely attributable to market dynamics concentrated in Life Sciences, which reflects the change in research funding policy versus what was initially anticipated as well as the slower return to normal levels of blood culture testing in our Diagnostics business. We are not satisfied with this quarter's top-line growth and it is not reflective of the mid-single-digits growth we've been consistently delivering over the last several years. I will share more on the decisive actions we are taking, including specific investments to reaccelerate organic sales growth in this dynamic market. Importantly, we were able to offset these challenges to exceed our adjusted EPS growth expectations, as we continue to consistently execute and deliver strong performance down the P&L. Specifically, we delivered adjusted gross margins of 54.9%, which increased year-over-year by 190 basis points. Our strong margin performance is being fueled by momentum in BD Excellence, with now four consecutive quarters of strong gross margin expansion. We continue to scale BD Excellence across the organization, including nearly tripling the number of Kaizens year-on-year, with over 600 completed year-to-date. As planned, we are now beginning to embed this system in our R&D and commercial operations and just held our first ever BD Excellence Leadership Summit three weeks ago. We continue to see BD Excellence as a key catalyst to drive gross margin expansion over the next five years and support increasing growth investments in commercial programs and R&D. Chris will take you through our results in greater detail. However, I'd like to provide some additional color on our Q2 revenue performance. First, Bioscience performance was impacted by further reduction in global research funding. At the start of the year, our forecast assumed a depressed but stable environment with modest improvement throughout the year. Q1 was directly aligned with those assumptions. However, as given changes in government policy, including the cuts to U.S. research grants announced in February, it's become clear that pressure on research spending increased in Q2 and will likely persist through FY '25. This has largely impacted research instrument sales. However, where instrument funding is available, our win rate has been strong, driven by high interest in our innovative facts portfolio. And we are pleased that effective in April, we received our first export license to resume selling our high parameter flow cytometers to China, following the U.S. Government ban imposed in early January. Finally, on the reagent side, we are seeing continued growth, which we see as a good signal that customers are continuing to advance their research. We believe this business remains well-positioned for growth as the market begins to stabilize. The other key area where we experienced challenges was diagnostics, with softness in our back tech blood culture business. If you recall, we experienced supplier challenges late last year, our team has done a great job working with the supplier to get back to full production, and we have returned to historical inventory levels. However, customers who had been operating under allocation last year took conservation actions within the standard of care guidelines, and have been slower than expected to move back to prior testing levels. We are partnering with our customers to accelerate this readoption. Given these dynamics, we are adjusting our full-year revenue guidance and now expect to deliver 3% to 3.5% organic growth. We don't take this change lightly and are acting decisively to address items within our control and drive upside in areas of momentum to accelerate growth. Specifically as planned, pharm systems returned to growth in Q2, giving us confidence in second half growth, where we expect performance to keep building driven by biologics and increased orders for GLP-1. We're investing behind Alaris' strong momentum and APM continues to be a key growth catalyst, which will contribute to organic growth, as we anniversary the acquisition in Q4. We believe our interventional business is well-positioned to deliver strong growth in the second half, fueled by continued momentum and additional commercial investments in PureWick and Phasix and our recent launch of Phasix umbilical. Our innovation funnel is robust and we have several new product launches planned in the back half, including FACSDiscover A8 and CentroVena One, our rapid insertion central catheter. Turning to earnings for the balance of the year. Before considering the impacts of tariffs, strength down the P&L, including strong margin performance, is enabling us to offset our updated revenue