Earnings Call Transcript
BECTON DICKINSON & CO (BDX)
Earnings Call Transcript - BDX Q4 2022
Operator, Operator
Hello, and welcome to BD's Earnings Call for the Fourth Quarter and Full Year Fiscal 2022. At the request of BD, today's call is being recorded and will be available for replay through November 17, 2022 on BD's Investor Relations website on bd.com or via phone at 866-342-8591 for domestic calls, and area code +1 (203) 518-9713 for international calls. The replay bridges are now dedicated so you no longer need a conference ID to hear the replay. 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 BD.
Francesca DeMartino, Senior Vice President and Head of Investor Relations
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 fourth quarter and full year 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 BD 2025 strategy. Chris will then provide additional details on our FY '22 financial performance and our guidance for fiscal 2023. Following the prepared remarks, Tom and Chris will be joined for Q&A by our segment presidents, Mike Garrison, President of the Medical segment; Dave Hickey, 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. I encourage you to read the disclaimer in our earnings release and the disclosures in our SEC filings, which are both available on the IR website. Unless otherwise specified, all comparisons will be on a year-over-year basis versus the relevant period. Revenue percentage changes are on an FX-neutral basis unless otherwise noted. In addition, the results and guidance we are presenting today are on a continuing operations basis, which excludes the historical results of Embecta, which are accounted for as discontinued operations. 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 terms you will hear today, such as base revenues and base margins, which refer to our results excluding estimated COVID-only testing. With that, I am very pleased to turn it over to Tom.
Thomas Polen, Chairman, Chief Executive Officer and President
Thanks, Francesca, and good morning, everyone, and thank you for joining us. I'm extremely proud of our organization and our performance this year. We closed the year with excellent momentum, having delivered strong and consistent growth in our base business. For the full fiscal year, we exceeded our revenue and earnings guidance and achieved our margin expansion goal. Our performance this year confirms BD 2025 is the right strategy and it's working. Our results reflect our strategy in action and the focused execution and dedication of our global teams who reliably served our customers, controlled costs and increased productivity during a challenging environment. At Investor Day in November 2021, we outlined our plan to build sustained shareholder value creation in five key focus areas. Today, I'm pleased to review the progress we've made to achieve this plan. First, we delivered consistent performance and durably strengthened our growth profile. Our FY '22 results are on track with our long-range targets to deliver 5.5% plus top line and double-digit EPS growth with operating margin improvement back toward our pre-pandemic level. In FY '22, we drove 9.4% revenue growth in our base business. Additionally, we achieved our margin expansion goals in an increasing inflationary environment by leveraging our revenue performance and realizing savings and efficiencies from several of our multiyear simplification and cost improvement initiatives. As a result, we delivered $11.35 in adjusted diluted EPS. Second, we continue to reshape our portfolio by advancing our innovation pipeline and M&A strategy towards higher-growth markets. In FY '22, we continued to transform our innovation pipeline with about 60% of our new product development invested in three market spaces that are reshaping healthcare and helping to fuel our growth: smart, connected care; enabling new care settings; and improving chronic disease outcomes. We believe our current pipeline is the most exciting in the history of the company. In addition, we deployed over $2 billion this year towards six tuck-in acquisitions, all of which were allocated towards higher growth markets. This includes Parata Systems, our largest acquisition since Bard, which is aligned to our focus on smart, connected care and enabling new care settings. Parata makes BD the global leader in the fast-growing pharmacy automation market and enables us to provide solutions to help pharmacies address rising costs and labor shortages. With today's transformative solutions from pharmacy automation to biotech drug delivery devices to high-throughput molecular diagnostic systems and new dyes and instruments for immuno-oncology and multi-omics research to at-home solutions for urinary incontinence, we are systematically creating a new wave of future growth for BD. Third, we executed our simplification programs and managed our cost structure. Like every other company, we face tremendous inflationary pressure. We saw the pressure coming early on, and we took action immediately putting in place an inflation task force to attack it from every side. We also prioritized our internal cost reduction programs and significantly leveraged our selling and G&A expense, driving strong operating leverage. In addition, we actively managed our portfolio, including spinning Embecta, as well as exiting more than 2,500 SKUs as we accelerated our Project RECODE initiative to simplify our portfolio and exit products that add complexity in our plant. A leaner portfolio and less complex manufacturing processes allowed us to improve output with the same fixed cost base and optimize our mix to produce more of the products most critical to our customers. We furthered our investments in what matters to our customers, strengthening our supply chain, validating secondary suppliers and building key component inventory, all factors that have been even more important in a supply-constrained environment. And finally, as we drove strong revenue growth beyond our original expectations, we leveraged our scale and excellence in manufacturing as volumes in our plants recovered from FY '20 and '21 lows due to COVID disruptions and procedures. As a result, in FY '22, we were able to absorb significant increases in inflation during the year and improved our margin profile back towards BD's pre-pandemic levels of 25% in FY '25. Fourth, we maintained a disciplined and balanced capital deployment strategy. Over the last few years, we significantly strengthened our balance sheet and improved flexibility. This has allowed us to advance our balanced capital allocation framework and support growth-enhancing investments in capital R&D and tuck-in M&A. We're now at 2.8x net leverage, and both Moody's and Fitch upgraded our debt this year, reflecting the strength of our business and disciplined approach on balance sheet management and capital deployment. Also, this framework gave us the flexibility to return capital to shareholders. We just announced our 51st consecutive year of dividend increases, continuing our long-standing recognition as a member of the S&P 500 Dividend Aristocrats Index, a distinction that reflects the consistency and reliability of our dividend policy. And finally, our strong teams continue to execute and create value even during uncertain times. Our execution in FY '22 is a testament to our growth mindset at BD, where we firmly believe there's nothing we can't do, only things we haven't done yet. And by navigating successfully the challenging macro environment, we are distinguishing BD and supporting our ability to consistently deliver strong performance. These capabilities are now all embedded in our operating principles and with the strong execution abilities across our network. They're having a positive impact on our overall cost effectiveness, responsiveness and sustainability. In summary, these proof points reflect how BD 2025 and the actions we've taken in FY '22 and over the past several years uniquely position us to lead and deliver strong and consistent results. I'll now provide more detail on the progress we made this year on organic innovation, which is a key