Becton, Dickinson and Company (BDX)

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Becton, Dickinson and Company (BDX)

March 13, 2013 10:45 am ET

Executives

Suketu Upadhyay - Acting Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Controller

Analysts

Matthew Taylor - Barclays Capital, Research Division

Presentation

Matthew Taylor - Barclays Capital, Research Division

Thanks for joining us for this morning session. I'm Matt Taylor. I'm joined by Becton, Dickinson this morning. Really pleased to have Suky, the CFO, here with us, as well as Monique from Investor Relations.

So maybe I'll just kick it off, and you want to give us a few opening comments in terms of how you're looking at growth this year. You recently had a pretty good quarter, and you've seen an uptick in trends in a number of your businesses. So maybe it would be helpful to give some context in terms of how you started the year and how you've seen trends going through the year and what we should expect for the rest of the year.

Suketu Upadhyay

Yes, great. So I think, Matt, before I get into that, just a little bit of background on BD and sort of the sector and the industry and where it's come from the last 5 years and sort of how we're placed opposite that.

So if you look at overall med tech sort of P multiples over the -- going back to 2007 to 2012, you would have seen compression of about 1/3 across the overall sector. And if you ask yourself why, I think the reasons are pretty well understood: developed markets, lower utilization, pricing pressure, regulatory hurdles, lack of innovation, et cetera. Right? And BD suffered from that sort of end-market environment in developed markets, as well as most of our peer group. And the management team went through a deliberate approach about 2 to 3 years ago to say this is not an environment that we think structurally is going to change in the near future or improve.

So how do we build ourselves and construct ourselves to actually grow our way out of this, to generate and accelerate top line growth in very sort of difficult, challenging end markets, as well as improve overall profitability and quality of earnings? So after the last 2, 3 years, BD has made several significant investments into acquisitions, new product opportunities, geographic expansion, efficiency plays, et cetera.

And the idea, again, was how do you grow yourself out of this in the backdrop of challenging end markets? Well, the other thing that's part of this, we were very transparent with the investment community, with analysts, with investors. And we said over this 2- to 3-year period, we're not likely to grow margins or expand margins. And in fact, revenue will also be somewhat compressed. But stay with us, we have a growth story. We have an investment story. And during that period, we rewarded the shareholders by recapitalizing the firm, taking on more debt and returning that cash back to shareholders to help maintain overall shareholder return at the upper end of our peer group.

Well, we're now at the point and just starting the runway of leveraging the benefits of those investments through accelerated top line, as well as margin expansion. And I think you start to see that, especially in the first quarter of our fiscal year, where you're seeing core underlying growth start to accelerate. You're beginning to see margin expansion. You would have saw the matriculation of our pipeline last year with 10 new products, and these are products that are less about line expansions, more about innovation. You're going to continue to see that into '13 and '14. So again, we think we're right at the front end of that new growth trajectory and that new profitability profile.

Within the first quarter, as you said, we had a really nice first quarter, 5% on the top line, 5.2%. We saw earnings per share grow at about 15%, maybe closer to 16%, well above our overall full year guidance range. And overall, that gave us the confidence to lift the bottom end of our guidance range for the full year. But there were several onetime items or onetime benefits, which we knew about and planned for, for the full year, which manifested into the first quarter.

Now we continue to see that strength. We did see some good durable gains in certain parts of our businesses that were upside surprises. If we continue to see that into the second quarter and beyond, of course, we'll recalibrate our earnings. But we're very pleased with where the first quarter came in. I think it's more about -- more than just the first quarter though, and it's really sort of a proof point around that entire investment strategy that I talked about over the last 2, 3 years that, that's really playing out. And we're at the beginning part of that runway.

Question-and-Answer Session

Matthew Taylor - Barclays Capital, Research Division

Okay. That's a great backdrop. Maybe just as a jumping-off point from there. Can you talk about, of those different factors, which we should view as more onetime and which you think are more durable that will continue to drive growth?

Suketu Upadhyay

Sure. So the onetime gains that we saw, just starting with the revenue top line for a moment. So we had about 50 basis points of flu upside in the quarter. Now we expected that to be in the full year forecast in our guidance range, but flu typically impacts our second fiscal quarter or the first quarter of the calendar year. We actually saw an earlier flu season, which came a little bit earlier than we expected, so in the first quarter. Again, 50 basis points. You've all seen the CDC website and how flu is playing out, and it's primarily a U.S. phenomenon this year. And you've seen a pretty precipitous decline in the second quarter. So we think that the flu was -- the biggest impact we saw was in the first quarter, and we think that, that's pretty much where it is. The other thing that we saw in the first quarter is really if you look at comparables versus last year, we had a very easy comp, so that also helped. So those 2 factors I sort of say are onetime in nature. But again, we're very excited about some of the durable gains that we saw in the underlying growth in the first quarter that we will continue into the rest of '13 and into '14. If you just sort of break it down by business and then I'll go into geography, from a business perspective, diabetes care continues to be a very, very big growth driver for us, in the pen needle market, conversion from syringes to pen needles. It's an epidemic that impacts just about every major economy out there. It's, we think, a market that still has a lot of runway to go yet. So a big growth driver for us is in diabetes care. Some other big growth drivers that sort of we're a little bit stronger than we expected were around safety growth. So safety growth outside of the U.S., particularly in Western Europe, but even more importantly and what's growing of more relevance is our safety growth in emerging markets, which is in the high teens. So that was a little bit better than expected, and we expect that to continue on through the rest of the year. We also saw some upside in the first quarter around stabilization in the U.S. So in '11 and '12, we really suffered, and I think our competitive set as well suffered from, again, declining utilization, higher pricing erosion, et cetera. So while I don't think things are maybe improving, let's say, in the U.S., we do see things stabilizing. So that got a little bit better for us. So those are just some examples of some of those durable gains I talk about that I think are really going to help propel and accelerate our core growth going forward.

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