Earnings Call Transcript - BDX Q1 2024

Operator, Operator

Hello, and welcome to BD's First Fiscal Quarter 2024 Earnings Call. At the request of BD, today's call is being recorded and will be available for replay on BD's Investor Relations website investors.bd.com or by phone at 800-688-7339 for domestic calls and area code +1 402-220-1347 for international calls. For today's call, all parties have been placed on a listen-only mode until the question-and-answer session. I will now turn the call over to Greg Rodetis, Senior Vice President, Treasurer and Head of Investor Relations.

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

Good morning, and welcome to BD's earnings call. I'm Greg Rodetis, Senior Vice President, Treasurer and Head of Investor Relations. 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 2024. We also posted an earnings presentation that provides additional details on our business, strategy and performance. The press release and presentation can be accessed on the IR website at investors.bd.com. Leading today's calls 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 Q1 financial performance and our updated guidance for fiscal 2024. 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 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 noted as a calendar period. I would also call your attention to the non-GAAP reconciliations included in the appendices of the press release and earnings presentation. With that, I’m very pleased to turn it over to Tom.

Tom Polen, Chairman, Chief Executive Officer and President

Thanks, Greg. Good morning, everyone, and thank you for joining us. Earlier today, we reported our results for the first quarter. Overall, we executed Q1 as expected. Total revenue growth was largely in line with our expectations. And on the bottom line, adjusted EPS was ahead of our expectations due to good execution on our margin goals through our BD Excellence operating system and the timing of discrete tax items. Also consistent with our plan, we delivered very strong growth in cash flow that positions us well to deliver another year of growing free cash flow double-digits. I want to thank our team of over 70,000 associates for the strong execution, agility and unrelenting determination to deliver for our customers, patients and shareholders. These results give us the confidence to increase our FY '24 guidance. Turning to our BD 2025 strategy. During Q1, we continued to execute well against the five actions we outlined at our Investor Day to drive profitable growth and value creation. This includes continuing to advance our innovation pipeline which supports our durable 5.5% plus targeted revenue growth profile. We remain focused on advancing innovation in high growth areas, anchored against three irreversible forces we see reshaping healthcare today and over the next decade: connected care, new care settings and chronic disease. Specifically in Q1, we made meaningful progress achieving several key R&D milestones for technologies that position BD as key enablers of care shift in new settings. In our PureWick portfolio, which is now the market's leading platform for non-invasive urine management in a billion dollar market growing double-digits. We started our randomized clinical trial pilots for PureWick Female to generate evidence to support future at-home reimbursement. Our PureWick program is progressing well and we remain on track to launch our next-generation Female External Catheter later this fiscal year, which will provide a better patient experience in a more dignified way for women to manage their urinary incontinence. In Q1, we received 510(k) clearance for our new BD MiniDraw Capillary Blood Collection System. Based on a recent study, two-thirds of patients prefer MiniDraw's finger-stick collection in a retail setting over a previous experience with the traditional venous blood draw. Since it does not require a phlebotomist, MiniDraw can expand access to sample collection for several routine blood tests to new settings such as retail clinics and pharmacies. Lastly, in molecular diagnostics, we initiated clinical trial enrollment for the BD Elience Point-of-Care Molecular platform. In our first assay, a rapid CT/GC test for in-office testing and treatment. BD Elience enables BD to enter into the high growth molecular point-of-care market. We continue to see molecular diagnostics as a strong growth catalyst as evidenced by double-digit growth this quarter in our BD COR and BD MAX platforms where we continue to leverage our growing installed base through menu expansion with more than 20 assays currently available on BD MAX. Both NextGen PureWick and BD MiniDraw are on track to launch later this fiscal year, and we anticipate our first 510(k) submission for the BD Elience system and our first assay this fiscal year as well. Regarding Alaris, servicing our customers and bringing all Alaris pumps in the field up to the cleared standard remains our priority. Customer response has been very positive with strong momentum, engaging with customers. And while it is still early in the process, I'm pleased with our progress and as we recently shared, we now believe $200 million as the floor on revenue in fiscal '24. We are also executing well on our broad simplification strategy to drive margin expansion and a double-digit base EPS CAGR through FY '25. This includes accelerating adoption of our BD Excellence Operating System, which focuses on the application of lean principles to drive excellence everywhere, every day across our plants and business and is driving productivity gains across our operations. In FY '23, we held 18 week-long Kaizen events. And in Q1 FY '24 alone, we executed as many, a trajectory, which will continue through