Becton Dickinson and Co

NYSE:BDX

Q4-2025 Earnings Call

[Operator]

Hello, and welcome to BD's Fourth Quarter and Full Year Fiscal 2025 Earnings Call. At the request of BD, today's call is being recorded and will be available for replay on BD's Investor Relations website, investors.bd.com or by phone at [phone] for domestic calls and area code [phone] for international calls. [Operator Instructions]

I will now turn the call over to Adam Reed, Vice President, Investor Relations.

[Unknown Executive]

Good morning, and welcome to BD's earnings call. I'm Adam Reed, Vice President of Investor Relations. Thank you for joining us. This call is being made available via audio webcast at bd.com. Earlier this morning, BD released its results for the fourth quarter and full year fiscal 2025. The press release and presentation can be accessed on the IR website at investors.bd.com. Leading today's call are Tom Polen, BD's Chairman, Chief Executive Officer and President; and Chris DelOrefice, Executive Vice President and Chief Financial Officer.

Before we get started, I want to remind you that we will be making forward-looking statements. You can read the disclaimer in our earnings release and the disclosures in our SEC filings on our Investor Relations website. Unless otherwise specified, all comparisons will be made on a year-on-year basis versus the relevant fiscal period. revenue percentage changes are on an adjusted FX neutral basis unless otherwise noted. Beginning October 1, we began operating under our previously disclosed new BD segment structure that includes medical Essentials, connected care, biopharma systems and Interventional and a fifth Life Sciences segment comprised of Biosciences and Diagnostic solutions. Reconciliations between GAAP and non-GAAP measures are included in the appendices of the earnings release and presentation.

With that, I am pleased to turn it over to Tom.

[Thomas Polen, executive]

Thank you, Adam, and good morning, everyone. As you saw in our press release, our Q4 and full year performance was in line with the preliminary results we announced last month. During our prepared remarks today, Chris and I will provide additional context on the drivers of our performance. I'll also provide an update on the immediate steps we are taking to accelerate our strategy as we transition into new BD, and I'll conclude with our fiscal '26 guidance and outlook on Q1, after which we'll take your questions.

With that, let's jump in. Q4 revenue of $5.9 billion increased 7% and 3.9% organic. New BD delivered strong organic growth of 4.9%, accelerating 90 basis points sequentially. For the full year, record revenue of $21.8 billion increased 7.7% and 2.9% organic. New BD grew 3.9% organic. We delivered adjusted diluted EPS of $3.96 for Q4 and a record $14.40 for the full year, which represents 9.6% earnings growth including a 2-point impact from tariffs. We also returned $2.2 billion to shareholders, inclusive of a $1 billion share buyback. Earlier this morning, we announced our 54th consecutive year of dividend increases.

During the quarter, we had a greater-than-anticipated impact in macro areas we've been closely monitoring, specifically farm systems vaccines and Biosciences academic and government research. Vaccines are approximately 20% of our farm systems business. While we plan for a slowdown in Q4, further reductions in demand evolved rapidly late in the quarter as most Q4 vaccine demand typically occurs in September and continues into Q1 and Q2. In our biosciences business, research funding remains subdued, but sales in the U.S. and EMEA continued to improve sequentially, led by strong demand for our new fax Discover platform.

In Diagnostic Solutions, the business returned to positive growth in the quarter as [ BD Bactec ] utilization continued to recover. Together, Biosciences and Diagnostic Solutions delivered flat growth for the quarter, excluding the impact of discontinued platforms. Outside of these 2 areas, we delivered strong growth across a broad range of the portfolio, demonstrating new BD's attractive profile with over 90% consumables revenue and a strong cadence of new innovation. This includes high single-digit growth in BD Interventional driven by double-digit growth in PureWick and advanced tissue regeneration.

We delivered double-digit pro forma growth in advanced patient monitoring, which in the first year of integration, performed well ahead of our deal model and is on track to continue this momentum in fiscal '26 and beyond. In Farm Systems, Biologics grew high single digits, driven by GLP-1s, and MMS had a record quarter for Alaris pump installations, including several new competitive wins, solidifying our leadership position now and for years to come as we complete our fleet upgrade in FY '26.

Our BD excellence operating model helped to drive strong P&L leverage throughout the year with adjusted gross margin up 140 basis points, fueling 80 basis points of adjusted operating margin expansion, while we invested in selling and innovation which will continue to be our engine for growth in the new BD. This supported robust 9.6% adjusted diluted EPS growth, inclusive of tariffs while we also delivered on our full year goal to reach a record 25% adjusted operating margin. While we are navigating specific transitory market dynamics that are expected to continue into fiscal 2026, we have strong business fundamentals, high confidence in our continued long-term mid-single-digit growth profile and a proven track record of delivering value through periods such as this.