expectations. Chris will go into greater detail on our updated guidance, including our tariff assumptions. But I'd like to provide some context for how we're navigating the current environment. First, we have a strong track record of effectively navigating macro challenges, including COVID and the supply chain and inflation headwinds that followed, driven by our advanced supply chain capabilities, regionalized manufacturing footprint and scaled leadership positions. We are applying these same strengths and operating approach to proactively navigate tariffs. Second, BD is the largest U.S. manufacturer in MedTech with a U.S. network of 28 plants that produce over 10 billion devices each year. This puts BD in a strong position with nearly 80% of our U.S. revenue currently sourced from our U.S. manufacturing network or tariff-exempt sources. To further strengthen our position and commitment to ensure a resilient U.S. healthcare system, today, we announced our intent to invest $2.5 billion in U.S. manufacturing over the next five years. Looking at imports, less than 1% of U.S. revenue is sourced from China. Given this structure and current tariff policies, our most significant tariff exposure comes from China tariffs placed on products manufactured in the U.S. and exported to China. We are committed to leading through this challenge and are proactively driving mitigation actions that have already significantly reduced near-term tariff risk. As a result, we assume $90 million of tariff expense in FY '25. Third, we have identified and begun to act on additional steps to further mitigate the impact of tariffs beyond FY '25. These actions include shifting supply flows, optimizing supplier locations and leveraging dual-sourcing options across our network. For example, we ship certain products such as vacutainers and flush from the U.S. to China that can also instead ship from our European plants to China, or we can accelerate transition to our China flush plant. As a global MedTech leader, we remain committed to serving China's healthcare system and patients and to preserving our relationships and business. Finally, related to tariffs, we immediately put G&A-focused cost containment measures in place and are taking a balanced approach on pricing that recognizes the current cost pressures, while closely partnering with our customers during this time of uncertainty. BD Excellence is also a differentiated capability in this environment, as it enables us to protect margins and preserve investment to support innovation and growth. Turning to other key strategic initiatives. The separation process for our Biosciences and Diagnostics business is advancing well and on schedule. As we have shared previously, we believe this is a unique opportunity to create value and interest has only increased since we announced the separation in February. We remain committed to maximizing shareholder value and will share more details on the specific form of the transaction this summer. We continue to make meaningful pipeline advances across several of our higher growth markets. In BD Interventional, we continue to expand into new advanced tissue regeneration applications with the launch of Phasix ST Umbilical, the first and only fully absorbable hernia solution designed specifically for umbilical hernias, one of the most common abdominal wall hernia procedures. The launch is off to a strong start. In BD Medical, we continue to advance our connected care strategy and last week received the next 510(k) clearance for BD Alaris enhancements, including cybersecurity updates and clearance of the EtCO2 module. We also recently launched BD neXus, our next generation infusion pump designed for the EMEA region. Finally, in Life Sciences, we were on track to launch the first BD FACSDiscover analyzer, the A8, in just a few weeks, bringing our spectral and real-time imaging technology to an even wider range of scientists and applications. The feedback from pilot customers has been extremely positive. In closing, we are acutely focused on managing our company to navigate the near-term environment and deliver improved growth levels in the back half of the year. The separation of our biosciences and diagnostics business remains on track and we believe we will be well positioned as a pure play MedTech leader focused on attractive categories shaping the future of healthcare. BD Excellence has good momentum, a long runway of opportunity and has the potential to drive strong margin accretion and fuel investments in R&D and commercial. We believe this will enable BD to deliver sustainable, consistent profitable growth. With that, I'll turn it over to Chris.