the rest of FY '24. We've deployed this mindset outside of our factories, driving greater efficiency through the organization at all levels. Our BD Excellence Operating System is an important new capability we're building to drive a world-class culture of continuous improvement and lean management throughout BD. We also progressed our Project Recode initiatives including our network optimization effort to drive plant efficiencies. We have multiple site consolidations either completed or underway to reduce our footprint by approximately 20%. The combination of BD Excellence with our recode network architecture program is supporting our FY '24 goals, contributing to our plan for 25% operating margins in FY '25. And also, now providing visibility for continued margin expansion beyond FY '25. We're also seeing our systematic focus on cash flow continuing to yield results. Through working capital efficiencies and our BD Excellence Operating System, driving more efficient CapEx spend, we delivered over $850 million in operating cash flows in Q1. This strong execution to start the year positions us well to deliver double-digit growth in free cash flows in FY '24 and positions us to capitalize on M&A opportunities in higher growth categories and opportunistically return cash to shareholders. Lastly, our teams around the world continue to make meaningful advancements on our ESG strategy. Just last week, we announced a collaboration with the Kenyan government to advance access to critical cancer diagnostics for women in Kenya through self-sampling, furthering our commitment to expanding health equity and access around the world. We see the power of the self-sampling model as applicable across other underserved markets, as well as in the U.S. In summary, I'm pleased with the progress we made in Q1 and the solid margin execution, which enables us to raise guidance for fiscal 2024. With the strong progress of our innovation pipeline and growing momentum from BD Excellence and our simplification programs, we believe we are well positioned to achieve our BD 2025 goals. 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, and good morning, everyone. As Tom noted, we executed well against our performance goals in Q1. Q1 revenue growth was largely as we expected, and I'm pleased to share we exceeded both our margin and earnings goals and delivered strong cash flow that positions us well to support our double-digit free cash flow growth goal. I'll now provide some insight into our revenue performance in the quarter. Additional detail can be found in today’s earnings announcement and presentation. Q1 revenue was $4.7 billion with organic growth of 2.4%, that was driven by high-single digit organic growth in BD Interventional and solid growth in BD Medical with China market dynamics playing out as expected, partially offset by a decline in BD Life Sciences, which was impacted by the comparison to the prior year respiratory season. As expected, China and respiratory were the primary drivers of Q1 revenue growth under indexing our full year goal. The respiratory season alone impacted total company growth by about 150 basis points. Regionally, organic growth was driven by the U.S., EMEA, and Latin America, partially offset by the expected decline in China. Total Q1 revenue growth of 1.6% reflects the divestiture of our surgical instruments platform. Turning to the segment performance. BD Medical revenue totaled $2.2 billion in the quarter, growing 2.4%, driven by growth and medication management solutions and pharmaceutical systems. Min-single digit growth in MMS was led by strong performance in dispensing, driven by innovations in our BD Pyxis portfolio that are improving nursing workflows and efficiencies. In our infusion business, we are pleased with our strong progress, bringing the BD Alaris Infusion System back to the market and continue to expect Alaris to ramp over the course of the year. Infusion also reflects strong demand for IV sets. Performance in Pharmacy Automation reflects the comparison to an outsized quarter in the prior year and the timing of planned capital installations. Growth of 3.4% in Pharmaceutical Systems was in line with our expectations and was led by strong double-digit growth in pre-filled devices for biologics and as expected was partially offset by customer inventory dynamics, including a slowdown in demand for anticoagulants. Growth in Medication Delivery Solutions was about flat and slightly ahead of our expectations. Our Vascular Access Management strategy continues to drive strong performance, particularly in Catheter Solutions. As expected, MDS growth was impacted by market dynamics in China, including volume-based procurement, which continues to play out within our expectations. BD Life Sciences revenue of $1.3 billion declined 2.5%, which reflects a decline in IDS as a result of a tough comparison in the respiratory season worth nearly 500 basis points. It was partially offset by strong growth in biosciences. Performance in IDS reflects the tough comparison in respiratory testing that was partially offset by high-single digit growth in our Microbiology platforms and double-digit growth in Molecular IVD assays on both our BD MAX and BD COR platforms. Biosciences grew 5.7% as expected despite a strong comparison in the prior year. BD Interventional revenues totaled $1.2 billion in the quarter, growing 4.7% and 8.4% organic, which excludes the impact of the surgical instruments divestiture. BDI organic growth was led by surgery and UCC. In surgery, double-digit organic growth was led by continued market adoption of our leading Phasix resorbable hernia products in our advanced repair and reconstruction portfolio and strong demand for our ChloraPrep infection prevention