Earnings Call Transcript - BDX Q1 2022

Operator, Operator

Hello and welcome to BD's Earnings Call for the First Quarter of Fiscal 2022. This call is being recorded at BD's request and will be available for replay until February 10, 2022, on BD's Investor Relations website at bd.com or by phone at 800-839-2461 for domestic calls and 1-402-220-7219 for international calls. The replay lines are now dedicated, so there is no need for a conference ID to access the replay. I will now hand 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 first quarter of fiscal 2022. We also posted an earnings presentation that provides additional details on our performance. The press release and presentation can be accessed on the Investor Relations 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 progress we have made against our BD2025 strategy. He will then turn the call over to Chris for the financial review and our updated outlook for fiscal 2022. Following the prepared remarks, Tom and Chris will be joined for a Q&A session by our segment presidents, Alberto Mas, President of the Medical segment; Simon Campion, President of the Interventional segment; and Dave Hickey, President of the Life Sciences segment. Before we get started, I want to remind you that we will be making forward-looking statements today. I encourage you to read the disclaimers in today's presentation slides and the disclosures in our SEC filings, which are both available on the Investor Relations website. Unless otherwise specified, all comparisons will be on a year-over-year basis versus the relevant period. Revenue percentage changes are on an FX-neutral basis unless otherwise noted. When we refer to any given period, we are referring to the fiscal period unless we specifically note it as a calendar period. I would also call your attention to the basis of presentation slide, which defines terms you'll hear today, such as base revenues and base margins, which refer to our results excluding 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. Welcome aboard. We're very happy to have you on the team. Good morning, everyone, and thank you for joining us. We are very pleased with our strong performance in Q1. It reflects the continued execution of our BD2025 strategy and another quarter of consistent strong growth in our base business. We made meaningful progress and delivered on our revenue, margin, earnings and cash flow goals while advancing our innovation pipeline and our tuck-in M&A strategy. Our performance, along with the progress we are making delivering across our key priorities, gives us the confidence to increase our full year revenue and earnings guidance for both our base business and COVID testing. We were able to deliver these results in an uncertain market environment, demonstrating demand across our broad portfolio of products essential to patient care, along with BD's unique ability to deliver strong performance in the face of an ongoing global pandemic. The market impacts from COVID-19 dynamics continue to be in focus, particularly in the health care sector. However, we've witnessed a global health care system that's more agile and better prepared as each new variant has emerged. In Q1, health care utilization levels continued at rates similar to what we saw in the fourth quarter of fiscal '21, remaining slightly below pre-pandemic levels until mid-December, then only declining modestly as a result of Omicron. While we saw some slowdowns in deferrable procedures in the back half of December in certain regions due to hospital-imposed restrictions and staffing constraints, overall, our customers were able to continue to provide care to support patients and sustain a solid base of deferrable procedures. These challenges to procedure levels had minimal impact on our business in the first quarter. In addition, we saw routine lab testing return to normal levels in Q1 and research lab activity remains strong. With that said, as we look ahead, there are some pressures today related to staffing constraints that are impacting the delivery of some deferrable procedures, coupled with supply chain dynamics. We continue to watch these market dynamics closely. Despite the continued recovery, uncertainty and inflationary pressures, I'm pleased with our team's focus on execution. Our segments are delivering strong profitable growth and our strategic initiatives to enhance margins are progressing well. As seen in our results, we're off to a strong start, being very active and intentional in executing our inflation-mitigation initiatives across procurement, shipping and continuous improvements in our plants as well as appropriate pricing-related actions. Further, we intend to be best-in-class in navigating the current inflationary environment. We see signs of continued pressure on shipping, labor, raw materials and electronic components over the remainder of the year since our last guidance update. However, we believe we have a clear path to accelerating margin recovery, and we expect to offset any inflationary impacts through various cost-containment and pricing-related initiatives already realized in Q1 that will enable us to deliver on our full year objectives. I'll now give a high-level summary of our financial performance. Q1 revenues of $5 billion reflect continued strong momentum in our base business. And through our focused execution, we grew base business revenues 8.3% in the first quarter. We also saw increased demand for our professional and at-home COVID tests relative to our previously communicated guidance, which was fueled by the Omicron variant. As expected, in comparison to the prior year, COVID-only testing revenues declined, driven by lower antigen test pricing and volumes and a number of new entrants to the market with over 40 EUAs now granted in the U.S. We have also continued to execute our cash flow initiatives, and we delivered strong operating cash flow of approximately $700 million. Our strong cash flow continues to enable investments in R&D and tuck-in M&A, which are fueling our BD2025 strategy. In Q1, we closed 3 acquisitions, Scanwell, Tissuemed and Venclose. And just this week, we announced the acquisition of Cytognos, whose differentiated flow cytometry assays for the detection of minimal residual disease in cancer, bring an important addition to our biosciences business. These acquisitions advance our strategy to expand in higher-growth spaces that complement our durable portfolio and bring new transformative solutions across smart connected care, new care settings