Chris DelOrefice, Executive Vice President and Chief Financial Officer

Thanks, Tom. To provide more detail on our Q2 revenue performance, we saw a revenue increase of 6%, with organic growth at 0.9%. It's important to note that this organic growth was impacted by a previously mentioned headwind of about 150 basis points due to an unusually strong licensing comparison from the prior year in our BDI segment, particularly affecting UCC and PI. As Tom mentioned, the Life Sciences sector was primarily responsible for our lower than anticipated organic growth in Q2, influenced by decreased demand for biosciences instruments due to shifts in government policy focus and a slower recovery in our back tech, blood culture business. Excluding diagnostics and biosciences, our MedTech business experienced 1.9% organic growth, which faced a headwind of roughly 170 basis points from last year's licensing comparison. We are pleased with the robust performance of Alaris and the recent clearance we received. We also see positive momentum across several key platforms, including strong double-digit growth in biologics, particularly GLP-1s, which helped the pharm systems return to growth in this quarter, aligning with our expectations for the year. In UCC, PureWick had another quarter of impressive double-digit growth, with continued adoption for both male and female product lines. The PureWick male product had its best quarter since launch, and PureWick Flex maintained its strong growth trajectory in both acute settings and the direct-to-consumer at-home market. In surgery, our strategy to transition the standard of care from synthetic mesh to our Phasix bio-resorbable mesh is progressing well, demonstrating strong market adoption and double-digit growth. Overall, we experienced solid underlying growth across all PI platforms in the U.S., although this was partially offset by volume-based procurement challenges in China. From a regional perspective, our total company organic growth was primarily driven by the U.S., Greater Asia excluding China, and Latin America, while EMEA saw a decline along with the anticipated double-digit decrease in China. In terms of our P&L results, we made significant progress down the P&L, achieving well-leveraged earnings growth and surpassing our adjusted margin and earnings targets, with Q2 adjusted diluted EPS reaching $3.35, a 5.7% increase. We also achieved a robust adjusted gross margin of 54.9% and an adjusted operating margin of 24.9%, both reflecting year-over-year increases of 190 and 60 basis points, respectively. The expansion in margins was driven by steadfast progress in BD Excellence, supported by improvements in manufacturing productivity, overall equipment effectiveness, waste reduction, and network optimization. This enabled us to invest in growth areas across selling, general and administrative expenses as well as R&D. Regarding cash and capital allocation, we reported year-to-date free cash flows of approximately $625 million, reflecting the timing of previously planned one-time cash payments. BD Excellence continues to enhance productivity, allowing us to leverage capital expenditures effectively. We made strategic inventory investments during the quarter to mitigate the impact of tariffs within the fiscal year. Please remember that our cash generation is typically heavier in the second half of the year due to the timing of tax and other payments. While we anticipate that tariffs may have a minor effect on cash in the latter half of the year, we expect steady progress toward our deleveraging goals. We ended the quarter with net leverage of 2.9x, which aligns with our projections. We continue to view share repurchases as a valuable use of capital due to our assessment of BD's intrinsic value, and we remain committed to repurchasing $1 billion in shares by the end of the calendar year, having already repurchased $750 million year-to-date. Looking ahead to our updated fiscal 2025 guidance, we are focused on driving momentum while considering the latest macroeconomic conditions, adjusting our expectations to 3.5% growth. For the quarterly breakdown, we anticipate year-over-year organic growth to improve sequentially to nearly 3% in Q3 and to further increase in Q4, supported by the key growth drivers mentioned by Tom earlier, as well as less challenging comparisons. Regarding foreign currency, based on current market rates, we predict a revenue headwind from translational currency of about $20 million for the full fiscal year, which is an improvement of approximately $230 million from our previous guidance. Consequently, we now expect total revenues for fiscal 2025 to fall between $21.8 billion and $21.9 billion. For taxes, we anticipate our adjusted effective tax rate to range from 14% to 14.5%. Excluding the effects of tariffs, we are maintaining our adjusted EPS target of $14.30 to $14.60, which represents a 10% growth at the midpoint while also accounting for an FX headwind of about $0.05 or 40 basis points for the entire year. Our performance down the P&L, driven significantly by gross margin improvements, is effectively counterbalancing the earnings impact from our revised organic sales forecasts. There remains considerable uncertainty regarding the future tariff landscape, but we are committed to executing our strategy while actively working to mitigate tariff impacts, having made notable progress thus far. Considering the actions we have taken and will continue to implement, we estimate the remaining tariff expense for this fiscal year to be about $90 million or $0.25, primarily concentrated in Q4. Accordingly, we project adjusted diluted EPS to be in the range of $14.06 to $14.34, reflecting about 8% growth at the midpoint that includes a tariff impact of around 2%. Finally, regarding Q3 margins, we expect strong adjusted gross margin levels to remain approximately flat year-over-year. With our planned increases in selling and R&D investments, while exercising discipline in G&A costs, we estimate the Q3 adjusted operating margin to be around 24.5%. In conclusion, we are focused on navigating the current landscape to achieve our revenue and adjusted EPS growth goals despite tariffs, while ensuring BD is well-positioned for continued momentum beyond 2025. Let's now open the floor for questions. Operator, could you please start our Q&A session?