We are acting with speed to optimize our performance during this time and emerge stronger. We've already begun implementing decisive actions to accelerate our strategy as we create the new BD with a focus on boldly advancing BD excellence across our commercial and innovation organizations while identifying cost optimization opportunities to reinforce our commitment to long-term profitable growth.

Let me highlight 3 specific initiatives underway. First, as part of accelerating our focus on commercial excellence, we're rearchitecting our operating model to build a more focused, agile vertical organization. This includes commercial teams directly aligned with each business unit to best support customer needs, drive share gains and accelerate growth. We're also taking immediate action to expand our sales force in targeted high-growth markets, investing an incremental $30 million to capitalize in areas that either are or have the potential to grow in the high single digits or double digits. These include opportunities such as the recent VA reimbursement for PureWick at home and new surgery innovations launching in Europe and a 15% increase in both the PI and APM sales forces.

Finally, we've announced that Mike Fell's role has been expanded to include the newly created position of Chief Revenue Officer. Michael will apply his expertise in BD excellence to accelerate our initiatives to become a best-in-class commercial organization to deliver incremental growth. Michael will remain President of Life Sciences until the close of the RMT with Waters. Second, over the last several years, we've built positions in multiple attractive markets and are investing to capture opportunities and new product innovation.

Going into FY '26, we've moved nearly $50 million of corporate costs into R&D and the businesses to fuel future innovation and growth in attractive high-growth markets, such as tissue regeneration, PureWick adjacent markets, biologic drug delivery and connected care. Additionally, we focused investments behind planned new product launches, including our recently launched [ BD NCADA AI-enabled ] platform that unifies BD device data into 1 intelligent ecosystem, and our next-generation BD Pyxis Pro medication dispensing platform as well as new planned launches in APM, MDS, UCC, surgery and MMS.

We are pleased we also recently received 510(k) clearance for HemoSphere Stream, our continuous noninvasive blood pressure monitoring module, an impressive clearance in less than 30 days paves the way for commercial launch in 2026. Third and finally, we initiated a 2-year $200 million cost-out program, proactively addressing stranded corporate costs with approximately half expected this year.

Before I turn it over to Chris to provide additional color on our performance. On behalf of the leadership team, I want to take a moment to thank Chris for his leadership, hard work and dedication to BD over the past 4 years. I'm confident the CFO transition ahead will be seamless and wish Chris well in his new endeavors.

With that, I'll turn it to Chris.

[Christopher DelOrefice, executive]

Thanks, Tom. Before I begin, I want to take a moment to thank the entire team at BD. It has been a privilege and a career highlight to serve as the CFO of this company and getting to work hand-in-hand with our talented and committed colleagues to advance the world of health. I am proud of the accomplishments we achieved together that enabled us to deliver against our BD 2025 strategy, including the meaningful work to advance the margin profile of BD while simultaneously transforming our portfolio that has us well positioned for the future. I look forward to partnering with [indiscernible] and my entire leadership team to ensure a seamless transition as BD enters its next phase of value creation.

Let's pivot to our performance results, starting with revenue. Organic growth was led by high single-digit growth in BD Interventional with strong performance across our growth platforms. This includes double-digit growth in UCC driven by PureWick and high single-digit growth in surgery led by our advanced tissue regeneration platform, including continued strong adoption of [ Phasix ] resorbable mesh. Growth in PI reflects strength across the oncology portfolio and [indiscernible].

In BD Medical, mid-single-digit organic growth was led by APM, which grew double digits on a pro forma basis with strong growth across all product lines. We feel really good about the momentum in APM continuing into FY '26, which will be further supported by significant sales force expansion currently underway. MDS also delivered a strong quarter with solid mid-single-digit growth in our Vascular Access Management portfolio. In MMS, we achieved a record sales quarter for our [ Alaris ] pump installations and we feel good about our strong backlog of committed contracts in dispensing.

Lastly, in Farm Systems, strong performance in Biologics continued with high single-digit growth driven by GLP-1s, this was offset by lower demand for vaccine products. In BD Life Sciences, GS returned a positive growth in the quarter with a greater than 300 basis point improvement in growth sequentially, driven by our molecular platforms and continued recovery in [ BD Back tech ] utilization, which exceeded 85% of historical levels in the U.S. In B2B, as Tom shared, research spending remains subdued, but sales continue to improve sequentially in the U.S. and EMEA led by demand of our new fax Discover platform. As a combined unit, and DS increased approximately low single digits on a reported basis and was approximately flat on a currency-neutral basis, excluding the impact of discontinued platforms. Rounding out the Life Sciences segment, solid growth in specimen management was driven by the BD Vacutainer portfolio, partially offset by China market dynamics.