and improving chronic disease outcomes. Our disciplined capital allocation framework gives us the flexibility to deploy capital towards value-creating opportunities in both R&D and M&A for future growth as well as return capital to shareholders through a competitive dividend and share repurchases when appropriate. As we look across the balance of FY '22, our Q1 momentum and focus on execution are driving our strong FY '22 outlook. As we have communicated, we see our growth profile as derisked as we're leaders in areas of health care that remain in high demand and are driving base revenues. We have strengthened our growth profile through new product launches and acquired assets in the higher-growth spaces that are adding to our performance. And we continue to support increased testing demand. While we expect the recent demand surge to be temporary, in the event that COVID-19 cases persist longer than anticipated, our testing portfolio provides a natural hedge against deferrable procedure softness and other COVID-related headwinds. In addition to our derisked growth profile, we're also confident in our ability to improve our gross margins given the strong progress we've made to date through focused execution against our detailed plans to offset inflationary pressures and deliver cost improvements. All of this gives us the confidence to increase our full year revenue and earnings guidance while remaining appropriately prudent given the current uncertain environment. So turning to innovation. We remain focused on enhancing our R&D productivity, and it's having an impact. During the quarter, we progressed our innovation pipeline, launching several new products. Examples include BD COR, where we recently launched our molecular MX module, which fully completes the CE Mark system. The MX is built off of our BD MAX assay technology, which will allow us to leverage the BD MAX menu of infectious disease tests into the high throughput lab segment. We also launched BD Kiestra IdentifA, which received the 510(k) clearance this quarter and is designed to fully automate and integrate the preparation of microbiology bacterial identification testing using smart connected robotics. Beyond these achievements, we also hit several milestones across our pipeline. We submitted the 510(k) to the FDA for our TREK bone biopsy device. The TREK biopsy system will provide interventional radiologists with an easier and faster way to perform bone biopsies without the need to use multiple devices, thus reducing the cost per procedure, inventory needs and reduces procedure time. Our Pyxis ES version 1.7 software is now live in limited commercial release at 4 sites in anticipation of full commercial launch. This software adds new capabilities like enhanced automation and controlled substance management via improved connectivity with our C2 Safe offering and enables deeper integration of pharmacy and nursing areas. We're also very proud of our new BD FACS Discover S8 CellSorter, which is currently profiled as a cover story of the January issue of Science Magazine. The S8 is a landmark advancement in flow cytometry that has the potential to transform a wide range of disciplines from immunology and genomics research to cell-based therapeutics. For the first time, we can sort cells at high speeds while separating cells not only based on which antibodies or other markers we see, but also based on new imaging parameters. To put this leapfrog technology in perspective, the most advanced flow cytometers today can analyze and sort cells based on 3 non-fluorescent parameters and have processing speeds of up to 15 megabytes per second. The S8 analyzes and sorts based on 11 non-fluorescent parameters and has processing speeds of up to 2,000 megabytes per second. We encourage you to visit bdbiosciences.com/celvieu to learn more about this exciting new innovation. I'm excited by the significant progress we continue to make advancing our BD2025 innovation-driven growth strategy. To that end, I am pleased to report that our Board of Directors recently approved the spin-off of embecta, which is scheduled to occur on April 1. We remain on track for a successful embecta spin. We continue to believe the spin is a significant value-creating opportunity for our shareholders as both BD and embecta are well positioned for success. embecta will be one of the largest pure-play diabetes companies in existence today with an ability to focus on its strategic goals, drive strong cash flow and allocate its capital more efficiently and effectively to drive higher revenue growth. Further, we expect the spin-off will not impact the long-term growth targets we laid out at Investor Day. And instead, we expect it to enhance both our sales and earnings growth profile and create an opportunity for additional shareholder value. Finally, regarding our progress on advancing our ESG strategy, which serves as a framework through which we address the most relevant ESG issues for our company and our stakeholders. We continue to make strong progress against our goals. We launched our inaugural 2021 Global Inclusion, Diversity and Equity report, in which we shared our ID&E foundation, strategy and actions towards the healthy workforce and communities pillar of our 2030 ESG goals. BD's commitment to ID&E sets a new standard for how the company will work together to innovate new products and solutions, and we firmly believe that the more diverse people and perspectives there are at the table, the better outcomes we can produce to deliver what's next in health care. We also published our second Annual Cybersecurity Report to update stakeholders on the state of health care cybersecurity, BD's impacts on advancing cybersecurity maturity and anticipated trends for 2022. We're very proud to be the first and only med tech company to publish a cybersecurity report. Through our leadership position in health care cybersecurity in our annual report, we're working to address cybersecurity challenges specific to our industry. We also continue to receive external recognition of our ESG efforts, including just recently being named one of America's Most Just Companies in the Annual JUST 100 Ranking and ranking in the top 3 within our industry. I'm proud of the progress we're making advancing both our BD 2025 and ESG strategies. The actions we're taking are driving excellent momentum. We believe we are well positioned to deliver and create value for all of our stakeholders. With that, let me turn it over to Chris to review our financials and outlook.