Operator, Operator

And our first question is from Larry Biegelsen with Wells Fargo.

Larry Biegelsen, Analyst

Good morning. Thank you for the question. Chris, let's address the tariff issue. Is the $0.25 amount net or gross, meaning is it after mitigation? You mentioned it would begin in fiscal Q4. So, people will likely try to annualize that. Is that the correct approach for fiscal 2026, or will there be some mitigation? What's the best way to consider this for fiscal 2026? Additionally, I have one follow-up. Yes, certainly.

Chris DelOrefice, Executive Vice President and Chief Financial Officer

Thank you, Larry, for the question. It's definitely an important topic. I want to give a big shout-out to the BD team. This number reflects our efforts after working hard to address tariffs on various fronts in both the short and long term. We've been actively managing our advanced capabilities and supply chain, optimizing inventory movements, and exploring sourcing alternatives throughout our extensive network. Significant progress has been made across multiple groups to handle this situation in 2025. Of course, the circumstances remain very dynamic, and we will have to see how the next few months unfold regarding potential changes in tariff rates. You are correct that while you can't simply annualize the figures, it's reasonable to state that we have, on average, about three months of tariffs included in our guidance. There is some impact in Q3, but when considering our fiscal year and where we are in our cap and roll period, some annualization factor is appropriate. From there, we will monitor how the rates develop, and our efforts to mitigate and take action are far from over. Lastly, I want to emphasize that despite the challenges BD is facing in the macro environment, we are demonstrating the strength of BD through BD Excellence, as shown by margin growth and our continued ability to achieve an 8% compound annual EPS growth at the midpoint.

Larry Biegelsen, Analyst

Thanks for the question. That's super helpful. Just one follow-up for Chris or Tom. Just maybe flesh out a little bit more how the second half organic growth improves? I think it was 0.9% in Q2, 3% you said for Q3, Chris. I think you've been a little bit higher in Q4. Put a little bit give us a little bit more meat on the bone there and kind of what gets better in the second half of the year and your level of confidence there?

Operator, Operator

Speakers, are you able to hear us?

Larry Biegelsen, Analyst

I can hear you. This is Larry. I was the one who asked the question. Yes.

Operator, Operator

Thank you, Larry. To our speakers, Mr. Polen or Mr. DelOrefice, are you able to hear us? You may be on mute.

Chris DelOrefice, Executive Vice President and Chief Financial Officer

Thanks, can you guys hear me now? Just confirm Larry.

Larry Biegelsen, Analyst

I can. Did you hear the question Chris?

Chris DelOrefice, Executive Vice President and Chief Financial Officer

Yes, I did. Yes, I heard the question. Perfect. Thanks Larry for the question. So obviously, in this guide you saw us reflect our best thinking on the macro landscape, which had evolved pretty quickly and dynamically as we're in Q2. If you remember Q1 we were well on track actually ahead of plan. As you think of the full year, so first half ex-licensing we're about 3% growth. As you step into the second half our implied guide is about 4%, so 1% step-up. What we did share in the call is, we expect Q3 to be similar to the first half, so right around 3%. What that implies is, just over 5% in Q4. There's really four key items in Q4. It's actually pretty straightforward, as you think of that acceleration and they're all about equally weighted. First thing is, we start cycling over APM, which now becomes organic growth contributor actually off of an easy comp as well. So you have that dynamic. You have Pharm Systems which has actually been playing out as planned through the year. You saw a step-up in growth there, continued momentum in biologics. So you'll see a stronger Q4 there. Again also off of an easier comp. BDI, we've always talked about that profile being a six plus grow. We expect high single-digits growth in BDI, partially driven by an easy comp in surgery. It's also an area, where we've actually added investment to our plan in the spirit of taking action and driving areas of momentum. And then lastly, actually in BDB, again we cycle through easiest comp last year at the end of the year is when market dynamics started affecting us and we have an exciting launch with FACSDiscover A8. So those four items explain the sequential step-up from Q3 to Q4. We feel really good about that.