enabler to our growth strategy. In FY '22, we significantly advanced our innovation pipeline, launching 25 key new products. We are on track to achieve our new product revenue contribution as outlined at Investor Day and are increasing our portfolio weighting in attractive, faster-growing markets. Our product launches reinforce our leadership position in our durable core and expand our offering in higher-growth spaces across smart, connected care, enabling new care settings and improving outcomes for chronic disease. These launches strengthened our position in strategic areas such as medication safety, immunology research reagents, molecular and point-of-care diagnostics, peripheral vascular disease and incontinence. Examples include PosiFlush SafeScrub, our next-generation flush product; Prevue, our peripheral vascular access system; BD COR, our fully automated high throughput molecular system and related women's health and STI assays; and the PureWick Male External Catheter. I'm excited by the progress we've made advancing our innovation-driven growth strategy and the strides we've made to improve outcomes for patients and providers and create value for our stakeholders. I'll now share a few updates on the progress our team made this year to advance our ESG strategy and goals. Together We Advance serves as a framework for our ESG strategy. In July, we published our 2021 ESG report, which provides details about our ESG strategy and progress against our 2030 commitments. Highlights include the launch of the BD Sustainable Medical Technology Institute, efforts to reduce our greenhouse gas emissions, including joining the UN race to zero and increasing our investments in on-site renewable energy. Just last month, BD in Sandy, Utah was awarded the Blue Sky Legacy Award for making significant strides towards Utah's environmental sustainability. We believe that the work we're doing today can make a lasting positive impact on our communities. We also made progress on our workforce IDE goals, ending FY '22 with increased diversity at the executive and management levels, and we remain committed to having an inclusive workplace. We're proud to receive continued recognition for our ESG efforts. Most recently, we were named to Forbes 2022 list of the world's best employers, a recognition of BD as a great place for the world's best talent to work as part of a healthy and inclusive community. Before I turn it over to Chris, as we look forward to FY '23, I'd like to provide some perspective on the macro environment and BD 2025 as we move toward the second half of our strategic plan period. Starting with the macro environment. Our BD 2025 strategy and the capabilities we have built over the past two years position us well to navigate what we expect to be some persistent macro challenges and uncertainty facing all companies. We reiterate our conviction in the three irreversible forces shaping healthcare and our strategy to address them. For example, as it relates to smart, connected care, there's an increasing need for digitalization and automation of healthcare processes as providers look for ways to increase efficiency and address labor and inflationary challenges. Regarding inflation and supply chain, our perspective continues to be that challenges are going to persist, not escalate at least through 2023. And although inflation could potentially start easing somewhat, we do expect that it will remain well above what we have seen historically. Companies that have processes, systems and capabilities to navigate this environment will continue to thrive over the next couple of years. And as we move forward, you can expect to see continued relentless focus on execution of BD 2025, which will continue to serve as our true north. This includes delivering impactful innovations for our customers by expanding our leadership positions in our durable core and continuing to invest to expand our portfolio in the higher growth areas that are transforming healthcare. In addition, Alaris remains our #1 priority, and we're making good progress. While we don't comment on the status of the review or approval timing, we are taking all the steps necessary to provide the required regulatory information and support our customers upon clearance. We will also continue our investments to increase manufacturing capacity, strengthen our supply chain and increase supplier redundancy to help ensure we continue to reliably supply our products for our customers. We will continue to focus on initiatives to return our margin profile to FY '19 pre-pandemic levels in FY '25. This includes accelerating initiatives like Project RECODE, including our efforts around operating model simplification, resulting in BD becoming a more agile and less complex organization. We expect to continue our balanced approach to capital deployment. Our priorities include investing in our business through R&D and CapEx. After investing organically and returning value through dividends, we will continue to execute our tuck-in M&A strategy and return value to shareholders through share repurchases. And we expect to continue to stay ahead of the curve as we navigate the macro environment, leveraging the capabilities we have built that are now embedded in our operating principles. We recently celebrated BD's 125th year anniversary as a company, demonstrating our durable model underpinned by our tradition of relentless focus on innovation and operational excellence. We're really excited about what the future holds. And with the performance of our global teams, we'll continue to grow our impact on customers and patients and advance the world of health. With that, let me turn it over to Chris to review our financials, guidance and outlook.
Christopher DelOrefice, Executive Vice President and Chief Financial Officer
Thanks, Tom. Echoing Tom's comments, we delivered strong, consistent results this fiscal year, which reflects our growth strategy playing out as planned. Through execution of our BD 2025 strategy, we are fulfilling our short-term commitments while progressing towards our long-term goals. Beginning with our revenue performance. We exceeded our revenue growth expectations for the fourth quarter and full year. We delivered $4.8 billion in revenue in Q4, with base business growth of 8.6% or 6.8% organic. Parata contributed about 140 basis points to growth in the quarter and about 40 basis points to the full year. COVID-only testing revenues were $37 million, which is expected to decline from $316 million last year. For the full fiscal year, we delivered $18.9 billion in revenue with base business growth of 9.4% and or 8.5% organic. COVID-only testing revenues were $511 million, which, as expected, declined from $2 billion last year. Total company base business growth was strong across all three segments with double-digit growth in BD Life Sciences and high single-digit growth in BD Medical and BD Interventional. Base revenue growth was strong regionally as well with double-digit growth in the U.S., China and Latin America, along with high single-digit growth in EMEA. Our revenue performance continues to be 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. We also continue to benefit from the organic contribution from tuck-in acquisitions we anniversaried, which was about 20 basis points for the full year. Let me now provide some high-level insight into each segment's performance in the quarter. Further detail can be found in today's earnings announcement and presentation. BD Medical revenue totaled $2.4 billion in the fourth quarter, growing 10.2% with strong performance across the segment. Growth was driven by strong growth in MDS of 8% driven by continued execution of our comprehensive vascular access management strategy; MMS growth of 11.5%, driven by strong demand for our connected medication management and pharmacy automation strategies, including our recent acquisition of Parata as customers focus on automation to drive efficiency to help address the constrained labor market, and another quarter of double-digit growth of 12.8% in Pharmaceutical Systems based on our strong leadership position in