Turning to the P&L. In Q4, as Tom shared, we continued strong execution down the P&L with momentum from BD excellence while investing in key growth areas. We delivered adjusted gross margin of 54.2% and adjusted operating margin of 25.8%, including an impact from tariffs of about 140 basis points. Adjusted diluted EPS of $3.96 grew 3.9%, including a 6-point tariff impact. For the full year, adjusted gross margin of 54.7% and adjusted operating margin of 25% increased by 140 and 80 basis points year-over-year, respectively, inclusive of absorbing about a 40 basis point impact from tariffs. We delivered adjusted diluted EPS of $14.40, which represents strong growth of 9.6%, including a 2-point tariff headwind.

We continue to execute against our cash flow and capital allocation strategy with fiscal '25 free cash flows of $2.7 billion. Underlying free cash flow was strong overall and in line with our long-term target and inclusive of Alaris remediation, tariffs and other discrete payments, free cash flow conversion was 64%. We ended the fiscal year with net leverage of 2.8x and made progress towards our net leverage target of 2.5x.

With that, I'll turn it back to Tom.

[Thomas Polen, executive]

Thanks, Chris. As we look ahead, we remain focused on executing the Waters transaction. The combination of our Biosciences and Diagnostic Systems business with Waters continues to be a significant strategic and financial opportunity to unlock value for our investors. Our teams are partnering exceptionally well to set up a successful combination and momentum for the new company. Last month, we received FTC clearance and remain on track to close around the end of the first quarter of calendar year 2026, subject to obtaining required regulatory approvals and customary closing conditions.

We've begun executing our new BD strategy and the work we've done since establishing BD 2025 has set the foundation for the long-term sustainable success of the new BD. During this period of strategic progress, we delivered $5.4 billion of organic growth, the most substantive period of organic growth in BD's history. We created multiple new growth platforms achieved best-in-class adjusted gross and operating margin expansion near the top of our peer group and increased adjusted operating margin to 25% in FY '25, a record level for BD with more room ahead.

We see a clear opportunity to drive further commercial momentum. New BD will be a pure-play med tech company with a deep innovation pipeline in attractive markets and a best-in-class consumables revenue profile of over 90%. Our growth strategy is supported by BD Excellence, a differentiated capability we've created that is driving gross margin improvement operating effectiveness, cash generation and fueling reinvestment in innovation and commercial capabilities.

To give some color on the benefits we're seeing, in fiscal 2025, consumables quality hit record highs with a 50% reduction in manufacturing nonconformances. Further, we delivered world-class gross productivity improvements of over 8% in our plants this past year. These productivity gains enabled more production with less CapEx and achieving the lowest CapEx to revenue ratio in over a decade. We expect momentum to continue in FY '26. We also plan to deliver an enhanced capital allocation strategy that prioritizes internal investment, share repurchases and a reliable and increasing dividend with focused tuck-in M&A in targeted high-growth markets. all with the focus on steadily increasing ROIC.

We expect to significantly improve free cash flow conversion, excluding onetime impacts resulting from the Waters transaction, including OUS tax payments. We continue to see share repurchases as a value-creating opportunity given our view of the intrinsic value of BD. We plan to execute another $250 million share buyback this quarter in addition to it using at least half of the $4 billion in cash proceeds from the Waters transaction following the closing with the balance for debt repayment.

In summary, we see new BD delivering consistent mid-single-digit revenue growth over the long term with margin expansion driven primarily by gross margin fueled by our BD Excellence business system.

Moving to our fiscal '26 guide. I'll start with our guidance for [ holdco BD ] and then provide color on our expectations for new BD post the Waters transaction. We're taking a prudent and transparent approach with our guidance framework. This includes low single-digit revenue growth as our starting point for the year and includes the following assumptions: First, regarding Aleris capital installations. fiscal '26 is the last year of our 3-year remediation commitment. We expect sales to remain strong and above our historical run rate. However, compared to FY '25's record install levels, this creates a headwind to growth of over 100 basis points.

Second, we expect China to decline in the mid-teens. As government policies, including volume-based procurement continue, which will impact growth by about 100 basis points. Our assumptions include China VBP reaching 80% coverage of our portfolio by the end of FY '26. Third, we are assuming reductions in vaccination rates will continue to drive conservative ordering patterns in farm systems vaccines. As we've said, vaccines are about 20% of Farm Systems revenue and our guidance assumes a decline of approximately 25%, which is an impact to growth of about 50 basis points.