Operator, Operator

Our next question comes from Robbie Marcus with JPMorgan.

Robbie Marcus, Analyst

Great. Good morning and thanks for taking the questions. I just want to follow-up on that last one. Just maybe a different angle of the question. You brought organic sales growth down for the year about 100 bps, 50 bps of that you highlighted was from some of the known headwinds like China, pharm systems, destocking and biosciences and then 50 bps from it looks like the rest of the business. Chris, maybe you could help us understand sort of where it's coming in a little soft in the remaining part of the business? And then of that 125 to up now 175 headwind, what's kind of doing better and what's maybe doing worse?

Chris DelOrefice, Executive Vice President and Chief Financial Officer

Yes. Thanks Robbie. That's a great question as well. So the 175 basis points, it was around, it's actually slightly over that, think of it a little bit higher. Here's the easy way to break it down. There's really three key drivers that we're adjusting for in the guide, two of which are very much market driven. So about 80% of the impact and I would say 60% of that 80% is both BDB and China. If you remember China, we originally said would be a mid-single-digits decline. We're now saying it's going to be a high single-digits decline. Some of that is just trying to make sure, we're thoughtful about the environment because China was actually tracking relatively in line in the first half. But we did start seeing some incremental, volume-based procurement in areas in particular BDI which we can touch on. And as you can imagine that the research spend in that area, so there's a little bit of overlap with BDB. BDB is the other one. Again that's fully market driven. There were a lot of changes that happened mid-to-late quarter in Q2 including how you saw Europe react, as it relates to standing up defense fund, some of that coming at the expense of research as an example. Obviously, in the U.S. in NIH there was a specific reduction there taking place? So we've reflected that in. The other big areas in the DS business predominantly back tech. So we described that on the call. Last year we had a third-party supplier create a supply challenge. We're fully back on supply. Team's done a great job there. Inventory is in the channel. But as you can imagine the healthcare system puts conservation efforts in place to ensure that they're appropriately following protocols, taking care of the most critical patients. It's taking them longer to ramp back to normal utilization level. So, we're partnering with our customers to get that back, give them confidence that supplies there which is there. Those are the big areas. There's some smaller puts and takes everywhere else, but that's the way I would think of it.

Operator, Operator

Our next question comes from Matt Taylor with Jefferies.

Matt Taylor, Analyst

Hi, thank you for taking the question. So just following on the discussion about tariffs and mitigation actions, I was hoping that you could delve into some of the different levers that you can pull and when you might look to pull them. A lot of companies have been talking about pricing selectively and then using global footprint and looking at different sourcing. So maybe you can talk about any actions you could take in the short term and then when the dust settles and we know more about how the landscape will look next year, what could you do in different scenarios next year and beyond?

Tom Polen, Chairman, Chief Executive Officer and President

Thanks for the question, Matt. This is Tom. As we mentioned in our prepared remarks, our team has a strong history of effectively addressing macro challenges. We managed this well during COVID, and the subsequent supply chain and inflation issues. Tariffs have been another external factor that we've actively managed. Early on, we repositioned our inventory to mitigate tariff impacts and create a buffer against costs. For instance, we increased our inventory of Veritor, our one product imported from China, to ensure we have enough for the year, even though it accounts for less than 1% of U.S. revenue. We continuously evaluate our global sourcing strategies. As the largest U.S. manufacturer in MedTech, we have a considerable advantage. For our high-volume consumables, we typically have multiple sourcing options. For example, virtually all vacutainers sold in China come from our Sumter, South Carolina plant, with production in Plymouth, England as well. We are transitioning our sourcing from China to that facility. Similarly, all flush products sold in China historically came from our Columbus, Nebraska site. Recently, we've opened a new flush facility in China, where we're focusing on increasing production ahead of schedule to avoid tariffs. We have additional options in other categories, and we plan to continue utilizing these strategies as we move towards 2026. Additionally, sourcing raw materials is a key area of focus for us. We successfully navigated previous tariffs by moving products within our supplier network, and we're applying that same strategy now. Finally, BD Excellence is a critical asset in this environment, helping us maintain margins while allowing for continued investment in innovation and growth as we offset tariffs. Regarding pricing, if tariffs stay in place, we will address the inflationary pressures. We have a solid history of managing through such environments. Initially, we'll work to mitigate tariffs, partially offset them with BD Excellence, and finally, consider passing along some cost increases through pricing as needed, as part of our comprehensive approach. Thank you for the question, Matt.