prefillable solutions for biologics and vaccines. BD Life Sciences revenue totaled $1.3 billion in the fourth quarter. The decline of 11.6% year-over-year is due to the expected lower COVID-only testing revenues previously discussed. Excluding COVID-only testing, Life Sciences base revenues grew 8.3% with strong growth across both IDS and Biosciences. Base business growth was driven by IDS growth of 8.6%, enabled by continued leverage of our molecular testing menu across our expanded BD MAX installed base and continued demand for our leading clinical microbiology and specimen management platforms. And lastly, BD Interventional revenues totaled $1.1 billion in the fourth quarter, growing 5.7%. Growth was driven by surgery growth of 5.4% and supported by our Advanced Repair and Reconstruction portfolio with strong market adoption of our leading Phasix hernia products. PI growth of 4.8%, which reflects continued expansion of our venous portfolio highlighted by Venclose in the U.S. and the global relaunch of Venovo. PI performance also reflects increased back orders primarily related to a specific European ERP system implementation. Urology growth of 7.2% reflects continued strong demand for our PureWick Female incontinence solutions in both acute and alternative care settings. Now moving to our P&L. Q4 adjusted diluted EPS of $2.75 increased 28%. Base business gross margin of 52.5% was up 80 basis points and base operating margin of 22.5% was up 430 basis points year-over-year. Full year adjusted diluted EPS of $11.35 grew 0.6%. As we anticipated, we made significant progress towards achieving our pre-pandemic margin improvement goals despite increasing inflation pressures. For the full year, base business gross margin of 53.4% was up 110 basis points and base operating margin of 22.4% was up 280 basis points. The key full-year drivers of gross margin include our simplification and inflation mitigation initiatives and increased volume utilization given our strong base revenue growth. Additionally, as expected, we had favorable FX that was recorded in inventory that benefited our GP as it flowed through sales this year. Base operating margin reflects strong operating expense leverage with base selling and G&A as a percent of sales, leveraging by 180 basis points, partially offset by significant inflationary impacts, primarily in shipping. To put this in perspective, shipping expense increased at a double-digit rate in our base business. This increase in shipping was offset by focused efforts on cost management and leverage of selling and G&A, which only grew at about one-third the rate of sales and was the primary driver of 21% currency-neutral growth in base operating income. This was a testament to the tremendous work by our organization to mitigate inflation and execute our margin enhancement initiatives. This was also a key enabler in supporting continued investment in R&D at just over 6% of sales to advance our innovation pipeline. Regarding our cash and capital allocation. Cash flows from operations totaled approximately $2.5 billion in FY '22. Operating cash flow reflects a higher inventory balance of about $600 million year-over-year. The increase reflects the impact of inflation, longer in-transit lead times and our strategic investments in raw materials to optimize product delivery and meet customer demand. As expected, our free cash flow conversion this year was below our long-term target. We remain very focused on cash flow conversion and we are taking actions to moderate inventory down. But, in the short term, we believe it's a prudent trade-off to ensure we support our customers while delivering strong results. As we execute against our BD 2025 strategy and supply chain constraints normalize, we expect to migrate towards our long-term cash conversion target. In addition to investing in R&D at over 6% of sales to advance our pipeline of innovative programs, we also invested over $2 billion in six tuck-in acquisitions across our businesses that will support our strong growth profile in 2023 and beyond. Beyond our investments in growth, consistent with what we shared regarding the planned use of Embecta proceeds, we paid down $500 million in long-term debt this fiscal year and returned $1.6 billion in capital to shareholders through dividends and share repurchases. We ended the year with a cash balance of $1 billion and a net leverage ratio of 2.8x. Moving to our guidance for fiscal '23. For your convenience, the detailed assumptions underlying our guidance can also be found in our presentation. Our FY '23 guidance aligns with the framework we communicated last quarter and the value creation model and long-term targets we outlined at our Investor Day to deliver 5.5% plus base revenue growth, continued margin improvement and double-digit base earnings growth on a currency-neutral basis. As a reminder, we manage our business on a currency-neutral basis to best represent underlying performance, consistent with what other companies are discussing in their forward outlook, we are accounting for a headwind to our reported results as we translate currency to a stronger U.S. dollar. Beyond that change, our guidance has only strengthened in a complex macro environment, where we continue to see elevated inflation and geopolitical uncertainty. Starting with revenues, I'll provide you some insights into some of our key guidance assumptions. First, on a currency-neutral basis, we expect base revenues to grow 5.25% to 6.25%, which is strong growth of 5.75% at the midpoint. This midpoint is above our 5.5% plus target we outlined during our Investor Day, given the confidence we have in our strengthening growth profile. Our revenue guidance includes two proactive strategic portfolio management actions that are consistent with our BD 2025 strategy and support our value creation goals. First, building on our FY '22 achievements, our base revenue guidance includes planned strategic portfolio exits as part of the acceleration of our portfolio simplification and RECODE programs. These actions will enable increasing manufacturing efficiency and capacity and ensure the reliable supply of the products that matter the most to our customers. We expect these actions to impact revenue by approximately 100 basis points while being accretive to margin. Second, offsetting this revenue impact is a positive contribution of approximately 100 basis points from the full-year benefit of our recent acquisitions, with Parata being the predominant driver. We will continue to be active in portfolio management as a lever to create value for all stakeholders. While we aren't providing segment-specific guidance, we are on track to achieve our long-range plan commitments, and we are assuming strong performance across the segments in FY '23. And we expect Medical segment growth to be above the total company range, which includes the acquisition of Parata; Life Sciences growth to be below given strong prior year comparisons; and Interventional to be at the high end of the range. Consistent with what we shared, we expect COVID-only testing revenues and related earnings to be at a level significantly below FY '22, with revenues more in line with the annualization of our Q4 FY '22 results or approximately $125 million to $175 million for the full year. Regarding Alaris, consistent with what we've done in the past, we are only modeling shipments related to medical necessity. While we will be prepared when clearance is received, we continue to anticipate a gradual ramp to revenues upon clearance. Regarding our assumptions on earnings, we expect operating margins to improve by at least 100 basis points over the 22.6% reported in FY '22. Despite the challenging macro environment persisting, our focused execution on driving profitable revenue growth, combined with our simplified programs, gives us the confidence that we will be able to continue to offset inflationary pressures and make meaningful progress in achieving pre-pandemic operating margin levels of about 25% by FY '25. To give you some color on inflationary assumptions, as a reminder, outsized inflation in FY '22 was a headwind