solution. High-single digit growth in urology was led by strong double-digit growth in our PureWick chronic incontinence solutions, with continued strong demand in both the acute care and home care settings. Mid-single digit growth in PI was in line with our expectations and reflects growth across the portfolio. It was partially offset by the expected timing of distributor orders. In our peripheral vascular disease platform, we continue to drive market penetration with our Rotarex Atherectomy System and our Venous portfolio. Performance in our oncology business was driven by growth in biopsy, including strong market acceptance of our recently launched BD Trek powered bone biopsy system. Now moving to our P&L. Adjusted gross margin of 51.1% and adjusted operating margin of 20.2% were ahead of our expectations due to good execution on our margin improvement goals across our portfolio of simplification initiatives and strong SSG&A expense leverage. R&D spend was in line with our expectations. In addition, as we previously shared, a discrete tax item that was contemplated in our full-year tax rate was realized in Q1. As a result of these items, we exceeded our Q1 operating income and our adjusted diluted EPS expectations, resulting in an EPS of $2.68. Regarding our cash and capital allocation, Q1 cash flows from operations totaled over $850 million. This reflects continued improvements around working capital, including good management of inventory levels, continued discipline around CapEx investments and leveraging our fixed asset base as a result of the benefit from our simplification programs and BD Excellence Operating System. We remain focused on free cash flow conversion and expect another step improvement in FY '24. As we execute against our BD 2025 strategy, we also remain well positioned to achieve our long-term cash conversion target of around 90%. Beyond our investments in growth, we returned $775 million in capital to shareholders, including dividends and $500 million in share repurchases. We ended Q1 with a cash balance of $1.2 billion and a net leverage ratio of 2.7 times. Moving to our updated guidance for fiscal '24. For your convenience, the detailed assumptions underlying our guidance can also be found in our presentation. Based on our Q1 performance, including the strong momentum in many parts of our business and the progression of our margin improvement initiatives, we raised the midpoint of our FY '24 organic revenue growth guidance, and raised our adjusted EPS guidance, increasing the midpoint by $0.09. The increase to adjusted EPS reflects Q1 operational outperformance and a small improvement in FX. As a result, we now expect to deliver organic revenue growth of 5.5% to 6.25%, which increases our midpoint to slightly above 5.8%. We now expect adjusted diluted EPS, including the impact of currency, to be in a range of $12.82 to $13.06, which reflects about $12.94 at the midpoint. Regarding foreign currency based on current spot rates, for illustrative purposes, currency has improved modestly and for the full year is now estimated to be a headwind of approximately 25 basis points to total company revenues and approximately 360 basis points to adjusted EPS growth on a full year basis. As you think about phasing over the balance of fiscal '24, the following are some considerations. First, we continue to expect organic sales growth to be higher than our full year range in the second half, partially driven by the expected ramp in Alaris along with the easing of prior year comparisons, such as China. Second, our updated guidance reflects an improved margin cadence over the balance of the year. Specific to Q2, adjusted gross margin is in line with our prior expectation and continues to reflect significant sequential improvement given the lessening impacts from inflation, prior year inventory reductions, and FX. We now expect Q2 adjusted operating margin to expand by 25 basis points to 50 basis points year-over-year, driven by our continued margin improvement efforts and continued leverage in SSG&A. Third, the discrete tax item realized in Q1 was largely a shift from Q2 and results from revised phasing of our full year effective tax rate. Based on this timing dynamic, we currently expect our Q2 tax rate to be nearly 17%. We expect strong operating performance to offset the tax phasing impact, and as a result, there are no changes to our expectations for Q2 adjusted earnings per share. Lastly, we remain confident in delivering about 50 basis points of adjusted operating margin improvement for the year. As a reminder, the first half inventory impact is transitory and behind us as we exit Q2. As FX and inflation moderate at a meaningful rate to the back half, coupled with a continuation of the first half margin improvement, we expect to deliver from our strong simplification portfolio, we can naturally achieve our second half margin goals. In summary, based on the strength of our portfolio and new innovation, we have clear line of sight to deliver our FY '24 revenue guide which at the midpoint is above our 5.5% plus target and results in a three year CAGR of nearly 7% growth. I'm pleased with the continued strong execution by our talented organization to start the year, which supported over delivering on our margin and operating income goals and increasing our earnings outlook. With a strong quarter of cash flow, we remain well positioned to deliver another year of double-digit free cash flow growth, which increases our capacity to support additional value creating opportunities including M&A. We remain well positioned to continue to deliver against our BD 2025 strategy and financial targets. With that, let's start the Q&A session. Operator, can you assemble our queue?