Excluding vaccines, we expect farm systems to grow mid- to high single digits. [indiscernible] The combined headwinds from these 3 factors impacts about 10% of BD revenue. Across the remaining 90% of the portfolio, we expect to drive mid-single-digit growth, including continued strength across our BDI, Connected Care and Medical Essentials portfolios fueled by commercial investments and our strong innovation pipeline. We're confident in delivering overall mid-single-digit growth over the long term as these dynamics exit, and we continue to advance our strong core business fundamentals. Based on current spot rates, currency is estimated to be a tailwind to revenue of about 90 basis points.

Moving down the P&L. We expect continued strong adjusted operating margin consistent with FY '25 of about 25%. This includes absorbing an incremental $185 million or 80 basis points year-over-year headwind from tariffs, in line with what we've previously communicated. Excluding tariffs, the primary driver of margin expansion is expected to continue to come from gross margin, powered by BD excellence along with some leverage in shipping and G&A. For tax, we expect our adjusted effective tax rate to be between 14% and 15%. Given these considerations, we are setting our initial adjusted diluted EPS guidance in a range of $14.75 and to $15.05.

Excluding the year-over-year tariff headwind, we expect EPS growth at the midpoint to be high single digits, which is the right way to think about our business longer term. As you think about fiscal 2026 phasing, we expect Q1 revenue to be down low single digits due to the items we covered. This includes a tough year-over-year comparison Biosciences, which also reflects prior year licensing revenue dynamics before we move to easier comparison periods beginning in Q2 and order timing in our Medical essentials portfolio. We expect Q1 adjusted diluted EPS to be in the range of $2.75 to $2.85, inclusive of tariffs, which we anticipate will be most prominent in Q1 and continue through Q3, and about a 5-point headwind to the tax rate due to a prior year comparison.

I'll now provide some context for how to think about new BD for the full fiscal year following the deal closing, which is expected to be around the end of the first quarter of calendar year 2026, subject to obtaining required regulatory approvals and customary closing conditions. We expect New BD's FY '26 revenue growth and margin profiles to be similar to HoldCo. This includes BDB and DS revenue and operating income moving to Waters along with conveyed costs. and a half a year of TSA income. Below operating income on a pro forma basis, we expect NewCo's tax rate will be about 200 basis points higher, driven largely by mix. Collectively, including the use of the cash distribution proceeds associated with the transaction and a higher tax profile, based upon projected close timing, we expected new BD pro forma adjusted EPS growth to be over 200 basis points higher than HoldCo.

In summary, as we close out fiscal 2025, we are excited to start the next chapter of BD. As we navigate transitory headwinds in contained areas, our broader portfolio is doing well, and we are actively investing in high-growth, high-margin areas. Combined with actions underway to unlock the untapped commercial potential in the new BD portfolio and reallocate resources, we are building the mechanisms to emerge stronger. We are confident in our long-term mid-single-digit growth profile and our ability to outperform our served markets. With the upcoming combination of biosciences and diagnostic solutions with Waters as a near-term catalyst, and an attractive capital allocation strategy, we are well positioned to deliver value for our shareholders, both in the near and long term.

With that, let's start the Q&A session. Operator, can you please assemble our queue.

[Operator]

[Operator Instructions] Our first question will come from Travis Steed with Bank of America.

[Travis Steed, analyst]

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

[Thomas Polen, executive]

Travis, thank you for the question. Yes. I think you -- as you just described, what we want to make sure we're doing is clearing the table on the macro dynamics and taking a prudent approach to our guide framework as we launch into the new BD. And so what you're seeing is we're incorporating our updated view on the operating environment, including a sharper view on certain areas of the portfolio, particularly vaccines as we've seen vaccine patterns, as I outlined on the call. Obviously, the Aleris -- success of Aleris over the last year and how we've been running ahead of performance there, and that just creates a natural headwind as we go into '26, still a very strong year in '26, a year that we expect continued share gains built into that plan as well. but a natural lapping of the success of being ahead of the -- of our commitment to the FDA on remediation.

And then, obviously, China, we've built in a prudent approach to China and what we've seen in terms of VBP. And so what we haven't done is we haven't built any improvements in the macro environment into our outlook. We think that's, again, the most prudent thing to do. If things improve, that could be an opportunity. But again, we think it's really important to clear the table on those macro dynamics, have them built into our plan in a very prudent way as we start and launch the new BD.