of over 200 basis points we expect a similar level of incremental outsized inflation in FY '23. The primary drivers of the incremental inflation are raw material costs and labor, which are about equally weighted. Even though we see some signs of cost normalizing in certain areas, a lot of the outsized inflation is from inventory we manufactured in FY '22, as there's about a four to six-month lag from production to sell-through. Labor costs, especially in our manufacturing plants, have continued to increase. We have taken proactive actions to ensure we are differentiating BD to retain our skilled workforce. Lastly, transportation costs have stabilized, and we've begun to see some downward movement on certain rates. However, we are still above more normalized levels. We remain committed to leading through the macro complexity while making investments to support our customers to offset these inflationary impacts we continue to leverage our strong growth profile and drive outsized cost reduction and other mitigation programs. We expect over 80% of the improvement in operating margin to come from SSG&A driven by internal cost containment and leveraging. The balance is expected to come from slight improvement in gross margin and R&D as we normalize back closer to our target of 6% of sales. Our simplification initiatives include continuing to execute on Project RECODE. You will recall when we announced RECODE, it was intended to deliver $300 million in savings by the end of fiscal year '24, with portfolio and network optimization representing about 70% of the savings. We are accelerating these efforts and are also making significant progress with the third pillar of RECODE, operating model simplification, which will result in BD becoming a more agile and less complex organization. In addition, to provide some color below operating income, we expect an increase of approximately $50 million to $75 million in interest/other. This is primarily driven by increased pension expense, which we fully covered in our guidance, and is a result of the negative movement in the financial markets. For tax, based on what we know today, assuming no major legislative or regulatory changes, we expect our adjusted effective tax rate to be between 13.5% and 14.5%. It would not be unusual for our rate to fluctuate above or below this range on a quarterly basis given the timing of discrete items. Our guidance assumes no material change in average common shares outstanding from our average FY '22 share balance. This takes into account the conversion of all outstanding preferred shares on June 1, 2023, the benefit from the FY '22 share repurchase and associated with the use of the impacted distribution and our commitment to mitigate the dilution from share-based compensation. So on an all-in basis, we expect adjusted EPS before the impact of currency to be around double-digit growth and within a range of approximately 9% to 11%. This includes absorbing about a 300 basis point headwind from the anticipated decline in COVID-only testing; and as a result, implies a very strong low teens base earnings growth of approximately 12% to 14%. Let me now walk you through the estimated impact from currency. As a reminder, we manage our business and provide guidance on an operational basis, but provide perspective on currency using current spot rates. Since our last call in August, the U.S. dollar strengthened against all major currencies. Based on current spot rates, for illustrative purposes, currency is now estimated to be a headwind of approximately 450 basis points or about $850 million to total company revenues on a full-year basis. This currency headwind has nearly doubled since our August call. Our guidance assumes the euro at 0.99, which is down about 4% since August. The Chinese yuan, Japanese yen, British pound and Canadian dollar have also all declined even more than the euro since August by almost 2x the euro movement. For context, these four currencies combined are in line with our total euro exposure. The currency headwind to EPS growth has also nearly doubled since our August earnings call. At current rates, currency would represent a total headwind of approximately 420 basis points to adjusted EPS growth. All in, including the estimated impact of currency, we expect revenues to be between approximately $18.6 billion to $18.8 billion and adjusted EPS to be in a range of $11.85 and $12.10. As you think of fiscal '23 phasing, there are three key items to consider. First, FX. At current spot rates, we expect the headwind to revenue will be over-indexed to the first half. For the full year, we expect the drop-through to earnings to be below our BDX operating margin. Due to the expected benefit from inventory flow-through in Q1, the drop-through is expected to start well below the full-year average and most significantly impact the second and third quarters. Second is the grow-over impact of COVID-related dynamics. As a reminder, in FY '22, almost 80% of COVID-only testing revenue was realized in the first half of the year, with strong margin drop-through as reinvestment was weighted to the latter part of the year. And the third is inflation. Nearly 40% of the full-year inflation headwind is expected to occur in Q1 as we sell through inventory produced in FY '22 in the first half of the year. As a result of these items, as you think of the progression of our total operating margin expansion through the year, for Q1, you should expect a year-over-year decline driven primarily by the year-over-year comparison of higher COVID-only testing. We expect operating expansion to ramp over the remainder of the year with the majority occurring in the second half. As a reminder, there are some tough comparisons to the prior year in Q1, such as the benefit of about $50 million in licensing revenues in Life Sciences. As a result of these dynamics, we expect Q1 base revenue growth and adjusted EPS to be under-indexed relative to an equal quarterly phasing of the full year. So this guide, coupled with our FY '22 results, has us progressing very well towards our FY '25 goals, including a two-year revenue CAGR assuming the FY '23 midpoint of 5.75% that is well above the 5.5% plus target at around 7.5%, achievement of nearly 400 basis points of margin improvement or over 70% of the way towards our FY '25 objective and two consecutive years of strong double-digit adjusted earnings growth in our base business. In closing, we are very pleased with our performance, particularly given the macro complexity and inflationary pressure we navigated. The consistent execution we delivered and our ability to mitigate these challenges through FY '22 enabled our results. This gives us confidence in our ability to continue this momentum into FY '23 and create long-term value for all of our key stakeholders. With that, let me turn it back to Tom for a few additional comments.
Thomas Polen, Chairman, Chief Executive Officer and President
Thanks, Chris. Our BD 2025 strategy is demonstrating strong momentum and performance positioning BD to be increasingly well positioned to drive long-term growth and value for all stakeholders and successfully navigate and differentiate in today's challenging environment. I'd like to thank our associates worldwide once again for their tireless commitment to our purpose of advancing the world of health. And before I turn it to Q&A, I want to officially congratulate and welcome Mike and Rick to their new roles, leading the Medical and Interventional segments, respectively. Both Mike and Rick are highly effective leaders who have demonstrated strategic and operational excellence in their nearly two decades at BD. Their focus on driving growth and meaningful outcomes has been critical as we pursue our BD 2025 strategy, and they are well-rounded seasoned leaders with a track record of developing strong teams that deliver impactful results. Their broad experiences across multiple BD businesses and segments position them well for their new roles as we advance our growth agenda and build BD's future. With that, let's start the Q&A session. Operator, can you assemble our queue?