Christopher DelOrefice, Executive Vice President and Chief Financial Officer

Thanks, Tom. Echoing Tom's comments, our Q1 results demonstrate the strength of our business and the momentum of our strategy. We are enhancing our growth profile through the portfolio and investment actions we are taking, while also executing on margin improvement and inflationary mitigation programs to deliver our long-term margin expansion targets and double-digit earnings growth profile. To that end, I'd like to recognize our associates across supply chain for their contributions. We have an incredible team around the world that is not only addressing the challenges that all companies are facing in today's environment, but they are excelling and driving performance. Turning to our revenue performance. We delivered $5 billion in revenue in the first quarter comprised of $4.8 billion in base business revenues, which had strong growth of 8.3%, and 7.8% organic, which excludes the impact of acquisitions. COVID-only testing revenues were $185 million, which, as expected, declined from $866 million last year, as this was our highest revenue quarter for COVID testing last year given higher pricing and volumes. The year-over-year decline in total company revenues of 5.9% is entirely attributable to the decline in testing revenues. BD is uniquely positioned to deliver strong performance during these uncertain times. The breadth and diversification of the total BD portfolio, including COVID diagnostic testing, provides insulation against COVID-driven procedure fluctuations, as demonstrated by the revenue performance across our segments, with BD Medical growing 6%, Life Sciences base revenues growing over 17% and Interventional growing 3.8%. Total company base business growth was also strong regionally, with double-digit growth in the U.S., China and Latin America. Let me now provide some further insight into each segment's performance. Our Medical segment delivered $2.4 billion in revenues in the first quarter, growing 6%, led by our Medication Delivery Solutions and Pharmaceutical Systems businesses. MDS revenues increased 7.3%, reflecting strong demand for our durable core products, particularly in the U.S., driven by competitive gains in catheters and vascular care devices. Our leadership position in these markets allows us to provide a strong value proposition to our customers in terms of the breadth of our portfolio and the cost and quality of our products. Importantly, as input costs such as resins have increased, we've been able to take appropriate price actions and accelerate cost mitigation programs while continuing to invest in innovation to support our strong value proposition. In MMS, revenues were down slightly due to the difficult prior-year comparison given the high number of infusion pump placements last year in the U.S. and Europe to support COVID-related hospital needs. Excluding this impact, our MMS business reflects continued execution of our medication management strategy, which drove strong demand worldwide for our dispensing solutions. This was particularly evident in the U.S., where we saw another strong quarter of customer signings. The traction we are getting reflects the value our Pyxis platform provides our customers. Revenue growth of 1.6% in Diabetes Care reflects our category leadership position. Growth was aided by the timing of certain orders. Pharm Systems revenue grew nearly 18%, driven by continued strong demand for pre-fillable devices. Growth was also enabled by our focused execution on capacity expansion that allowed us to fulfill certain orders earlier than originally anticipated. Demand for pre-filled devices continues to be aided by the fast-paced vial to pre-filled device conversion for biologics, vaccines and other injectable drugs. BD Life Sciences revenue totaled $1.5 billion in the first quarter. The decline of 24.8% year-over-year is solely due to lower COVID-only testing revenues previously discussed. Excluding COVID-only testing, Life Sciences base revenues grew 17.2%, with licensing revenue in IDS contributing about 400 basis points to the segment's base growth and about 100 basis points to the total company based revenue growth. In IDS, base business revenues had strong growth of 20.3%, including about 600 basis points from licensing revenue. Performance was driven by our specimen management, microbiology, and molecular platforms as routine lab testing returned to pre-pandemic levels. Growth in BD MAX IVD assays was also strong, reflecting the leverage we are getting on the larger installed base. Performance in our base business includes sales of our combination flu COVID assay that were in line with our expectations. Indications are the respiratory season will be a normal to low flu season. Biosciences revenues increased 9%, driven by strong demand for research solutions as a result of lab utilization returning to normal levels and continued research on COVID variants. Contributing to Life Sciences Q1 growth were the 2 new FACSSymphony instruments that we launched in FY '21. As the evolution of flow cytometry continues to move from large labs to more midsized independent labs, we now provide a complete suite of analyzers for researchers from the benchtop A1 to the A5 SE, our first spectral analyzer that enables researchers to do even high-parameter cellular analysis to gain broader insights into pioneering new discoveries and treatments for cancer and other immune-related conditions. Our new e-commerce site also contributed to growth in Q1. BD Interventional revenues totaled $1.1 billion in the first quarter, growing 3.8%. BDI's performance reflects strong growth in Surgery and UCC. Q1 performance was impacted by temporary supply chain disruptions, and consistent with our ReCoDe initiative, product line discontinuations of lower-margin products in our PI and UCC businesses. While these strategic discontinuations create a temporary headwind to revenue growth, it demonstrates our commitment to simplifying our portfolio and enhancing margins. We had a strong start to the year in our Surgery business, with revenue growth of nearly 9% despite some modest slowdowns towards the end of December due to Omicron. Strength in the quarter was driven by double-digit growth in advanced reconstruction and repair, with strength in hernia as deferrable procedures recovered, and the recent acquisition of Tepha. Tepha provides us with a vertical integration strategy for our current Phasix platform, but more importantly, it provides us with exciting new opportunities to expand our horizon into new high-growth areas of tissue repair, reconstruction and regeneration. Double-digit growth in biosurgery and high single-digit growth in infection prevention was also driven by the recovery of deferrable procedures and continued market adoption of Sterile BD ChloraPrep. Revenues in Peripheral Intervention declined 3.1% as a result of a product recall from fiscal '21 and the previously mentioned supply disruptions and product line discontinuations that support our margin enhancement goals. However, we saw continued acceleration in our atherectomy platform in China as we have leveraged the capabilities of our sales force. We are also experiencing positive momentum from our recent acquisition of Venclose. Urology & Critical Care revenues grew 7.7%, driven by continued strong demand for PureWick in our acute urology portfolio. We're also seeing continued adoption of our PureWick solutions in the home as we advance our strategy to expand our addressable market and deliver transformative solutions for alternate care settings. Also contributing to growth was remediation of Q4's temporary supply disruption within acute urology. Now moving to our P&L. We delivered adjusted net income and EPS above our expectations in Q1, with adjusted net income of $1.1 billion and adjusted diluted EPS of $3.64. We had strong execution of our margin enhancement initiatives in Q1 and delivered base business gross margin of 55.4% and operating margin of 24.3%. We remain on track to deliver our full year base margin goals, with our base margin performance in Q1 ahead of our expectations for the quarter and also above our full year base margin expectations, due to our ability to realize some of our inflation mitigation and pricing initiatives sooner than we previously anticipated. In addition, our Q1 base business operating margin also included a benefit of about 40 basis points from licensing revenues in Life Sciences that was included in our full year plan. Excluding the licensing revenue, base gross and operating margin would have been nearly 55% and 24%, respectively. Other key drivers of gross margin in Q1 include a benefit from increased volume utilization given our strong base revenue growth and, as expected, favorable FX we experienced in 2021 but was recorded in inventory and benefited our GP this quarter when sold. We did realize a negative impact from inflation in the quarter, which was broadly in line with our expectations and was partially offset by our cost improvement and inflation mitigation actions, which are occurring as planned. We are making very good progress with strong sequential improvement and