Operator, Operator

Thank you. Our first question will come from Rick Wise with Stifel. Please go ahead; your line is open.

Christopher DelOrefice, Executive Vice President and Chief Financial Officer

Good morning, Rick.

Rick Wise, Analyst

Tom, hi, Chris. You used the word confidence repeatedly, and just picking up on that, heading into the quarter, we know you were very clear about things like currency and the peso divestitures, the flu benefit, if you will, time shift, but the setup and your new guidance clearly says that the rest of the year, we're going to see accelerating organic growth second half, I think your language in the slide, above full year guide. Help us, maybe you could talk in a little more detail about the drivers of sales acceleration than the things that are most critical to creating that outlook that you're feeling confident about.

Tom Polen, Chairman, Chief Executive Officer and President

Yeah. Thanks for the question, Rick, and good to connect. So, as you said, Q1 played out as expected, total revenue growth was largely in line with our expectations, as you said, there were really two factors that we recognize were going to be playing out in Q1. One was the flu compare given the large kind of early timing last year that was about 150 basis points that we knew was going to happen and then value-based procurement in China. And those two factors played out actually exactly as we expected in China, in fact that we were watching that and we saw VOBP stay focused within MDS which was just our assumption. We had really strong growth in BDI within the quarter, double-digit, mid-teen growth, high-single digit growth in life sciences and so we saw that play out. China actually did a little bit better than budgeted in Q1 and so we feel good that that's going to continue to play out for the year. I think, as we also think about the back part of the year to your question, something else we are looking at as we started and gave guidance to begin, '24 was, of course, Alaris. We were really pleased to have Alaris back with new improvements. Our new 510(k), it's a big deal to be back servicing our customers fully. It's a great product and highly unique and so, of course, Q1 was really the first quarter with Alaris relaunched and our team backed it proactively upgrading and remediating our base and we wanted to get feedback and engagement. And it's been quite positive, and I think that part also, as we look ahead, that confidence in those early engagements and the progress we're making is what's led us to also comment that we're seeing now $200 million as the floor for the year. In the other aspects, as you think about the growth drivers that we've been talking about and we often call out six specific platforms, we saw a really great growth in PureWick this quarter. Pharm systems, we have signaled very clearly the anticoagulant topic that was going to create a slower compare or slower growth in Q1. We're seeing the underlying business there do really well. Biologics grew double-digits in the quarter. Flow playing out, strong demand for FACSDiscover, Molecular double-digit growth as you heard in the prepared remarks, Peripheral Vascular and Pharmacy Automation, those trends in the marketplace continue with strong outlooks for those businesses. So again, we saw very clearly the two factors that we knew were going to impact us in Q1 and they played out as expected. Chris, any other comments to add.

Christopher DelOrefice, Executive Vice President and Chief Financial Officer

I mean, just, sometimes, it's easier just play bigger picture right. I'm sure you're looking at our balance to go plans which we are very confident into Tom's point. We've expressed confidence in Alaris and establishing a floor now. I think the Alaris dynamic is important. If you look at the balance to go, it's about 7% revenue growth. Last two years, we delivered right around 7%. This year, actually, if you think about it, Alaris is going to cycle over medical necessity. It's not a significant contributor to growth in the first half despite seeing very strong progress, but what that does is it adds about a point to growth more in the second half, right? So, we see really good momentum there. So when you think of sort of Alaris adjusted, you're at six and we cycle over the China compare in Q4, which have declined as well. So, I think plans are intact, the strong underlying fundamentals in kind of these six key areas we keep pointing to, like, Tom mentioned in biologics are well positioned and feel good about the rest of the year.

Tom Polen, Chairman, Chief Executive Officer and President

Thanks for the question, Rick.

Rick Wise, Analyst

I would like to follow up on the EPS guidance of $0.07. Chris, if I'm calculating correctly, you operationally beat the EPS and have raised the midpoint for the full year by $0.09. Can you discuss your confidence in this increase in midpoint EPS? Additionally, could you elaborate on how margins, mix, or volume will contribute to achieving those EPS targets? Thank you.

Christopher DelOrefice, Executive Vice President and Chief Financial Officer

We were quite satisfied with the margin improvement and operating income in Q1, which was robust and surpassed our expectations. We effectively passed that along. Additionally, we managed to accelerate margin enhancement in Q2 by about 25 to 50 basis points, lessening risks for the latter half of the year. At the beginning of the year, we needed to address a few points. One significant factor was a temporary challenge from China. We faced a transitory issue with inventory that impacted us by 200 basis points in the first quarter. We also experienced significant foreign exchange effects during the quarter, all of which unfolded as anticipated. Our efforts in managing inflation dynamics and, more crucially, our margin improvement program yielded positive results. We've consistently advanced these initiatives over the past two years, successfully restoring margins to pre-pandemic levels with a 400 basis points improvement. As we analyze our margin progression for the year, with those transitory issues now behind us, the cost improvements made in Q1, combined with the expected moderation of high inflation in the latter half of the year, are promising. Initially, we indicated that inflation would be nearly double what we anticipated for the year, with 100 basis points of outsized inflation. That figure is expected to halve in Q2 and then decrease further in the latter half. Therefore, it is essential that we continue to execute our margin improvement strategies, which are quite robust. This has bolstered our confidence in the Q1 performance and our ongoing initiatives for the year.

Rick Wise, Analyst

Thanks, Chris.

Operator, Operator

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

Travis Steed, Analyst

Hi. Thanks for taking my question. I'll take the first question on revenue. Just curious if there's anything to call out in some of non-flu areas, pharm systems MMS. If you think kind of growth outlook, they are still on track with your expectations, and the decision to raise the revenue guidance. Just curious, what's giving you the confidence at this stage to go ahead and raise that revenue guidance at this point.

Tom Polen, Chairman, Chief Executive Officer and President

Yes, Travis. This is Tom. Thank you for the question. Good morning. Regarding our pharmaceutical systems, we saw the anticipated impact from one customer in anticoagulants, along with strong underlying growth, particularly with double-digit growth in biologics. The investments we've made are continuing to yield expected results, and we have sufficient capacity to meet customer demands while actively engaging in that market. As we consider our slight revenue increase, we feel confident in setting the Alaris floor to 200 for the year, based on our early interactions with customers. We believe this adjustment is prudent given our outlook in that area. Mike, do you have any additional comments?

Michael Garrison, President of the Medical Segment

In addition to the strong demand in biologics, we have been successful in securing development agreements for our future pipeline of molecules in this area, as well as our innovation portfolio around Hypak and Neopak, and the wearables portfolio with Libertas, which continues to progress well with more development agreements being established. We have characterized the pharm systems business as a high-single-digit grower since Investor Day, and we anticipate that trend to continue in 2024, despite any potential headwinds at the start of the year.