And as you said, we have a very strong track record on continued margin expansion. BD excellence, you saw this past year has very strong momentum. We're continuing that momentum into FY '26. You saw the margin expansion in '25, you're continuing to see that strong margin expansion underlying in '26, fully offsetting tariffs. And that flows through, right, EPS performance is driven largely by the continued gross margin expansion from BD excellence.

[Travis Steed, analyst]

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

[Thomas Polen, executive]

Yes, sure. Good question. So as we think about, obviously, the factors that I described, Aleris vaccines, China we're building those into Q1. Q1 guide reflects the full year -- those full year headwinds as well as the BDB comp and Med Essentials timing that we talked about. And some of the areas, particularly vaccines their greatest weighting is in Q1. So you have a disproportionate impact of vaccines in the quarter. I think we then expect growth as a step up in Q2 and Q3, which will likely be our strongest quarters in the year. And so I think very unique this year is the phasing doesn't rely on any back half for ROIC, right? We're not assuming that at the end of the year. And we're not assuming macro relief in the base either as we describe that. So we're confident in the step-ups.

We also see comps easing in Q2 and Q3. And as well as we continue to drive the continued strong momentum in areas like APM, advanced tissue regeneration, PureWick dispensing biologics, right, that 90% of the portfolio that we still see continuing to grow strong mid-single digits and that you heard us announce some incremental selling investments behind those areas of both high growth but also higher margin areas, which fuels our strategy as well. So thanks for the question, Travis.

[Operator]

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

[Patrick Wood, analyst]

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

[Christopher DelOrefice, executive]

Patrick, it's Chris. Thanks for the question. Look, what we've said is we're going to continue to focus on cash generation. And as we generate cash above our plan, we're going to be in the market based on what we see as the intrinsic value of the stock and be aggressive with share buybacks. Thus, the incremental $250 million. It's important to note that we're trying to be disciplined around kind of a net leverage ratio. We did show progress through the year. We went from 3x down to 2.8x. And I think importantly, the Waters transaction here is a huge value creation unlock. And as you know, there's $4 billion of proceeds there, of which we said at least half of those will go to the share buybacks, that actually creates an opportunity post spin, where you're going to see our earnings profile increase in terms of the growth rate by over 200 basis points.

I think importantly, the value that BD shareholders will get on the earnings that moves to Waters as part of the spin is coming at a significant premium multiple, almost 2x where it's trading at BDX approaching 20x. And then I think importantly, when you look at kind of new BD and the EPS, it would imply a trading multiple of about 10x against an extremely attractive financial profile when you think of the leadership positions we have, a mid-20% margin profile an earnings profile that's going to be high single digits, right? We're having the impact of tariffs this year. If you extract that, our guide implies high single digits, plus it's going to improve by 200 basis points, strong cash generation. So we're definitely going to be in the market with those cash proceeds and see this as a significant value creation opportunity.

[Thomas Polen, executive]

Patrick, maybe just to add on to Chris' good -- very good comments there is, as you said, we see the intrinsic value of the company significantly higher than as trading today and a real value disconnect, which is why we also announced the incremental $250 million buyback effective essentially immediately early this quarter. And we'll continue to obviously, as we close the transaction. execute at least half of the $4 billion into a share buyback, which will by itself then accelerate, as I mentioned on the call, at least 200 basis points higher EPS growth for new BD because of that than the initial guide for HoldCo.

I think just maybe to give a little bit more color on what Chris shared. If you look at -- we're really pleased with the transaction with Waters. Both teams are working phenomenally well together. As I shared, we just got FTC clearance on the transaction. We're moving forward to our time line. And the pace and progress of the separation and integration is certainly very much on track. If you look at the current water share price and obviously our percent ownership in the transaction, that translates to about $50 per BD share that's embedded in our current share price.

And so obviously, what that means is that if you take that $50 of value that's just for that part of the business that embedded in our price, the remaining piece then is trading at a 10x multiple. And obviously, as you think about the new BD, we have a presence in a wide range of attractive markets there's 10% of the portfolio that's going through some cyclical dynamics that we made very clear they're contained dynamics. The other 90% of the portfolio is continuing to grow solid mid-single digits.

We're #1 in 90% of the markets we play in. mid- to high 20s margins, mid-20s today going, we see continued expansion going forward and a strong recurring cash flow profile with a shareholder-friendly capital allocation policy. And we don't see that as a profile of a 10x stock. Which is, to your point, why we're buying in with now in Q1, and we'll continue to do so, obviously, as cash proceeds come in, and it's an area that we've prioritized our capital allocation strategy for. So we certainly see from a BDX shareholder perspective, you've got new BD EPS, there's buyback accretion. There's some interest benefits. You've got the Waters ownership being very accretive, all while providing improving strategic clarity, capital allocation and a long-term value creation setup for our shareholders. So we appreciate the question and happy to provide additional color.