our full year base gross margin improvement goal remains on track despite continued inflationary pressures. SSG&A was in line with expectations and increased year-over-year, driven by variable expenses, including selling and commissions, and inflationary impacts, primarily in shipping, that we have previously shared. The increase in SSG&A as a percent of sales is a function of lower testing sales. However, we did leverage SSG&A versus our base revenue, which is contributing to our base operating margin improvement. R&D increased year-over-year, consistent with our strategy to invest more to support our long-term growth outlook. As anticipated and communicated on our prior earnings call, our tax rate benefited from the timing of discrete items, resulting in a lower effective tax rate in the quarter. Regarding our cash and capital allocation, cash flows from operations totaled approximately $700 million in the first quarter. We ended Q1 with a strong cash balance of $1.9 billion and an adjusted net leverage ratio of 2.8x. Our cash balance reflects our strategic investments in M&A during the quarter. Our current cash and leverage position and continued focus on strong cash flows provide us the flexibility to advance our balanced capital allocation framework and support our BD2025 growth strategy through investments in R&D, capital and M&A. During Q1, we invested in R&D at over 6% of sales to advance our innovation pipeline. We also invested over $400 million in 3 additional tuck-in acquisitions across our businesses that will support our strong growth profile in 2022 and beyond. Turning to our fiscal '22 guidance assumptions. First, the macro considerations that support our guidance. While we still expect some global COVID-driven variability, our guidance assumes the continued easing of COVID-19 restrictions, the stabilization of deferrable procedures and no significant disruptions to deferrable procedure volumes. Additionally, we see signs of continued inflationary and supply chain pressure over the balance of the year, with some stabilization by the end of the year. However, we believe we have a clear path to margin recovery, and we expect to offset any incremental inflation impact through various cost containment and pricing-related initiatives already realized in Q1. Our guidance doesn't contemplate a more significant step increase in market-driven supply chain and inflationary disruption. A few comments on testing-specific assumptions. Our base business revenue assumptions include sales of our combination flu COVID assays. We anticipate a normal to light flu season based on what we've seen so far from the CDC surveillance reports. Moving to our updated guidance for fiscal '22. We are well positioned for strong growth across our 3 segments, which are delivering at or above our initial expectations and, thus, we are increasing our base revenue guidance. While we aren't providing segment-specific items, relative to our revised total company base growth outlook, we expect our Medical segment growth to be slightly below and our Life Sciences and Interventional segment growth to be slightly above total company growth. We now expect base revenues to grow 5.75% to 6.75% on an FX-neutral basis from $18.3 billion in fiscal '21. This is an increase from our previous guidance of 5% to 6% growth and is driven by our Q1 revenue outperformance and confidence in the strength and resilience of our base portfolio, and our Q1 acquisitions, which account for about 25 basis points of the increase. For COVID-only testing, we are now assuming $450 million in revenue, which is a little more than double our original expectation of $200 million. As we communicated last quarter, higher testing revenues position us well to manage through this period of uncertainty and also provide the potential to create value through reinvestment in our business. Given our increased testing revenue expectations, we currently plan to reinvest a portion of the testing profits over the balance of the year, but we'll ensure they are value-creating opportunities and would not invest at a level that would result in our full year testing margins dropping below our base margins. Should those investment opportunities not materialize as anticipated, we would allow the incremental profits to flow through. Based on current spot rates, for illustrative purposes, currency is now estimated to be a headwind of approximately 125 basis points or about $250 million to total company revenues. This is an incremental 75 basis point headwind compared to our prior view. All in with our base revenue, COVID-only testing revenue and the illustrative currency impact, we now expect reported revenues in the range of $19.55 billion to $19.75 billion in fiscal '22, compared to $19.3 billion to $19.5 billion previously announced. We still expect operating margins in our base business to improve by approximately 200 basis points over our fiscal '21 base operating margin of 21.7%. Given the planned reinvestment, we also still expect operating margin on COVID-only testing to be modestly above our base business margins. A few additional items for your models. We now expect $50 million to $75 million in year-over-year improvement in interest other or an incremental $25 million benefit. We still expect an effective tax rate of 12.5% to 13.5% for the full year. Our guidance still assumes share repurchases that, at a minimum, offset any dilution from share-based compensation. All in, we are raising our adjusted EPS guidance to be between $12.80 and $13, which is an increase of $0.50 at the midpoint from our prior guidance of $12.30 to $12.50. This includes absorbing the negative impact of currency, which we estimate to be about $0.10. The increase reflects our strong Q1 base business performance and our expectations for increased COVID testing net of reinvestment. As a reminder, our fiscal '22 guidance continues to include our Diabetes business. As Tom mentioned, the embecta spin has now been approved by the Board of Directors. As we proceed towards the spin date, I want to provide a few reminders Restated financials for RemainCo will not be made public until the completion of the spinoff. Given the higher but declining margin profile of embecta, one should expect BD margins to be lower after they're restated. However, off the restated FY '21 financials, we are still targeting about 400 basis points of base operating margin expansion through FY '25. BD is expected to receive a distribution of approximately $1.44 billion, equivalent to multiple years of cash generated by the Diabetes Care unit. We remain excited for what's ahead for embecta and making this a successful and value-creating opportunity for everyone. As you think about phasing for the balance of the year, the following are a few key considerations as you think of our base revenue and earnings. Regarding sales, we remain confident in the durable nature of our portfolio and the strength of our underlying sales. In Q2, we expect some impact from Omicron on hospital staffing and procedures. But recall, Q2 is a relatively easy compare due to the significant COVID resurgence we experienced in Q2 of fiscal '21. As a result, we anticipate base revenue growth in Q2 to be above our full year guidance range, with the remaining quarters being equally balanced. Regarding our margins and P&L, as I noted, Q1 had the benefit from licensing, which added about 40 basis points to operating margin, which will not repeat in Q2. While we expect improvement versus the prior year, we also previously shared that Q2 would be the quarter with the largest inflationary impact. So given those 2 dynamics, you would expect a sequential step down in margin, and we expect Q2 to represent the low watermark for base operating margin for the year. We remain well on track to achieve our base operating margin guidance of approximately 200 basis points improvement. As we progress through the second half of the fiscal year, in Q3, we expect the impact of inflation on our business to stabilize and see a modest pickup of cost improvement and price-related benefits flowing through, with Q4 being the highest benefit. As a reminder, we see our SSG&A and R&D costs relatively evenly spread through the year. As expected, our tax rate in Q1 benefited from the timing of discrete items. At the midpoint of our full year guidance range, that would imply we expect our average tax rate for the balance of the year to be about 13.7%, which is best to apply for the subsequent quarters. Regarding COVID-only testing sales, we expect the vast majority of testing revenues to occur in fiscal Q2 and then trend down as Omicron subsides. In future years, we would not expect this level of COVID-only testing to repeat. In summary, we are continuing to advance our BD2025 strategic objectives with focused execution against our key priorities. As we look forward, and as reflected in our FY '22 guidance, we are well positioned for growth with excellent momentum in our base business, increased investments in our innovation pipeline, tuck-in M&A momentum, strong progress executing our balance sheet and cash flow initiatives and clear visibility to meaningful margin improvement.