Travis Steed, Analyst

Great. And last question, Chris, just on margin in Q1 was a nice kind of core outperformance on margins in Q1, especially without the revenue upside. Just curious kind of go through what got better in Q1 on the margin side and confidence, and what gets better if you think about that 300 basis point step-up in margins from Q1 to Q2, just to give some confidence that that 300 basis point step-up sequentially is achievable?

Christopher DelOrefice, Executive Vice President and Chief Financial Officer

Yeah. Thanks, Travis. So, first of all, in the quarter, it wasn't one thing. I'd just say execution is kind of the theme here, organization is hyper focused consistent with what we've done is predominantly our cost improvement programs. We had some mix benefit as well which has been part of our strategy on portfolio as well. So, all of that, I would say, the headwinds kind of played out as expected and we over delivered through good focus, execution on our margin improvement initiatives. To your point, the Q1 step-up, the step-up from Q1 to Q2 about 300 basis points that we've signaled. If you think of it this way, again, we had two, what I would call, pretty transitory items in Q1. We have the outsized FX, coupled with the inventory reduction in absorption dynamic. Those two items alone as you head into Q2 are about 30%, so as we're 400 basis points. They're only about 30% of that value in Q2. So, you pick up momentum there, coupled with the fact that the outsized inflation, which was almost 2x, what we call, for the year in Q1. It starts moderating significantly almost in half in Q2 and then it further moderates by the back half of the year. So really, it's just cycling over those kind of one-time items, outsized inflation moderating back and us continuing to deliver what we already delivered in Q1. So, we're confident that that progression continues. With that, you naturally get the sequential step-up that we're driving towards. And again, feel good about our operating margin, which is why we improved our phasing increased Q2 and feel good about the line of sight we have to the back half of the year.

Travis Steed, Analyst

Super helpful. Thanks, Chris.

Operator, Operator

We'll take our next question from Vijay Kumar with Evercore ISI. Please go ahead. Your line is open.

Vijay Kumar, Analyst

Good morning, Tom, and thanks for taking my question. My first one, Tom, if I just look at Q1 organic 2.4 right? A lot of questions on, look utilization is strong. Why is this optically 2.4 well below medtech sort of trends we've seen so far. Can you help us bridge? I think you mentioned 150 basis points of respiratory, does that include COVID? I think you mentioned China. What was the China impact in Q1? I think you mentioned some timing elements, customer orders. What was that impact? And Alaris, it looks like it was not a contributor to growth, so maybe just help us draw bridge between the 2.4 and what it should have been without some of these underlying one-time items?

Tom Polen, Chairman, Chief Executive Officer and President

Yeah. Great question, Vijay. Maybe just those two items that we've referenced, from the start of our guide, flu and China. Those two combined, if you take those out, it's about 5% underlying growth, just excluding those two items. So, those are quite significant. If you look at procedure volumes, etc., you're seeing that flow through in the base business where those two items aren't, so as an example, if you look in Interventional, you'll see that very strong growth in surgery, right, double-digit growth, which is getting the benefit of procedure volume. We're seeing in UCC, 9% growth there as an example, solid in PI, a little bit of inventory timing there, but we're seeing those factors play out. Again I’d concentrate on those two topics, which again played out as we expected. The large flu compare just given the early timing last year in China, underlying was about five. Chris, do you have any comment?

Christopher DelOrefice, Executive Vice President and Chief Financial Officer

No. Just I mean on Alaris, Alaris played out as expected actually. Again, what we've highlighted is, it was going to be a journey as you think of the natural progression of engaging with customers and the natural kind of life cycle of then placement, revenue recognition, etc. We're actually very pleased with our progress there. And as a matter of fact, right, we declared the $200 million more of a floor that was part of what gave us confidence to increase the low end of the revenue guide. And so we're continuing to focus on executing there and that was as expected on the flip side, what it does is, in the back half of the year, gives you almost basically a full point of growth tailwind that will help, which so, when you look at the back half, think of that or kind of moderate the expectation that you're seeing around feeling like that growth is outsized versus the front half of the year. It's as expected with the ramp we were expecting on Alaris.

Tom Polen, Chairman, Chief Executive Officer and President

I will turn it over to Mike now. This is the first quarter since we relaunched Alaris, and our main focus is engaging customers and securing agreements for remediation and upgrades. These are the key metrics we concentrate on during the first quarter post-launch, as they indicate how revenue will develop in the latter half of the year, and we are optimistic about this.