Operator, Operator
Certainly. The floor is now open for questions. Our first question is coming from Larry Biegelsen with Wells Fargo.
Lawrence Biegelsen, Analyst
Congratulations on a strong finish to the year. First for Chris on the top line guidance. It implies only about 4.75%, excluding Parata and testing. You just grew 6.8% organic in Q4, 8.5% for the full year. So why the deceleration in fiscal 2023? It seems conservative given the momentum. And can you talk about assumptions for pricing and those divestitures? And I have one follow-up.
Christopher DelOrefice, Executive Vice President and Chief Financial Officer
Thank you for the question, Larry. We are very happy with our growth rate. What we are achieving demonstrates our strategy in action, consistently delivering growth in our durable core while also accelerating through transformative solutions and organic contributions from recent acquisitions. This has contributed about 20 basis points to our growth. This year, we achieved a strong growth rate of 9.4%, even in a more complex environment. For instance, we grew double digits in China despite challenges, with 8.5% organic growth. Our underlying growth rate is robust relative to our '23 guidance. If we consider a two-year growth period at 7.5%, it surpasses our 5.5% target, even after adjusting for inorganic growth, which remains around 7%. This indicates we are consistently achieving growth. Regarding strategic portfolio exits, this aligns with our simplification efforts. Our strong underlying business and optimistic growth outlook enable us to make bold strategic decisions that enhance value for our customers and shareholders, which is what investors expect from us. These exits are distinct from simply rationalizing SKUs; they involve clearly defined divestitures as we reassess our portfolio to maximize value for both customers and investors. This involves typical divestiture profiles that may not contribute to growth but are necessary due to their significantly dilutive margins, often below half of our existing rate. While these decisions are dilutive to margins, they positively impact earnings. We have accounted for this in a robust earnings guidance, indicating a bottom-line growth target of 9% to 11% on an FX-neutral basis, factoring in comparisons to the revenue losses during the COVID period. Adjusting for that, we achieved base earnings growth of about 12% to 14%, which we believe is the right approach for the long term. The 1% impact is something to consider similarly to an inorganic adjustment since the rest of our portfolio is performing well. In fact, if you look closely, we're exceeding the 5.5% midpoint. Moreover, returning to the two-year view, we’re over 7% on an organic basis. We are confident in our revenue growth and our bottom-line performance.
Lawrence Biegelsen, Analyst
That's very helpful. And just, Tom, one follow-up. It's been about 1.5 years since you filed. What can you share about the review process? And are you still confident you can bring Alaris back before 2025 since I think the BD '25 margin target assumes about 80 basis points contribution from Alaris.
Thomas Polen, Chairman, Chief Executive Officer and President
Larry, it's always a pleasure to connect, and I appreciate your question. As we've stated multiple times, our top priority is getting Alaris back on the market. We are confident in the resources we've dedicated to our submission and our leadership team's focus on this initiative. We believe we will receive clearance. However, we want to remain cautious and thoughtful about our approach with the FDA, which is why we are not providing specific timelines due to the complexity of these submissions. The relaunch of Alaris is part of our strategic plan that we discussed at Investor Day, and that has not changed. While we are not predicting timelines, we are ready for launch once we receive clearance to best serve our customers. Additionally, we successfully launched the new Alaris pump in Canada this past year and have received positive feedback from our customers there. Thank you for your question.
Operator, Operator
And we'll take our next question from Vijay Kumar with Evercore ISI.
Vijay Kumar, Analyst
Chris, I want to start with guidance and I have a question for Tom. What are you assuming for vaccine contributions? I believe vaccines contributed around $150 million in fiscal '22. Is that expected to be zero? Is that going to be a headwind? Regarding Alaris emergency use, is that expected to be similar to fiscal '22 or lower? Also, in the past, you've mentioned ongoing discussions with the FDA. Has that status changed concerning Alaris?
Thomas Polen, Chairman, Chief Executive Officer and President
This is Tom. So no, we continue to have active discussions with the FDA on Alaris. And as I mentioned, things are progressing towards our process, and we'll obviously give an update when we get ultimately clearance on that, but we don't want to try to predict the timing on that. And so therefore, again, as we have been being prudent, we haven't reflected that in our guidance specific approval timing. So we do have the same run rate of medical necessity in our guidance, which is about $100 million, same as '22. We've carried that forward into '23. And to your question on vaccines, it is a headwind in '23 that we're jumping over there. There's relatively limited vaccination demand ongoing for COVID. And so that's definitely a headwind that we're jumping over in MDS, but we have that covered.
Vijay Kumar, Analyst
Understood. And Tom, sorry, can you quantify what the headwind is? And related to that, sorry, my second question here. Parata, it looks like your pro forma organic here was really strong, perhaps in the teens. Maybe talk about what's driving this strong contribution from Parata. And is that part of your revenue synergies as part of the deal?
Thomas Polen, Chairman, Chief Executive Officer and President
Yes, we won't disclose the specific number there. However, the revenue related to vaccines in our hypothetical scenario for 2023 is very limited. As for Parata, we are performing strongly, meeting or slightly exceeding our expectations. We're off to a great start and experiencing significant demand. Now, I’ll hand it over to Mike Garrison, who led the acquisition while heading MMS and continues to oversee that area as well as the Medical segment. So, Mike?
Mike Garrison, President of the Medical Segment
Hi, Vijay, thanks for the question on product. Parata, yes, we're very excited about Parata, also the MedKeeper, the Medbank acquisitions that are in the portfolio. They are just great teams with a passion for their craft. And it may be the things that are differentiating it in our approach, the extensive diligence we did prior to the acquisition, a real focus on culture in the first 30 days of working with the teams. And then we also set up an integration management office within MMS with some of our senior leaders to really guide and focus on each individual work stream across the functions to make sure that the acquisition goes well out of the gate. But I think the main thing is the value proposition is very strong and clear for Parata. It directly addresses the labor shortages and the clinical efficiencies that customers are seeking, especially right now, and as well as their long-term goals around smart, connected care, data-driven decision making, things like that. So it both addresses short-term needs and long-term needs, and that's why customers are reacting so favorably to it.