Operator, Operator

Our next question comes from Travis Steed with Bank of America.

Travis Steed, Analyst

Hi, thanks for taking the question. I guess, Chris, I wanted to ask kind of a higher level bigger picture question. I think we came into the year thinking that we were going to set a more conservative guidance. And then, just trying to think about the philosophy here, like, there is an acceleration now in kind of the back half of the year again. I'm just trying to get confidence in the guide again and trying to understand like is the business, the macro just changing so much it's hard to capture, is that just a tough business to model? Just trying to take a bigger picture, how do we kind of improve the execution here going forward?

Tom Polen, Chairman, Chief Executive Officer and President

Travis, this is Tom. Let me start by addressing that and then I'll hand it over to Chris. We are certainly not satisfied with the changes in our revenue, and we take this very seriously. We are fully focused on the actions we need to take to accelerate in the latter half of the year. As we have mentioned before, we've been observing market dynamics, particularly in research spending and biopharma in China. In biopharma, we're seeing a recovery to our initial expectations, which is a positive sign. However, research funding underwent a significant change in Q2, as the environment became more volatile than we expected, particularly due to government changes announced in February regarding NIH grant funding. Following that change, we witnessed a slowdown in capital purchases for research purposes in many instances. Although we continue to see growth in reagents, there was a pause in that growth. In Europe, as Chris pointed out, uncertainty about government spending impacted our orders, particularly in the NHS, where some orders were put on hold as they reevaluated their allocation of government funds amidst a changing landscape, including increases in defense spending. It’s important for us to communicate our outlook accurately, anticipating continued pressures and dynamic changes through the remainder of FY '25, which reflects a decline from our expectations at the start of the year and a step down from Q1 as well. This aligns closely with the policy decisions made within the new administration during the quarter. Regarding China, we want to proactively address the evolving macro environment there. As Chris mentioned, year-to-date through Q2, we are on track with our original expectations for China. That said, we've been closely monitoring the situation. Research spending pressures persist in China, and we're also keeping a close watch on the VoBP environment. Consequently, we have adjusted our outlook, shifting our expectations from a mid-single-digit decline to a high single-digit decline in our projections. These are the primary factors at play.

Chris DelOrefice, Executive Vice President and Chief Financial Officer

Yes, that addresses the top line. I would like to add that the market dynamics related to China and the significant factors occurring in life sciences and BDB in particular are not unlike what others in that space are experiencing. When you consider MedTech or even new business development, the full year guidance remains solidly in the mid-single digits excluding licensing. There is considerable strength in the business that may not be evident. This includes the headwind from China in that figure. Regarding growth, another key point I briefly mentioned is the consistent performance in earnings. We have met our earnings expectations every quarter, with one instance being a match, reflecting an 8% earnings growth. We are effectively maintaining our guidance excluding tariffs, which have been a new challenge for everyone. We managed that well in 2025, exceeding external expectations, demonstrating the strength of our supply chain, capabilities, and our ability to navigate macro challenges, instilling confidence in our financial performance. We are managing a 5% headwind to EPS growth—comprising a 2% impact from tariffs and a 3% on revenue—yet still achieving 8% earnings growth. This reflects a high-quality, high-leverage financial performance, and with the momentum from BD Excellence, it reinforces our ability to deliver strong results even in tough environments while compounding earnings.