Michael Garrison, President of the Medical Segment

That's correct. Just to remind everyone, last year we had the Certificate of Medical Necessity which involved our shipping process, but that is not the case anymore. Now, it's more like a stepping stone to get to our goals, with growth anticipated on top of that, which is what we're observing in the first quarter. We are essentially starting from scratch in terms of our sales process and gradually building it up. I'm actually quite optimistic about this. I'm pleased with how our manufacturing ramp-up has progressed, and everything is scaling up well. This allows us to provide products to our customers. The customer feedback indicates that Alaris is perceived almost as an entirely different system. It stands out in a new category with its combined infusion modalities, and it boasts the most advanced interoperability available, with 750 live sites—significantly more than any competitor. This different recognition is encouraging. We have also surpassed the expectations we initially set regarding our return to market and upgrading the fleet in the field. Although it's still early, the progress we've made instills confidence in our belief that 200 is the minimum.

Vijay Kumar, Analyst

That's helpful. Chris, could you briefly discuss the margins? They suggest a 300 basis point increase in the second half compared to your second quarter levels. I believe inflation played a role in this, but could you provide a similar breakdown of margins from 2023 to 2026 and in the second half?

Christopher DelOrefice, Executive Vice President and Chief Financial Officer

Yeah. Again, it's basically a continuation of Q2 when you move out of Q2, both FX, the inventory dynamic goes completely away, which is almost 75 basis points still in Q2, so right off the bat, you pick that up as you move through Q2. That's probably the biggest item FX continues to moderate. We have reasonable signals on FX, obviously can continue to move, but that moderates down. The other thing is outsized inflation moves from about 100 basis points, which is our full year average in Q2 that further moderates down significantly. And then again, if you just continue the cost improvement and margin improvement initiatives we already executed in Q1 throughout the year, it gets you to where we need to be from a margin standpoint.

Vijay Kumar, Analyst

Fantastic. Thanks, guys.

Christopher DelOrefice, Executive Vice President and Chief Financial Officer

Thanks, Vijay for the question.

Operator, Operator

We'll take our next question from Larry Biegelsen with Wells Fargo. Please go ahead. Your line is open.

Lawrence Biegelsen, Analyst

Good morning. Thanks for taking the question. Mike, why would medical growth in fiscal '24 be in line with the corporate average given the tailwinds in MMS and pharm systems, you just said you expect pharm systems to grow high-single digits in 2024, so what are the expectations for MMS and MDS this year. Last year, Medical was 90%, was above the corporate average.

Michael Garrison, President of the Medical Segment

The MDS business is showing strong momentum, although it is somewhat hindered by the VOBP impact in China, which we expected and have accounted for in our plans. In the U.S., we are experiencing solid growth, particularly in catheters, supported by recent product launches like Site-Rite 9, Nexiva, NearPort, and PIVO Pro. These innovations are appealing to customers as we work toward our One-Stick Hospital Stay vision. We are also monitoring the injection systems and hypodermic market, being aware of recent recalls and agency actions, and have increased our capacity to meet potential market demands in the U.S. From the MMS perspective, I see infusion becoming a growth contributor again with the return of Alaris, rather than being flat or a drag. We are also looking forward to the upcoming market release of our ex-U.S. infusion system, BD neXus. Our dispensing business is performing well, showing solid growth in both hospitals and alternate sites. The MedBank acquisition is experiencing double-digit growth and helping us expand in non-acute settings, which is promising. Additionally, pharmacy automation continues to resonate well, particularly with ROWA and Parata. It’s worth noting that last year’s Q4 for Parata was particularly strong, which makes this quarter a tough comparison. This was anticipated, as our installation ramp-up is more concentrated in the latter half of the year. Overall, this gives me confidence about the prospects for both MDS and MMS.

Larry Biegelsen, Analyst

That’s helpful. And Tom, China was down 5% in this quarter in Q1. Talk about what you're seeing there and your confidence. I think in the past, you said you expect China to be flat to up low-single digits this year. Thanks for taking the question.

Tom Polen, Chairman, Chief Executive Officer and President

Thank you, Larry. Our expectations remain the same. China's performance was essentially in line with our forecasts for the quarter, slightly exceeding our budget. We observed what we anticipated with VOBP, as Mike mentioned, particularly within MDS, and it has not expanded to other areas. Our outlook aligns with our previous projections. We also anticipated strong growth in BDI, which we've consistently seen over the past few years. In the first quarter, we achieved mid-teens growth in BDI and experienced solid growth in Life Sciences in China, with very high single-digit growth nearing double digits. The core business in China continues to thrive. We noted the onset of VOBP in the latter half of last year, and this will serve as a tailwind for us as we evaluate comparisons in China moving forward. Thank you for the question.

Christopher DelOrefice, Executive Vice President and Chief Financial Officer

Thank you.

Operator, Operator

We'll take our next question from Robbie Marcus with J.P. Morgan. Please go ahead. Your line is open.

Robbie Marcus, Analyst

Great. Thanks for taking the question. I wanted to ask, I know we're in fiscal '24 here, but wanted to look out to '25, and based on operating margin guidance, it implies about 100 basis points expansion next year to get to your long range plan target. So, I'm sure the answer is pretty similar to the '24 but how do we think about the implied about 100 basis points next year and your confidence in that?