[Operator]

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

[Larry Biegelsen, analyst]

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

[Thomas Polen, executive]

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

[Larry Biegelsen, analyst]

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

[Thomas Polen, executive]

Thank you, Larry. Really, really good question. And as I just described a little bit as part of Patrick's response, we're really excited about the new BD as a focused Medtech leader, again, with presence in a wide range of very attractive markets that you're seeing us lean into heavily in an up-tempo way, taking actions around our commercial excellence to really drive optimal performance in areas. We're putting additional sales force investments behind those, and we're doubling down, reallocating costs within our cost structure from corporate into the businesses into R&D, into fast-growing, high-margin spaces, areas like urinary incontinence, adjacent spaces to that connected care areas, tissue reconstruction, biologic drug delivery, all markets that are attractive and that we also have leading positions in.

And we do see -- we're very confident. I think we said that 10 times on the call, we remain very confident in our long-term mid-single-digit growth profile. We're delivering that in 90% of the business even in the near term. We have again, a portion of the business in a contained way that is going through dynamics, some of which are a result of our own success, Aleris. And we're continuing to increase our free cash flow conversion, as Chris shared in his remarks.

And so we think that profile, as you mentioned is -- there's a really unique opportunity within the Medtech industry to take that profile and translate it into a continual compounder, utilizing that cash generation to continue to buy back shares, create compounding earnings growth take on top of all of that, our BD Excellence business system, which you've seen us build over the last several years.

And you've seen us start doing things that are setting records for the company, right? Record productivity, best-in-class productivity, not just in our industry but across most all industries at 8%. You're seeing us hit strides in our capital -- use of capital and getting more out of those investments. Again, we hit a more than 10-year high capital as a percentage of revenue this past year. You're seeing safety at a record level. You're seeing quality at a record level. You're seeing our service levels at a record level, all because of BD excellence. And we think we're still in early innings there [indiscernible] from a margin expansion opportunity, which fuels that profile. So as you mentioned, we think we have a very prudent, thoughtful approach to value creation going forward that fits really well with who is -- from a portfolio perspective, what that means from a margin and cash flow generation perspective and how we create maximum value in a steady, durable way for our shareholders.

[Operator]

Our next question comes from Robbie Marcus with JPMorgan.

[Robert Marcus, analyst]

Tom, I'd love to hear your update good luck. Tom, I'd love to hear your update on the new BD love to hear your updated thoughts on the new BD strategy were there any quarters that it really benefited -- and I remember $400 million to $450 million is the normal run rate. So -- is that still a good normalized run rate now that the installed base has pretty much been upgraded after the relaunch. And then I have a follow-up.

[Christopher DelOrefice, executive]

Yes, Robbie, it's Chris. Yes, thanks for the question. I guess as you think of 26, right, versus 2025, so 2 comments. One, as you think of how we relaunched Aleris, which has been extremely successful, right, when you look at this and it's given us the opportunity to not only lock up and enhance leadership position in the market, really proud of the team there. the relaunch really started progressing through '25, right? The beginning -- the front end of $25 million has the more difficult growth comp when you think of the contribution versus 24, and then it moderates as you go back through the end of '25. So actually, that's part of the Q1 dynamic. Aleris is actually the -- one of the highest comps that we're cycling over in terms of contribution to growth in '26 because it was a favorable comp in '25.

From a full year standpoint, I think just think of what we shared on the call around '26 is about a 100 basis point headwind heading into '26, that's kind of largely what played out in '25. With that said, as you think of Aleris' contribution to performance in '25, all the other market headwinds that we had experienced in '25 were actually slightly above the total benefits we got from Aleris. So hopefully, that helps give you some color as you think of one, Q1 and 26 being the hardest comp with Aleris in terms of contribution of growth and then the full year impact.

[Thomas Polen, executive]

Yes. And Robbie, maybe let me give you a little bit of color on how we think about it going forward. So first off, as we shared, we're really pleased with how the team has executed. They've done an outstanding job remediating ahead of commitment, right, on a massive scale. We've locked in our installed base and leadership for many years to come, and that's really allowing us to pivot heavily to share gains and growth opportunities, not only in Aleris, which, of course, as the market leader, the remaining market is smaller, but we're going to be very focused on share gains there as well as driving -- using our sales team in MMS to drive growth in additional areas of the portfolio. And we've got the perfect timing with the launch of Pyxis Pro. Obviously, we've got pharmacy automation there, a number of new launches, including Incada that they'll be able to pivot focus to.