Tom Polen, Chairman, Chief Executive Officer and President

Yes. This is Tom, Travis. Good question. So as we shared, nothing has changed. The planned separation process remains on schedule and there continues to be very strong interest in the assets. As we progress, we're going to continue to be thoroughly evaluating all the transaction options, net of tax, to make sure that we get the best outcomes for shareholders. That remains our priority, maximizing shareholder value through this process, and we continue to expect to announce the transaction this summer. So, we remain very focused on that.

Operator, Operator

And our next question comes from Patrick Wood with Morgan Stanley.

Patrick Wood, Analyst

Perfect. Thank you so much for taking the question. I'll keep it to one. We've talked about a lot on this call, but obviously, you guys have done very, very well on the efficiency side over the years. There's been a lot of exercises, I'm sure, internally that have gone through to land us to where we are now. I guess, my question is kind of to what extent you build muscle tissue in that skill set internally with the employees, but, also, it's a lot of work, right? It's kind of exhausting in its own way. So I guess what's the interplay here between the capacity for people to keep doing these exercises and kind of remain happy versus the skill set of the muscle tissue that you guys have built up in that arena? And how do you make sure that, you don't end up, because there's obviously everyone has limited time? There's a bit of an interplay between market and product development and efficiencies that everyone has a certain amount of time. How do you sort of balance those things internally? I know it's a very vague question, but I'm just curious.

Tom Polen, Chairman, Chief Executive Officer and President

Thanks, Patrick. That's a great question. I’ll start with my perspective and then I’ll invite Mike Feld, who is taking a leadership role in our BD Excellence initiative, to share his thoughts. I frequently attend various Kaizens. Just recently, I was in Singapore for the annual CEO Kaizen, where I spent the entire week at the plant with the team. During that time, we conducted eight Kaizens simultaneously, leading to some remarkable accomplishments. These events are incredibly inspiring and engaging; they create an energy similar to that of a sales meeting, which is truly impressive. What happens is that the teams involved in daily operations get the opportunity to step back from their regular tasks to focus on improving and transforming their work, aiming to enhance safety, quality, cost efficiency, and overall effectiveness for themselves, the company, and our customers. The results they achieve are outstanding. These initiatives have full organizational support, including assistance from IT leadership which allows for tasks that usually take a month to be completed in just a couple of hours at times. This process is inspirational and fosters momentum. We are still in the early stages, having launched this in the latter half of 2023. We plan to triple the number of Kaizens this year, which have so far mainly targeted our operations and warehousing areas, where we can see the direct impact on our gross margin. We are just beginning to expand BD Excellence into R&D and commercial sectors. For instance, last week we conducted a Kaizen focused on one of our significant clinical trials, which resulted in accelerating the trial by four months. The team left feeling excited and inspired by their achievements, which encourages others. We place a strong emphasis on storytelling within the organization to share best practices and highlight what teams are accomplishing, allowing others to learn from these experiences. This creates a positive cultural shift and builds momentum through the sharing of stories about accomplishments. Mike, do you have anything to add?

Mike Feld, President of Life Sciences

Yes. Thanks, Tom. And I mean, I couldn't be more excited, Patrick, about the journey we're on. And as Tom mentioned, we're in the early stages of this. I think one of the maybe misconceptions is, as we put in lean and continuous improvement processes and standard work, this actually frees up time. It allows our associates to spend less time on some of the more mundane tasks and spend more time on the things around creativity, strategy, problem-solving to really drive results. So, as we extend these philosophies into our operating mechanisms, our commercial footprint, R&D, as Tom mentioned, I expect excitement to continue to grow, as well as even more time to spend on the things that are popping up like tariffs, to really resolve those to the most efficient manner.

Operator, Operator

Our next question comes from David Roman with Goldman Sachs.

David Roman, Analyst

Thank you. Good morning, everyone. I'll limit myself also to one here. I guess, I think about the evolution of organic growth here the past several quarters. A lot of the dynamics that have impacted your business really have stemmed from end market dynamics. So, if you kind of take that as context, can you talk us through the process by which you gather market and competitive intelligence? Do you have a central team to validate business assumptions? And do you think, you have the right people in place to get the best intel on what's happening in your business and markets?