Christopher DelOrefice, Executive Vice President and Chief Financial Officer

Yeah, Robbie. Thanks for the question. Actually, at J.P. Morgan, as you know, we outlined a strong plan outlining all of our margin improvement initiatives. I think gross margin is the next stage of accelerated focus for us and we already have a great pipeline of margin improvement initiatives there through Project Recode, right? We actually already completed our 20% goal SKU rationalization. We're actually going to go further there. The network architecture, Tom, highlighted in our prepared remarks the strong progress there with initiatives underway that reduced our network by 20%. As a matter of fact next year, the network architecture value we get out of that actually doubles going into '25, you're going to really start seeing the benefits of that. BD excellence is another one. We're getting great traction this year. It's part of the momentum we have in this year on margin that will continue into next year. You also have the Alaris dynamic. As that fully ramps up and scales, we'll get margin leverage there. So, all those things coupled with the continued strong growth profile of being able to consistently do 55 plus which we've been well above gives us strong confidence in 2025 and the 100 basis points, as a matter of fact, as we exit this year. Doing everything we did, we really should be well positioned to carry that kind of momentum into next year. It's premature to kind of make a formal commitment and manage all the puts and takes but certainly high confidence in the '25 and great momentum there.

Tom Polen, Chairman, Chief Executive Officer and President

Good morning, Robbie. To add to Chris's positive comments, as we launched BD 2025 in 2022, we set a four-year roadmap. By the end of 2024, we will be 75% through BD 2025. When you consider the margin target we've established for fiscal year 2024, we're at 80% of our margin goal. From a timing perspective, being 75% through BD 2025 and reaching 80% of our margin goal shows that we are on track, slightly ahead even. We're experiencing strong momentum in our programs, as evidenced this quarter. We've focused on getting Alaris back, applying our learnings across the company to build capabilities. We've optimized our portfolio for growth, resumed acquisitions that drive growth, and reallocated our R&D towards high-growth areas. Our portfolio simplification initiatives, starting with Recode, are on track and are already showing results. Since last year, we've also started developing capabilities for BD Excellence, our operating model aimed at enhancing lean capabilities across the company. Last year, many associates were engaged in BD Excellence, and this year we are accelerating that program following progress in the initial areas I mentioned. In fact, we completed as many Kaizens in the first quarter of this year as we did throughout last year, and this effort will continue to expand. We're seeing strong momentum that gives us visibility not just on our margin goal for 2025 but beyond, indicating further margin improvements in the future. Thank you for the question, Robbie.

Robbie Marcus, Analyst

Great. Really helpful. Just a quick follow-up. China VBP is a headwind you've talked about. How do we think about where that's hitting each of the business units and the size, just so we can kind of try to back out that headwind in our models? Thanks.

Tom Polen, Chairman, Chief Executive Officer and President

Hey, Robbie. It's almost all within MDS specifically. Essentially, it is all within MDS. That's where we see it, so.

Robbie Marcus, Analyst

Great. Thank you.

Operator, Operator

We'll take our next question from Patrick Wood with Morgan Stanley. Please go ahead. Your line is open.

Patrick Wood, Analyst

Amazing. Thank you. Two quick ones. I guess the first is Pharmacy Automation completely get the timing of year-end and that side of things, but just curious how you think things on orders, whether it's like order mix and kind of the outlook for the rest of the year based on what you're hearing from the customers right now from the order book?

Michael Garrison, President of the Medical Segment

Sure. I'll address that. In terms of pharmacy automation, we are quite optimistic. As I mentioned, we are facing a challenging comparison because Parata and their team were motivated to close out their fourth quarter strongly. They had already set up installations last year to finish strong, achieving a record quarter. So, this creates a bit of a tough comparison. However, our order book is looking promising, particularly in the Retail and Long-Term Care sectors. We also continue to utilize our Business Development Salesforce to engage with our acute-care customers about transforming pharmacy services with our Integrated Delivery Network clients. We anticipate this growth trend to continue throughout the year. Overall, we have characterized it as a low double-digit growth area, and that is what we are projecting and expecting for the remainder of the year.

Patrick Wood, Analyst

Brilliant. And then maybe quickly one either you, Tom or Dave. Elience, Molecular Point-of-Care is obviously a very fast-growing but very competitive market. Just curious how you're seeing that product fit in, the interplay between like high and low plex. Just curious how you're going to fit into that market? Thanks.

Tom Polen, Chairman, Chief Executive Officer and President

I turn that to Dave. Thanks for the question, Patrick.

Dave Hickey, President of the Life Sciences Segment

Thanks, Patrick, and for picking up on Elience. Just take a step back. If you look at the molecular dynamics overall, we have said that this is one of the sort of six growth drivers for BD, right? So, we continue and if you look at the divergence of the market, there is real thesis playing out in terms of the way customer evolution will happen, right? So you think about the centralization of high-volume molecular cervical cancer testing, we satisfy that with BD COR. You think about BD MAX in the acute setting, and we're seeing good, as you heard Tom say in the prepared remarks, good double-digit growth there. But clearly, there is decentralization of relevant testing to the point-of-care and these new care settings. And obviously, Elience will be our entry there in this sort of high, you know, single-digit market. If I think about it specifically on Elience, the way to think about it is, what is different about it? Our goal here will be that we would anticipate it to be CLIA-waived, giving critical results within less than 15 minutes but can be used in a wide variety of settings. What is the unmet need that it will actually address and deliberately, we've actually selected CT/GC as our first assay because when you look at all the CDC and NIH reports, there is an increasing burden of STI. So, it will increase access to testing. And I think about it now, if you're one of those unfortunate patients and you're in the clinic, you could get that result diagnosed and a potential treatment administered while you're in a clinic in a decentralized setting. So, deliberately, we think CT/GC is really the right assay to lead with. And then, of course, because of the capabilities and these less than 15 minute results, we see a strong roadmap behind it, you know, focused on respiratory assays, other STI assays, vaginitis, etc.