Operator, Operator
And we'll take our next question from Robbie Marcus with JPMorgan.
Robert Marcus, Analyst
Great. Maybe to follow up on some of the '23 guidance questions. I was wondering if you could help us with some detail maybe around what you're assuming for the COVID flu combo tests. We're off to the worst start of flu in over a decade. So what you're assuming in there or just for flu in fiscal '23? And remind us where those tests ended up on sales in fiscal '22? And also, how do we think about Parata down the P&L? It's 100 bps on the top line. Just remind us of what you're assuming on the bottom line for that.
Christopher DelOrefice, Executive Vice President and Chief Financial Officer
Yes. Thanks, Robbie. Appreciate it. Yes, I can take the Parata question as it relates to the margin, and then either Dave and/or Tom can maybe talk about COVID flu, how we're thinking about it. Parata, what we've shared publicly is it was immediately accretive to BD. We weren't specific with the amount. But actually, we did say it's actually even accretive to our long-range outlook, which is think of it as that about 25% from an operating margin. So it is certainly a positive contributor on the bottom line. I will just reinforce, remember, as you think of our total all in. So Parata, I think, is a great example of adding a strategic asset with a strong growth profile, strong accretion on the margin standpoint. We did have to jump over the COVID-only, which was a $300 million-plus drag on the top line that also had a higher, slightly higher margin profile. So I think when you look at our total guide at 9% to 11%, that's very strong, and we kind of reversed into the math we had shared that the COVID-only was about 300 basis points headwind in total. It implies a 12% to 14% base earnings growth profile. This is really strong, well, very consistent with what we shared at Investor Day, especially again in an inflationary environment, where we're going to have similar levels of inflation year-over-year.
Thomas Polen, Chairman, Chief Executive Officer and President
Robbie, this is Tom. It's great to connect this morning. We've got Dave on the call with our Latin America team at their kickoff meeting. I'll bring Dave into the conversation shortly. Regarding the flu combo, we do have some moderating expectations compared to last year when there was significant demand for the flu COVID combo due to COVID. As you mentioned, there is potential, but we don't anticipate a substantial demand driven by the COVID aspect of the combo test as we look forward to 2023. There may be greater potential for demand related to flu and distinguishing between flu and COVID. As you noted, the flu season has started early, though its scale remains uncertain. In Australia, we experienced an early start to the season, but there was a brief peak in demand, resulting in lower overall demand and testing due to its short duration. It remains to be seen how this will unfold in the U.S., so we want to approach it cautiously. Dave, why don’t you share some additional thoughts?
Dave Hickey, President of the Life Sciences Segment
Yes. Thanks, Tom. And Robbie, thanks for the question. And just as I get into answering that, I just, given this is my first chance on the Q&A here, I do want to just recognize and thank the Life Sciences team globally and all the associates for another outstanding year in fiscal '22. I mean you saw the quarter growth of over 8% there, a record base growth of 13.8% for the year. So Life Sciences continues to be strong. On flu respiratory, I'll just build upon what Tom has said is, if you think about it pre-pandemic, we were always in this range right of the $75 million to $100 million, we were considering the normal flu season. I think also to remember that, that was on Veritor only. We have not really anticipated or seen a normal flu season during the pandemic at all. Definitely in October, we are seeing more visits to urgent care centers and things on influenza-like illness. But again, when you look at it, we think the season has started, it's about eight to nine weeks early. It peaked very quickly in Australia. So it's a little bit early to call what it would look like. I think if we were looking at the range for this year, based on just leverage of the Veritor installed base, we would expect that sort of that flu range of that Veritor base to be about $130 million to $150 million.
Robert Marcus, Analyst
Great, really helpful. I have a follow-up question for Chris and Tom. The 100 basis points margin expansion is impressive, especially considering the headwinds. You provided some good insights on the slides, but I would appreciate a bit more detail on how we should consider inflation and raw material costs, as well as any other challenges. Can you also elaborate on how foreign exchange impacts the operating margin negatively?
Christopher DelOrefice, Executive Vice President and Chief Financial Officer
Yes, Robbie. Thanks. So yes, as it relates to 100 basis points, as you noted, definitely another strong year of margin enhancement. That would put us about 70% on track to deliver against our FY '25 goal of about 25%. So really strong progress, having delivered almost half of that in the first year. So not only do we feel good about what we delivered last year, continuing that momentum and driving towards our long-term objectives. Yes, there's a couple of ways to think of it. One, the predominant driver of margin improvement this year is really going to be leveraging our strong growth profile, focused on cost containment more at the operating margin level, in selling and G&A. So that's about 80% plus of that 100 basis points improvement that we're expecting. The balance is really, there's a little bit of moderating R&D back to our 6% goal. We've actually been over-indexed two years in that area. So obviously, like other areas, you'd expect to, without impacting project spend, just leverage your base with a strong growth profile, 6% is a good outcome there. The balance, which is really minor then, is in GP. So GP, you're going to kind of see that's where we're experiencing most of the inflationary impacts. As a matter of fact, you're seeing a little bit of relief in shipping. It's still above historic what we call normal levels. You're seeing some benefit there as well that's playing out mostly in the operating margin side. As it relates to where we're seeing the most inflationary pressures, it's still raw materials. It's shifted a bit more from kind of resins to other materials, such as packaging would be an example. We do have a carryover effect, too, of the inventory that was built in '22. And so a lot of that will hit in the first half of the year. And the other big area where you still continue to say, I would say, escalating pressures is labor. So labor and raw materials is about 50-50 each of what we're realizing in GP. Obviously, we're taking a ton of action within GP probably in this order in terms of how we think of them not necessarily size, but as we always think of driving cost improvement. One, it starts with our growth profile, outsized volume in our plants, leveraging our plants portfolio, favorable mix to the extent we can drive that outsized cost improvement, again, going back to our plant mindset as it relates to growth mindset and driving more efficiency and then other factors such as price as well would be part of that equation lastly. So that's how we're thinking of inflation this year and what we're doing to mitigate it. And we're very pleased with the progress that we've had year-to-date. As it relates to FX, we gave some color. Certainly, the team can support you through that in more detail. The drop-through from sales to earnings is slightly lower as consistent with what we've shared in the past on a full-year basis. You're going to see sort of quarterly phasing dynamics play out differently because you have the nuance of how FX impacts cost and inventory and how that flows through. You got that four to six-month lag. So you'll see a little bit more favorability in the first half, and it normalized to the full-year drop-through that we shared by the end.