Operator, Operator

Our first question comes from Vijay Kumar with Evercore ISI.

Vijay Kumar, Analyst

Maybe my first question, some clarification on the Q1 numbers here. Can you quantify what the contribution from combo test? There's some confusion on whether it was an abnormal contribution. I think in the past you've said it's about $75 million to $100 million. So was it in line with expectations? Has anything changed on combo test? And this licensing fee, it looks like maybe it was $40 million or $50 million contribution from a dollar perspective. Is that the right way to think about it?

Thomas Polen, Chairman, Chief Executive Officer and President

Vijay, this is Tom. Thanks for the good question. So on flu COVID combo testing, it is very much in line with our expectations. As you said, it was $70 million to $80 million or so is what we expected for the full year, and you would expect a portion of that to be in Q1, and it played out as such. Essentially, it's relatively immaterial to overall BD, as you can imagine if you take the 75 to 80 and you spread it over a couple of quarters. So that's what was in our numbers. We have not seen any it's a normal to light flu season this year. It's certainly higher than it was last year when there was essentially no flu. But if you look at the CDC data, it is on track for a light to normal flu season. But nothing above our expectations at this point in time. I'll turn it over to Chris for the other question.

Christopher DelOrefice, Executive Vice President and Chief Financial Officer

Yes, just to clarify, the licensing revenue contributed 40 basis points, which is approximately $50 million. As I mentioned, we are actively pursuing our ReCoDe initiative and improving SKU productivity, making deliberate choices to boost our profitability. With our strong growth, we are in a position to absorb some challenges as we streamline our portfolio. Specifically, in the BDI business, there was an impact that negatively affected the quarter by about 30 basis points.

Vijay Kumar, Analyst

That's extremely helpful, Chris. And maybe my follow-up on the guidance here. You guys beat Q1 by about $250 million on the revenues versus street models, $0.60 on EPS. The guide raise was of a similar magnitude. When I look at your gross margin execution, ex-licensing, it's well over 55%. It feels like perhaps the guidance is conservative, maybe talk about the assumptions that went into the 2Q to 4Q implied guide?

Christopher DelOrefice, Executive Vice President and Chief Financial Officer

Thank you for your question. I want to address this in two parts. First, I'll discuss our quarterly performance and how it compares to external expectations. We're very pleased with our Q1 results, which showed strong base revenue growth that surpassed our predictions. We also executed well on our margin enhancement goals, achieving benefits in some areas sooner than anticipated, which will benefit us moving forward, especially as we expect ongoing supply and inflation pressures later in the year. Additionally, we gained extra revenue from COVID-only testing, which you can see in our results, and it also had a strong margin in the first quarter. It's encouraging to see a good balance between our base revenue and the additional revenue from testing. There were a few timing considerations when comparing our results to external expectations. We had anticipated a specific tax item in Q1, which did occur, resulting in a lower effective tax rate for the quarter. However, we remain confident in our expected full-year tax rate, so you should expect a slight increase as we move through the year. You also pointed out the licensing impact, which was in our plans but may not have been considered externally. These two factors primarily explain the difference between our overall results and external expectations. Two other considerations that aren’t reflected in this quarter's results are the reinvestment of the testing upside that will take place throughout the year as we uncover value-creating opportunities, and the negative impact from foreign exchange, which amounted to about $0.10 and will also affect the later part of the year. This suggests that we have a strong foundation for the second half of the year to handle those challenges. In general, we increased sales by $250 million. That increase included a base increase of $150 million and testing revenue that ranged from $250 million to $400 million. We offset currency headwinds of $150 million, resulting in a net increase of $250 million. Importantly, when we compare our Q1 actual results against our new base guidance and look at our implied guidance for Q2 to Q4, it aligns with our previous guidance, indicating that we haven't lowered our future revenue projections. There is more uncertainty due to Omicron, as we noted from our December exit into January, which supports our positive outlook for the latter half of the year. We also improved our EPS by $0.50, absorbing $0.10 from currency effects. Our EPS to sales conversion is exceptionally high, which indicates strong margins and reflects our effective utilization of our base. This gives us confidence that we are on track to meet our margin commitments. Overall, we see this strong performance as encouraging, especially amid ongoing market uncertainty, and it underscores our growth in the base business and our execution focus.