And now with that success of refreshing our fleet, we will see that, of course, we've got the '26 headwind of about 100 basis points. And then for modeling purposes, as you think about beyond FY '26 given that will be the last year of remediation, and you'll see the comps then roll after, that would lead to about a 200 basis point headwind for Aleris in a sequential year. And then what happens is longer term then, you're now at a normalized run rate, and the fleet replacement cycle will turn into a tailwind again essentially as you move into the 2030s. And the fleet that we've just installed in the marketplace starts hitting that 8-year or so replacement cycle again, and we see it then more normalizing thereafter.

[Robert Marcus, analyst]

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

[Christopher DelOrefice, executive]

Yes. Thanks, Robbie. I appreciate that. Look, this is the power of BD excellence, right? I mean we just executed FY '25. We had 140 basis points improvement in gross margin, 80 basis points on operating margin. That included absorbing 40 basis points of tariffs. So this is what exactly we said would happen, it started at the end of '24 into '25. Importantly, that becomes an opportunity for us to compound earnings at an attractive rate, right? We almost delivered double-digit growth in '25, despite the absorbing the tariff impact, which was 2 points but most importantly, reinvest back in the business, right, and drive incremental investment in selling most notably, which we did delever in the back half of '25. You saw that.

So as you think of '26, we're basically going to have 3 quarters of the year with a tariff impact in there. Despite that, we are still going to be about flat it implies basically an 80 basis point improvement in operating margin. The significant majority of that is going to play out exactly the same way. It's coming from gross margin. And we're doing the same thing. We're going to invest. We're starting these investments, building on what we did in Q4. You're going to see selling deleverage in the first quarter, most notably and slowly moderate throughout the year as we cycle the investments we put in Q4.

We will get a little bit of leverage in G&A and shipping is something that we consistently strive for with the incremental cost-out program that we announced as well, that will start in the front end of the year. But as we build through the year, that will become more prominent as we move through the back half of the year. So I do think you can look at this as a very attractive profile. The power of BD excellence reinvesting back of the business. If you look at the midpoint of our EPS growth rate of our guide and take the 3.5 point plus tariff impact, the midpoint is basically high single digits, right, just about 7%.

And so even as you think of 27, as we shared in the script, right, high single digit is the profile of earnings you should think about. And so we think this is one of the exciting things. It goes back to Tom's point around a great opportunity to invest in a company that can compound earnings despite macro environment.

[Operator]

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

[Frederick Wise, analyst]

Chris, I was reflecting, listen to you, Tom, just -- gosh, I think I've covered Becton now maybe 30 years. I mean, Becton has always done an amazing job on consistently reducing costs and you talked about the $200 million this year. But I'm more fascinated and hoping to dig in further on the 3 major initiatives, operating model change in the commercial team alignment or realignment, the targeted sales team focus, [ Mike Bell's ] new role. I was hoping you could expand on your comments and beyond just the cost reduction stuff, I mean these seem like meaningful moves and maybe with longer-term implications.

Talk about the impact, if you would, for [indiscernible] a whole when do we start to see the benefits of these initiatives. And maybe talk us through the implications if there are by -- for divisional growth or margins. Just if you could dig into all of that then do you feel like I'm characterizing it right here?

[Thomas Polen, executive]

I do, Rick, and thanks for the question. Yes, I'd love to share a little bit more about those. And as I said, we're really focusing on up temping and leaning in heavily to the launch of new BD and capitalizing on the opportunities that we have there. So first, we're starting with a really strong foundation, having built multiple growth platforms and creating and embedding BD excellence over the last several years in our operations as we executed our 2025 strategy. We want to take that excellence and that performance that you're seeing happen in our operations. We want to take that now into commercial and into innovation, right? We want excellence everywhere, every day, and that includes right, not only in our delivery side within our operations, but within our commercial side and our innovation agenda. And you're seeing us take action against that.

And so as we think about the new BD post the waters close, as I said, we're really up temping the new BD, moving at a pace and taking actions to accelerate that strategy. and reinforce our commitment to delivering long-term profitable growth. So building off of BD excellence momentum and the success in operations, as I said, we're extending that core competency to the commercial side. That starts with expanding Mike Fell's role as we get to the close of the Waters transaction as he takes on the role of Chief Revenue Officer. First time we have had that role in the company. Mike brings deep domain expertise in Kaizen, in lean, in BD excellence where we'll be using that and applying it to the commercial organization. to accelerate our initiatives there.