Thomas Polen, Chairman, Chief Executive Officer and President
That's great. To build on Chris' comment, it's a good question, Robbie. We are facing significant inflationary pressures that are affecting all industries. I want to highlight the excellent work our plants are doing. The last thing we want to do in any situation is raise prices. As Chris mentioned, our plants have significantly increased their continuous improvement efforts, almost doubling what we've done historically, and they are working hard to offset as much of those costs as possible. Additionally, the earlier discussed strategic portfolio exit is underway. As we pursue mergers and acquisitions and experience strong underlying growth, we are taking this opportunity to evaluate our portfolio and identify non-strategic products that may be undermining our operational effectiveness. This will help us enhance performance across our lines, staffing, and resource deployment. These actions are positioning us for long-term strength. We are implementing this strategy this year, which is also contributing to our ability to manage inflationary pressures, improve efficiency in our plants, and ensure we deliver the most valuable products for our customers and shareholders in the long run.
Operator, Operator
And we'll take our next question from Matt Taylor with Jefferies.
Matthew Taylor, Analyst
So I had two questions. I guess the first one I wanted to ask was, I know you probably won't comment on litigation, but I was hoping you could address some of the ethylene oxide issues from two angles. One is maybe just talk about some of the things that you have done already with the regulatory agencies to work with them to mitigate risk there to improve the plans? And then any commentary you can make on litigation to get investors comfortable with that risk would be helpful.
Thomas Polen, Chairman, Chief Executive Officer and President
Sure. That's a great question, and I appreciate it. As you know, BD is one of the largest producers of medical products essential for patient care, and our devices must meet FDA sterilization standards. It's important to note that many types of sensitive medical products rely on ethylene oxide (EtO) for sterilization, as about 50% of all medical products in the industry use it. Alternative sterilization methods like radiation, steam, chlorine dioxide, or vaporized hydrogen peroxide can damage these products, which is why EtO is necessary to ensure the required level of sterility given the materials involved. We are confident in the systems we've invested in over the years, utilizing the best available EtO emissions control technology in the industry. We have achieved over 99.95% destruction of EtO from our emissions. In response to the FDA challenge, we are continuously investing in cycle optimization and EtO technology upgrades, expanding beyond our plants. We take the safety of our employees and the communities we operate in very seriously, which is why we have a strong history of proactively upgrading our emissions control technology supported by ongoing investments. For example, back in 1997, we upgraded our emissions control equipment in Georgia to thermal oxidizers and began routing exhaust to primary emissions control equipment, a step that is still not routine across the industry. Currently, we have established programs and procedures to ensure compliance with all relevant regulatory requirements, including those from the EPA, OSHA, state environmental agencies, and the FDA. Our facilities are at least 20 times more effective at removing EtO per cubic meter of air than the Clean Air Act mandates. We are collaborating with the FDA and other industry leaders to look at new sterilization cycles that could potentially lower emissions even further than ever before. Regarding ongoing litigation, there have been no new cases since the third quarter, and we have not accrued any costs related to outstanding EtO cases. We have undergone a thorough internal and external review process and are prepared to vigorously defend our position based on the way we operate.
Operator, Operator
And we will take our next question from Josh Jennings with Cowen.
Josh Jennings, Analyst
I have two questions for Chris regarding Alaris. I would like to review the revenue run rate for Alaris in the U.S. related to medical necessity shipments and inquire about the current status of remediation efforts. Additionally, I want to understand the margin impact, assuming Alaris will not be operational again in the U.S. during fiscal '23, specifically what the margin drag was in 2022 and if there will be a drag in '23 as well. Lastly, how are you structuring the Alaris franchise to ensure readiness for a launch once remediation is complete and full commercialization can resume?
Christopher DelOrefice, Executive Vice President and Chief Financial Officer
Thank you, Josh. I appreciate it. To reiterate some previous points, we have generally estimated our total sales at around $400 million. Regarding medical necessity, we mentioned a figure of approximately $100 million per year, which was our figure last year and aligns with our expectations for this year as well. This should give you a sense of the overall scale. When we achieve clearance, we anticipate a gradual ramp-up, although we haven't provided a specific timeline since it’s difficult to predict exactly. To offer some perspective, we are not looking at less than a year for this ramp-up; it will likely occur over about 12 months, all well within our long-range plan period. As for margins, while we haven't disclosed specifics for each year, it’s worth noting that following the deleveraging from our fiscal year 2019, we faced roughly an 80 basis point headwind to our margin. This situation is expected to remain similar, with adjustments made as the product returns. We have invested in regulatory quality and have kept our service and field organization intact, which means as sales begin to recover, we will benefit from natural leverage from these investments aimed at supporting our existing customer base.
Thomas Polen, Chairman, Chief Executive Officer and President
And maybe just one other thing to add, Josh, is, as Chris mentioned, so we kept our commercial team. We kept our service team, which as we relaunch again, we'll see the positive flow through since those expenses are already on the P&L and the recovery of that. That 80 bps of dilution that we currently have on the P&L. Just on there is a benefit that we're seeing right now is we're seeing very strong demand on other capital areas within MMS, particularly in the Pyxis area, where we're able to utilize some of those additional service capabilities that we have to actually help us in the installs on the Pyxis side, and maybe since we have Mike here today who again was recently leading that business, maybe Mike, if you just want to comment on some of the broader demand we're seeing on the capital side on the MMS.