Tom Polen, Chairman, Chief Executive Officer and President

Yes, David, this is Tom. I'll address that. The teams closest to the markets are those in the businesses, and we have a central strategy group that supports them. We also incorporate external insights as we develop our perspectives. As you may have noticed, key areas such as research spending and pharmaceuticals have required adjustments from everyone involved. We are distinct within MedTech in having these elements in our portfolio, as few others in MedTech face similar situations. The companies that focus solely on those areas have had to adapt as well. We continuously challenge ourselves to stay ahead of these issues, including the policy changes in the U.S. and the adjustments in research spending. We had already reduced our research spending at the start of the year, and it decreased further due to the new administration's policy shifts. In previous years, we were among the first to identify the Value of Better Pricing (VoBP) and discuss it proactively. We were also early in recognizing inflation and addressed it promptly with pricing strategies after COVID. Similarly, we have been able to anticipate supply chain dynamics. Throughout many of these discussions, we've focused on how we can foresee challenges.

Operator, Operator

And our last question comes from Matt Miksic from Barclays.

Matt Miksic, Analyst

Thank you for including me. I have a combined question regarding how you managed to navigate through the hyperinflation period. You were notably the only company in our coverage area that effectively implemented cost optimization programs, which allowed you to increase margins during that hyper growth and hyperinflation phase. As a follow-up to a previous question, how much more potential do you see for further optimization? Additionally, Tom, what initiatives have you been pursuing or can you pursue regarding internal optimizations using AI to move away from less productive tasks and focus on creating more value?

Tom Polen, Chairman, Chief Executive Officer and President

Thanks. Yes. Great question. So, appreciate and we appreciate the acknowledgment of the work that we did to navigate the hyperinflationary environment that existed post-COVID. We're proud of that work and applying a lot of the same lessons and experience to the tariff environment as well. So, look, as we think about maybe the last part of the question, AI, we're taking an approach on both innovation as well as our internal systems, and taking one where we are investing in a moderate level, seeking to learn, confirm that we get value and then proceed, which we think is a prudent approach to demonstrate value creation that comes with any investment. And so, obviously, we've talked a lot about just launched a new AI-based platform in APM that we're really excited about. We've got the new AI platform that we'll launch with the Pyxis Pro later this fiscal year in MMS. And obviously, we have the use of AI already in areas like Kiestra and diversion analytics. And we continue to have quite a few other programs in AI within our pipeline. We also funded an AI incubator within our R&D organization, put a leader in place of that and a nimble, agile team who's doing prototyping and pilots in new spaces that we can apply AI to. But, we're keeping it small, nimble and, again, rapid prototyping, apply, understand the business models for those, and then we'll fund those as business models are confirmed. As we think about it internal, and Chris can speak to this perhaps a bit further. Again, we are using and applying AI on things from back office processes like expense reviews. We just announced managers don't review expenses anymore. We've taken that off of people's plates, because we have AI doing that as an example. We're using it in our manufacturing area to optimize scheduling on the lines, right? What products in what order do you make to be able to minimize changeover and maximize OEE on line throughput? Other areas like inventory management, we use AI in. And so, we're using in very focused spaces, again, where we know that there's clear tangible value that we can get out of the technology.

Chris DelOrefice, Executive Vice President and Chief Financial Officer

Just the last comment maybe tying Patrick's question and yours a little bit. Just all these initiatives, as you talk about the energy in the organization, these all actually enhance the work experience across the board. And importantly, in this profile for earnings growth, like we're adding investment in key areas, selling, R&D, you see that in the back half of the year. And so, these all create a lot of energy and momentum and feel really good about that.

Operator, Operator

Thank you. And that will 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.

Tom Polen, Chairman, Chief Executive Officer and President

Thanks everyone for joining today and for your support of BD. We are acutely focused on navigating the near-term environment and believe we are well-positioned to accelerate growth as markets recover. We look forward to updating you on our progress on our next earnings call. Thank all of you for your time today.

Operator, Operator

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