And taking what is a good organization today, you don't get to market leadership in 90% of your markets without being good commercially. But we think there's another level of world-class that we're going to be driving for just like we've done to build true world-class performance within our operations side. And so having a single point of responsibility and Mike, he's going to be working with our segments and our businesses, advancing commercial rigor and pace arming our teams with the latest tools and analytics. There's a lot of great technology to apply to drive that next level of world-class performance today and rearchitecting our commercial operating model moving sales direct line into the businesses like we talked about.

We also talked about we're putting increased dollars, about $30 million more than the normal run rate behind selling in very specific targeted high-growth markets. They happen to be high-margin markets as well. And I shared some examples there. Markets like PI APM, which is tracking well ahead of our deal model in '25. It delivered well ahead of our deal model. We continue to deliver well ahead of the deal model in '26. We're doubling down there, 15% increase in their sales force 15% increase in the PI sales force, and we're putting more money behind it. We got a great win with the VA, the Veterans Administration now, fully reimbursing PureWick at home, the first big contract that we have with full at-home reimbursement, we're putting sales forces behind that to help make -- help veterans access that technology.

We've got some great new launches in surgery happening in Europe. We're putting investments behind those, doubling down to accelerate already strong high single-digit, double-digit growth areas of momentum. And then we constantly, as you said, look at our cost structure and say, are all the -- are we spending in the ways that give us the best return? And so we -- we went through that look and we said we're going to move $50 million of corporate costs into the businesses to further fund innovation in some of the really exciting areas that we have. In some cases, that's investing behind launches like Pyxis Pro or our PureWick portable or Hemosphere stream or others or in other situations and the majority of that money is going into the next phase of innovations.

We see attractive spaces adjacent to PureWick that we want to capitalize on and create the next PureWick. We see opportunities to expand in tissue regeneration. We're having great growth in biologic drug delivery. It's now more than half of farm systems. We want to continue that innovation leadership in that category and double down on some innovation opportunities there. And with Belal now on board, we've actually rotated all of our software development from the corporate team under [indiscernible], and he's got a whole series of innovations that he wants to really invest behind that we're excited by.

So like most R&D investments, those will take a couple of years to bring new products to market. I think we'll see the commercial investments certainly start paying off within this year, starting to see some benefits of that. And scaling up into the next years. But I think what we're really focused on is balancing looking through a microscope to drive the quarter and the year in the very near term, we talked about some of those accelerated actions we're taking on the commercial side to do that. But we're also keeping our eye on the telescope to ensure that we emerge stronger from this near-term environment that we're navigating and drive a durable growth profile, it's led by commercial excellence, led by innovation to make sure that, again, we deliver a strong, durable long-term profile that we've talked about here on the call today.

[Frederick Wise, analyst]

That's a great answer. I'll just say a quick follow-up more quickly. Just when you -- Chris highlighted the or I think you did the 25% operating margin targets. And you're not that far away. You said, "I think there's more room ahead" just maybe expand on your thinking there. I mean what are you dreaming longer term over the next, whatever, 3 to 5 years?

[Thomas Polen, executive]

Yes, thanks for the question. We won't certainly put out the number that we're heading towards on operating margin. But maybe some of the color I could share is we are at 25% or we ended 25%, just in line with our Analyst Day commitment that we made in 2021, we're really pleased to have delivered on that 25% by the end of '25 commitment. And that includes jumping over a kind of a last-minute 40 basis point headwind from tariffs and still delivering on that. And so great work by our team in that and BD Excellence had a really important role to play there. BD excellence is going to continue to be a major driver of our margin expansion strategy.

As we think about OP margin expansion, we do see room ahead, and we see that continuing to be driven by gross margin expansion. BD excellence and the investments that we're making in our manufacturing network consolidation and our operational excellence and productivity improvements will continue to fuel that. but also our innovation pipeline and the markets that we're investing in. And it's not the accent, you're hearing me talk about investing in higher growth and higher margin spaces, both in where we're putting additional channel resources, but also where we're putting additional R&D dollars.

So we see mix as having an important role as we think about margin progression continuing to go forward. And we see that as a real opportunity from a gross margin perspective. If we look at us versus peer groups, our portfolio in general has a lower gross margin profile. We have an extremely efficient cost base. But we see opportunities to continue to grow that gross margin line. We've been doing it the last 2 years. We see good runway ahead there. So really appreciate the question.

[Operator]

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

[Thomas Polen, executive]

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

[Operator]

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