Mike Garrison, President of the Medical Segment
Thanks, Tom. Even though we recognize the tough economic environment and the uncertainty it brings, we are not facing the same level of capital pressure that may have been reported elsewhere. In fact, we ended Q4 with a record year for bookings and have a strong implementation schedule ahead. There are a couple of reasons for this. One is that our strategy with the Connected Med Management Solutions continues to resonate, especially in addressing labor shortages. Our ability to adapt and implement solutions, supported by highly skilled service professionals, including many former nurses and IT personnel, adds significant value for our customers. They appreciate our flexibility in meeting their needs. Both of these factors are contributing to our success, and we're also seeing high utilization from the infusion side of the business.
Operator, Operator
We'll take our next question from Matthew Mishan with KeyBanc.
Matthew Mishan, Analyst
Just a clarification for me. I think last quarter, you said that you would expect some organic revenue growth around like 5.5-plus percent base growth, not including Parata. At that time, were the strategic electrics included in that number? Or are those new? And if they were included, does that mean that there was a little bit of softness over the last three months versus what you were thinking?
Christopher DelOrefice, Executive Vice President and Chief Financial Officer
No. I appreciate the question. Yes. No, that hadn't been contemplated at that point. Again, we took a hard look at our portfolio in the spirit of simplification. This is different from our core RECODE program that has a different lens. Similar principles, but a very different lens in terms of a pure exit. We really wanted to make sure we were focusing on our organization in higher value-creating areas. And so this was an add. And again, I think there's so many puts and takes across the year. Looking at this two-year metric, however you look at it, 7-plus percent growth on an organic basis is extremely strong. And we think this is an appropriate action to think we could easily put that back in, right? And our base growth would go up by 100 bps, but this is the right thing to do for all stakeholders over the long term, and we'll be creating significant value and has not impacted our bottom line performance at all.
Mike Garrison, President of the Medical Segment
Yes.
Operator, Operator
We'll take our final question from Rick Wise with Stifel.
Frederick Wise, Analyst
Tom, you've emphasized your focus on transformative solutions, mergers and acquisitions, and the portfolio. You and Becton's Chief Financial Officer both mentioned the strength of the balance sheet as a new lever at this time. What is your sense of urgency regarding external technology acquisitions? How do you view your current opportunities? Does the decrease in med tech valuations and the compression of multiples offer more opportunities? How are you approaching this?
Thomas Polen, Chairman, Chief Executive Officer and President
Great question, Rick, and it's good to connect. I agree that we have a very strong CFO. We have a solid pipeline and remain focused on tuck-in mergers and acquisitions. Our strategy has not changed, as we've mentioned many times before. We'll continue to pursue M&A, with over 95% of our activities centered on transformative solution categories, such as smart, connected care, facilitating the transition to new care settings, and enhancing outcomes in chronic diseases. We anticipate that future tuck-in M&As will be similar in size to Parata. While we have completed 19 deals in the past two and a half years, we might do fewer but larger deals going forward, given the benefits and execution strength of our businesses. We will maintain our disciplined approach to M&A. I'm proud of our team, not only for the deals we have completed but also for those we have chosen not to pursue. We are pleased with how our completed deals are performing relative to our expectations and the returns they are generating for shareholders. We will continue to uphold this discipline while remaining open to opportunities as we aim to advance our strategy and enter higher-growth markets. You'll see us being active in portfolio management, not just through M&A but also in completing the spin-off of Inventor earlier this year and in some targeted one-time portfolio exits that balance with the inorganic growth we expect this year.
Frederick Wise, Analyst
Yes. And maybe just one final one from me. I thought it would be interesting to hear from Mike and Rick, since you throw them under the bus a little bit by mentioning their names. Mike, in your new role at BD Medical and Rick on the Interventional side, the boss just said growth and meaningful outcomes is a priority. But I'd be curious to hear about your key priorities and when we speak this time next year, what are your priorities for this year? And what should we expect to see over the coming year? We can pretend Tom is not listening.
Mike Garrison, President of the Medical Segment
Thanks, Rick. This is Mike. My priority remains getting Alaris back to market, which is a top focus for the company. Additionally, it's important to ensure our innovation is effective and that the funds we allocate to R&D deliver value to our customers since innovation that doesn’t reach customers isn’t productive. I believe in fostering a culture where we continuously develop and coach our talent for improvement, which is vital in today’s environment. Just like our customers, we face labor challenges as well. It’s essential for us to be a desirable workplace where people feel a sense of belonging and purpose. Lastly, I hope we maintain a performance-based culture that emphasizes commitment, ensuring we fulfill our promises with a mindset of abundance. On a personal note, I want to acknowledge that Rick interviewed me and hired me 18 years ago, so I owe a lot to him. Thank you, Rick.
Rick Byrd, President of the Interventional Segment
Great. No, I think we have a great opportunity to improve the supply chain to give an example of the ERP system upgrade, finally bringing in fully integrating BDI into the beauty system as well. These are going to provide efficiencies to hold deliver products to our customers reliably, on time and things like that. So again, I've spent a lot of my time first off in BDI, looking at opportunities that we can continue to streamline things, drive operational effectiveness. Exactly. So thanks, Tom, for that.
Thomas Polen, Chairman, Chief Executive Officer and President
The great benefits of obviously being able to rotate talent across diverse groups of businesses. And I think Rick's background, as everyone knows, MDS is probably the most operationally heavy business within the company, just given the billions of products we make on syringes and catheters, and bringing that where the BDI businesses have been very innovation-driven and growth-driven. It's a very nice complementary skill and leadership to be able to bring in those capabilities over. So great question. Yes. Thanks, Rick, for the question.
Operator, Operator
And there are no further questions at this time. I'll turn the call back over to Tom Polen for any closing remarks.
Thomas Polen, Chairman, Chief Executive Officer and President
Okay. Thank you, everyone, for the very good questions today. I just want to take a moment and thank our team again around the world for an extremely strong FY '22, a challenging macro environment. And all of the work and sacrifice that all of our 75,000 associates around the world have made this past year to deliver for our customers and the patients that we mutually serve. Obviously, we've outlined a very strong outlook for FY '23, and we look forward to continuing to focus relentlessly on executing our BD 2025 strategy and bringing that to life. So thank you very much, and have a great rest of the day.
Operator, Operator
Thank you. And this does conclude today's teleconference. You may disconnect your line at this time, and have a wonderful day.