Tom Polen, Chairman, Chief Executive Officer and President

Yeah. That testing treat concept with 15 minutes or less time to result is a core component.

Operator, Operator

We'll take our next question from Patrick Miksic with Barclays. Please go ahead. Your line is open.

Matthew Miksic, Analyst

Good morning, Patrick. Sorry, Matthew. This is Matt. I have a few follow-up questions regarding some of the factors impacting Q1 that you mentioned last quarter. One area I wanted to touch on is the peso and wage situation. It seems like you are mostly through that process during Q2, so could you provide a quick update? Additionally, regarding the anti-coagulation business in China, I recall you expected that capacity would find a new home either this quarter or next. I would appreciate an update on that as well. Finally, I have one more follow-up if I may.

Christopher DelOrefice, Executive Vice President and Chief Financial Officer

Yeah. It's Chris. Thanks, Matt, for the question. Appreciate it. Yeah, when we started the year, we talked about kind of the inflationary dynamics and supply-chain. One of the biggest ones that we were still seeing play out through the year was wage dynamics in our supply-chain organization, that continues but it's playing out as expected. So, nothing new there. Regarding FX, good news is moderately favorable. We passed through both the revenue and earnings on that. So, stable at this point and moving in the right direction. We'll continue to watch it, and I think we're happy with the operational performance in passing through both the $0.07 operational beat and the $0.02 of FX.

Michael Garrison, President of the Medical Segment

For pharmaceutical systems, some capacity that has opened up for anti-coagulants is still being allocated, and while there has been some success, we made a strategic choice to assess the overall anticoagulant market as it returns to a post-COVID state. We are converting lines to biologics to enhance our capacity in that area, which is progressing well. We expect to recognize increased demand for biologics later this year, thanks to these line conversions. So, the situation with anticoagulants involves a bit of both factors.

Tom Polen, Chairman, Chief Executive Officer and President

Thanks for the question, Matt.

Matthew Miksic, Analyst

That's very helpful. I have a follow-up regarding cash flows and M&A. Last quarter, Chris, you mentioned several times that excess inventory was affecting margins, and you indicated that progress was made on leverage. Can you share what that looks like for the remainder of the year, the M&A outlook, and the potential size of deals we might expect in the next six to eighteen months? Thank you.

Christopher DelOrefice, Executive Vice President and Chief Financial Officer

Yeah. Thanks for the question, Matt. I appreciate you recognize. We've definitely been extremely focused on cash flow performance. I was really pleased with the quarter. There was really strong cash flow, strong double-digits, gives us confidence for the year. It played out in all the areas we've been trying to leverage. One, we're getting more efficient with our CapEx expenditures. Part of this is from a simplification efforts on BD Excellence that we're driving through our plans. In addition, you saw improvement in inventory and you saw improvement in our collection cycle as well. So, all really positive things. We sit basically at our net leverage target and so we're well positioned and consistently will remain disciplined as you think of M&A, but as you can imagine, we always have an active portfolio of things that we look at. We're going to remain disciplined. It's been a nice contributor organically to growth last year, delivering nearly 40 basis points. So, certainly something that we're going to continue to focus on as part of our growth strategy and more to come on that. Tom, I don't know if you want to add?

Tom Polen, Chairman, Chief Executive Officer and President

Extremely well said. Remains an active part of our growth strategy and I think as we've shared in the past, we've been focused on accretive growth, accretive margin acquisitions, which has been our track record and we've executed well against those over the last several years. I think we've clearly built a good track record of that. And so, we've got a strong healthy M&A, you know, active pipeline focused again in strategic areas where the market has significant structural or macro tailwinds to drive sustainable growth and where we can bring meaningful additional value either through our channel or global footprint, our manufacturing prowess. And again, we remain very disciplined on strong returns accretive growth. We haven't been doing dilutive deals that remains, right? Our emphasis is we're focused on delivering on our 25% operating margin goals. And but we're going to continue to focus on that and we have a strong pipeline. Thanks for the question.

Operator, Operator

And this time, I'll return the call to Tom for any closing comments.

Tom Polen, Chairman, Chief Executive Officer and President

Thank you all for joining our call. As you heard, we had good momentum to start the year and we look forward to sharing our progress towards delivering our BD 2025 goals and increased outlook for FY '24 on our next call in May. Thank you very much and have a great rest of the day.

Operator, Operator

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