Operator, Operator

And our next question comes from Robbie Marcus with JPMorgan.

Robert Marcus, Analyst

Yes. And congrats on a good quarter. Chris, maybe I could just follow up on that a little bit and get a little more from you. You raised EPS by less than the beat. Should we think of that as any changes to the inflationary environment? Or maybe what went into the view to not raise it as much? Was the licensing, did it come earlier than expected? Or just anything we can get and help us phase through the rest of the year versus where we were before.

Christopher DelOrefice, Executive Vice President and Chief Financial Officer

Thank you, Robbie, for your question. I'll revisit some points I previously mentioned. To your observation, it was an exceptionally strong quarter, and the results exceeded external expectations. There were two timing factors to consider. We had anticipated tax in Q1, which was not factored into the external outlook, and licensing, which was also not included in that view. Both of these were planned, and we did communicate the tax. So, when considering just these two factors, we are actually providing a more favorable outlook than what was originally expected. Additionally, there are new elements to consider for the latter half of the year. Foreign exchange will also play a role, contributing an estimated $0.10 post-Q1. Furthermore, we indicated that we would be reinvesting some of the margin from the increased testing that took place in Q1. This provides some clarity. To simplify, we achieved 8.3% growth in Q1, and our revenue forecast maintains that same growth rate moving forward, showing our confidence in the initial estimate, despite the anticipated challenges posed by Omicron and other factors. This also suggests a robust link between our sales and profitability, equating to a strong drop-through to profit. All that revenue indicates that we are effectively utilizing our resources, which points to an optimistic outlook on our margins. We're enthusiastic about the year's start. I feel positive about our position. Of course, we have discussed potential continued inflation pressures throughout the year, and our team is diligently working to manage those challenges. Nonetheless, it is a unique situation overall. The increase in our guidance reflects greater confidence than when we commenced the year, even amidst what I would describe as increased complexity.

Thomas Polen, Chairman, Chief Executive Officer and President

And Robbie, this is Tom. I think you've heard me use the word prudent pretty nonstop since the COVID pandemic hit. And so I would view our guide today as prudent, with as the market continues to remain more stable, that there's an opportunity for upside as we move through the year.

Robert Marcus, Analyst

That's actually very helpful. So it sounds like there's an extra $0.20 or so of reinvestment going back into the business. How should we think about where that's going and when and where we might see that materialize?

Christopher DelOrefice, Executive Vice President and Chief Financial Officer

Yes. Thanks, Robbie. Yes. Obviously, as the CFO, of course, it's going to be contingent on, there'll be strong value-creating opportunities. We've always looked to innovation, I think, first. I think also anything that we can do to accelerate the great programs that we have in place to build capability and execute against our Simplify agenda, which will lead to margin, I think, would be the 2 areas that we would continue to prioritize. I would likely see that kind of phase more second half. Certainly, with the new guide in our plan, some of that will happen in Q2, but it will probably be more kind of spread throughout the year is the way to think about that.

Operator, Operator

We'll take our next question from Matthew Mishan with KeyBanc.

Matthew Mishan, Analyst

Just first, could you go a little bit deeper on the Peripheral Intervention issues around the recall and supplier constraints and how long that's expected to last? And is there any way to quantify the magnitude? And was that originally contemplated in the guidance as well?

Thomas Polen, Chairman, Chief Executive Officer and President

Matthew, this is Tom. I'll turn that over to Simon.

Simon Campion, President of the Interventional segment

Yes, I’d be happy to provide that information. I want to start by saying that we're quite pleased with BDI's performance this quarter. Regarding PI, we're satisfied with that portfolio's position and our competitiveness. We're also confident in our ability to continue enhancing that portfolio, as evidenced by our acquisition of Venclose during the quarter. The challenges we face are significant and time-sensitive. Three main issues have primarily caused our current problems. One year ago, we recalled the Venovo venous stent, which has created a headwind for four quarters. We anticipate that this situation will change in two ways: first, it's nearly annualized; and second, we expect it to return to the market in the second half of this financial year. To clarify, this is not an implant issue. In fact, last September, we shared three-year data from the Venovo study, showing an 84% success rate with no fractures or migrations. We are very optimistic that Venovo will positively impact the market again. The second issue involves backorders and challenges with suppliers in the NPI. PI has the most complicated portfolio, products, and supply chain within BDI. We have faced challenges due to raw material capacity, COVID-related impacts at supplier sites, and sterilization capacity over the past several quarters. However, we are beginning to see improvement in several areas, especially regarding sterilization, and expect to see significant progress in our backlog by the end of this quarter. Lastly, as Chris and Tom mentioned, SKU rationalization has affected PI more than any of our other divisions this quarter. As we've discussed in other forums, these discontinuations are strategic, aimed at enhancing margins and increasing efficiencies throughout our entire operation, from manufacturing to sales rep time allocation.

Thomas Polen, Chairman, Chief Executive Officer and President

To add, we've been strategically exiting certain products in PI and other areas as part of our ReCoDe initiative. With our strong revenue, we've been able to accelerate that strategy in several ways. The products we're discontinuing generally have growth rates and margins that are significantly below the company average. This approach allows us to simplify our portfolio and concentrate on higher-growth areas that will drive the future of the company. Thank you for the question.

Matthew Mishan, Analyst

Okay. And just lastly on Alaris. And I'm sorry if I missed it in the prepared remarks. I know it wasn't previously assumed in guidance, but it says that FDA clearance of Alaris is not expected now in FY '22. Did something change in the conversations with the FDA?

Thomas Polen, Chairman, Chief Executive Officer and President

No, Matthew. That's exactly what we communicated when we provided our guidance. There is no change at all. We remain focused on advancing Alaris, and there are no updates.

Operator, Operator

We'll take our next question from Larry Biegelsen with Wells Fargo.

Lawrence Biegelsen, Analyst

Congrats on the nice start to the fiscal year. I'll ask both my questions upfront. I heard pricing a lot so far on this call. Where do you guys see opportunity to take price? And what's embedded in the guidance for net price change year-over-year? And second, Chris, the guidance for the base business implies second half growth is below the range, I believe, based on your quarterly phasing, by our math, maybe 4%. Is that conservatism? And what does it imply about your ability to grow 5%, 5.5% plus beyond fiscal 2022?

Thomas Polen, Chairman, Chief Executive Officer and President

Okay. Thank you for the question, Larry. Why don't we start with the last question first? I'll turn it to Chris on the growth pretty clear answer.

Christopher DelOrefice, Executive Vice President and Chief Financial Officer

Yes, Larry, thank you for your question. The full balance remaining is in line with our guidance. However, we did indicate that in the second quarter, we're still working through a recovery phase, especially considering last year's resurgence. So, I would characterize it as particularly significant in the BDI segment. There are also some minor comparison factors in the fourth quarter; for instance, we had several new product launches. If you examine the comparison with last year, it's notably robust. Therefore, it mainly comes down to comparison factors in relation to our long-term goals of 5% to 5.5%, which confirms that we are on the right track. Additionally, when we assess growth against 2019, it remains very strong, exceeding 5%, which is impressive, especially given the impact of COVID during that year. This indicates a positive trajectory for the business.

Thomas Polen, Chairman, Chief Executive Officer and President

As you know, we've been focused on pricing for many years and have dedicated resources to pricing leadership at the company level. In an environment with high inflation, this area has become increasingly important. Last year, we started working on pricing in this inflationary context and began taking actions that you will see reflected throughout the year. We take these actions seriously in our discussions with customers, who operate in a reimbursement-constrained environment. The most significant price implementations are in products sold for very low amounts, where we have invested billions in creating efficient, automated manufacturing facilities. This allows us to sell large quantities of devices at low prices. Any increases in variable costs like resins or chips directly affect product margins and profitability. We discuss these raw material impacts with our customers and have been actively increasing prices, especially in those product categories. While we aren't sharing specific pricing numbers for the year, we have been very active in this regard across all regions, not just in the U.S. or Europe, as we respond to inflationary impacts on raw materials. Simultaneously, we are taking other actions beyond pricing, such as implementing cost reductions within the company, driving continuous improvement in our manufacturing processes, and always seeking greater efficiency, with pricing being our last resort. We have certainly increased pricing this year more than we have in the past.

Christopher DelOrefice, Executive Vice President and Chief Financial Officer

Larry, I have one more thing to mention. I'm not sure if this helps or if your comment was about operations. The FX impact will definitely be more concentrated at the end of the year, which is something to keep in mind. Regarding Tom's earlier point about pricing, we didn’t break down that dynamic, but it’s part of our strategy as we discussed the effects of inflation and our cost improvement programs. Cost improvements play a significant role, contributing a net 50 basis points to the full year out of a total of 200 basis points. The remaining 150 basis points come from volume growth and some beneficial FX effects from last year. At the start of the year, we had 80% to 90% of our pricing plans in place and 50% of those actions implemented. Now, 100% of our plans are fully defined, with 7% already executed; the remaining is more dependent on timing related to certain triggers and events. We are making strong progress.

Operator, Operator

We'll take our next question from Matt Taylor with UBS.

Matthew Taylor, Analyst

I just had a follow-up on the thread on all the supply chain inflation issues and your ability to mitigate them. So wanted to understand better the forecast and what you're assuming for the second half of the year in terms of some of those headwinds abating. And Tom, I appreciate your comments on the nickel, dime and quarters, the lower-cost products. I was wondering specifically if you could also raise price on reagents or anywhere else in the portfolio?

Thomas Polen, Chairman, Chief Executive Officer and President

Thank you for the question, Matt. Regarding the supply chain and inflation, we don't anticipate any significant reversal in costs. There are some areas, such as resins, that have shown a slightly favorable trend, and we expect that to continue. However, we do not see major decreases in areas like shipping or chips. We have factored this into our outlook moving forward. We believe these supply chain challenges will persist longer than anticipated a year ago, and many of them will continue through 2022. We have taken this into account in our considerations and outlook. The other question was.

Matthew Taylor, Analyst

Just on reagents or any other areas...

Thomas Polen, Chairman, Chief Executive Officer and President

Yes. Thanks, Matt. Certainly, we do look at those, and we have raised price in a number of areas as appropriate across the portfolio. There are a few products, of course, in today's environment that aren't impacted by inflation in areas such as shipping or computer chips, et cetera. Instrumentation will be a good example of electromechanical inflation that we see and we raised costs there in areas such as service, where spare parts, certainly, the cost of those go up. And we do share the increases of those as well. So the answer is yes. But by far and away, the most significant increases would be on those products that we are just extremely efficient at producing and where the percentage of COGS made up of raw materials are disproportionately high.

Christopher DelOrefice, Executive Vice President and Chief Financial Officer

I just want to add something that might help you understand how this could unfold throughout the year. The effects of inflation became more prominent in the latter half of last year. Therefore, in the first half of this year, you will experience the full impact of ongoing inflation. In the latter half, you will notice some stabilization along with continuous increases, but to a lesser extent. Conversely, consider how the offsets will influence the overall net, which will increase at a slower pace. We actually surpassed our expectations for the first quarter, but there is a natural progression as we implement actions throughout the year. This might assist you in thinking about the timing dynamics. We mentioned that the second quarter is expected to be the low point for gross profit or gross profit operating margin due to the complete effect of inflation coming through. This applies to both gross profit and operating margin since a significant portion of inflation affects shipping costs as well. So, keep both line items in mind regarding this matter.

Thomas Polen, Chairman, Chief Executive Officer and President

And Matt, just maybe one other item to add is we have been very active and we put this in place last year. We have a formal inflation task force that we've established, with multiple different pillars within that and dedicated groups, working on everything from rethinking our logistics chain, and that includes looking at alternative shipping partners in a number of areas. For example, how can you ship from Asia to the U.S. or from Europe, U.S. to Europe in more efficient ways? What parts of our supply chain have traditionally used air freight, as an example, that we can move on to rail or boats? We've been taking actions and rethinking that, both how we get products to customers, but also from raw material suppliers into our plants. And of course, looking at the materials themselves, where there's alternative vendors and working with existing vendors on different technologies that could be more cost effective for us to use. All of those are different components within our inflation task force, it's been very active, and we're seeing the impacts of that as well.

Operator, Operator

We will take our final question from Rick Wise with Stifel.

Frederick Wise, Analyst

Tom, reflecting on this excellent quarter and the outstanding margin performance, it brings to mind our meeting in mid-December 2019 as you were preparing to become CEO. I'm interested in two aspects of your comments from that time. First, you mentioned your growth-focused priorities, especially regarding inorganic growth. I would like an update on your thoughts about M&A opportunities for the rest of the year, including how aggressive you plan to be and what those opportunities might entail. Secondly, today we've repeatedly heard about the clear path to a 400 basis point improvement in operating margin. Could you provide more detailed information about the three initiatives you highlighted back in December 2019? You mentioned reducing the manufacturing footprint, unifying the end-to-end operational processes, and SKU rationalization. What is the current status of those initiatives, and how much work remains to be done? Thank you for your insights.

Thomas Polen, Chairman, Chief Executive Officer and President

Thank you for the question, and I look forward to seeing you in person again soon. It's been quite some time since we last connected live, which I always appreciate. Your question is excellent. Reflecting on our BD2025 strategy, we are starting to transition from the first phase to the second. Initially, we focused on strengthening our balance sheet and cash flows to gain flexibility. The team's efforts in managing accounts receivable, payables, and inventory have been impressive, leading to a significant improvement in our free cash flow conversion. This enhancement has enabled us to pursue M&A opportunities, and we have been quite active in this area, likely leading the med tech industry in acquisitions over the past two years. We have also prioritized accelerating innovation, reshaping our portfolio, and executing effectively. We initiated this with our Growth and Innovation Fund and further boosted it by reinvesting part of last year's COVID testing proceeds, and we are beginning to see positive results from these efforts. The organization is energized and committed to growth, and I'm pleased with our M&A activity, having completed four acquisitions this quarter alone. This year, we have made around six or seven acquisitions, following last year's total of 17. We plan to maintain this focus, with 80% of our M&A directed toward transformative solutions in areas such as smart connected care, new care settings, and chronic disease outcomes, all within higher-growth sectors. Our tuck-in M&A strategy will continue emphasizing these areas while selectively pursuing deals that reinforce our core business, which is performing well as evidenced by our current results. Looking at future M&A opportunities, we have a robust pipeline. Currently, we are not considering transformational M&A but are concentrating on tuck-in acquisitions. We do have the capacity to pursue larger deals, potentially up to $2 billion, and we will consider exceeding that for strategic opportunities that create value. Additionally, I want to highlight a significant milestone this week with the Board approving the spin-off of embecta, part of our portfolio strategy that establishes a dedicated Diabetes Care business. This positions us as one of the largest dedicated diabetes companies globally, supported by a focused management team and strategy aimed at generating shareholder value while allowing us to concentrate our resources on other strategic areas at BD. The milestone coincides nearly with the 100-year anniversary of the first insulin injection therapy. On the Simplify side, I’m proud of our progress, particularly in streamlining our portfolio by phasing out thousands of SKUs to concentrate on key products that will drive growth. We have dedicated teams working on our network simplification strategy, which is already in progress regarding our manufacturing footprint, and SKU rationalization is well underway. We aim to complete this largely within the next year. Simultaneously, we are highly focused on our margin strategy, which encompasses our ReCoDe initiative, supply chain and inflation management, and pricing strategies. We committed to improving our margins by 400 basis points to return to pre-2019 levels by 2024, and we're dedicated to achieving this goal. Overall, we are pleased with our progress and will continue to execute the BD2025 strategy, keeping you updated on our advancements.

Operator, Operator

And 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, and thanks, everyone, for your questions. Before we sign off, I just want to thank BD's 75,000 associates around the globe who live our purpose every day to advance the world of health, who are working tirelessly to support our customers and frontline health care workers around the world and are committed to executing our strategy. I'm proud of how we've started fiscal '22. I'm looking forward to continuing to deliver on our goals and making meaningful impacts for our customers and their patients around the world. On behalf of the entire executive team, thank you for your efforts and sacrifices. And operator, with that, we will end today's call.

Operator, Operator

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