Becton, Dickinson and Company - Shareholder/Analyst Call

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Becton, Dickinson and Company (NYSE:BDX) January 31, 2012 1:00 PM ET


Edward J. Ludwig - Executive Chairman and Chairman of Executive Committee

Gary M. DeFazio - Vice President and Corporate Secretary

Vincent A. Forlenza - Chief Executive Officer, President and Director

Edward J. Ludwig

So good afternoon, ladies and gentlemen. It's now 1:00 p.m. The 2012 Annual Meeting of Shareholders of Becton, Dickinson and Company is called to order.

And I'm Ed Ludwig, Chairman of the Board of BD, and I'm pleased to welcome you on behalf of our directors and officers.

To my right, I would like to introduce Vincent Forlenza who's our Chief Executive Officer and President and member of our Board of Directors; Gary DeFazio, to his side, Vice President and Corporate Secretary; Carlo Ciampaglia and Donna Bent of Computershare Trust Company, our Inspectors of Elections, are also here.

I'd next like to introduce the other members of our Board of Directors. Biographical information for each director appears in our proxy statement. So the directors here are: Basil Anderson -- and I'll ask you to just stand briefly. And Basil Anderson, Henry Becton, Jr., Edward DeGraan, Dr. Claire Fraser-Liggett, Christopher Jones, Marshall Larsen, Dr. Adel Mahmoud, Gary Mecklenburg, Willard Overlock Jr., James Orr, Bertram Scott and Dr. Alfred Sommer.

Finally, I would like to acknowledge Cathy Minehan who is leaving the board effective with this annual meeting. Cathy joined our board in 2007, and we extend to her our best wishes and thanks for her many contributions during her 4 years of service.

I will also like to introduce the executive officers of BD who are here today. First is David Elkins who's our Executive Vice President and Chief Financial Officer; Gary Cohen, Executive Vice President; William Kozy, Executive Vice President; Donna Boles, Senior Vice President of Human Resources; and Jeff Sherman is here but he's not in the room right now. Gary DeFazio, Secretary of the company, will now report on the call of this meeting, the presence of a quorum and other formal matters.

Gary M. DeFazio

Mr. Chairman, I have proof of notice of this meeting in the form of an affidavit executed on behalf of Computershare Trust Company, which will be filed with the minutes of this meeting. The board has appointed Computershare Trust Company as Inspector of Election, and Ms. Bent and Mr. Ciampaglia have taken the inspector's oath. A list of shareholders of record entitled to vote at this meeting with the address and number of shares held by each is available for inspection during the meeting.

The Inspectors of Election have informed me that 83% of the shares entitled to vote are present in person or represented by proxy. A quorum is therefore present, and you may proceed with the business of this meeting.

Edward J. Ludwig

Thank you very much. The minutes of the 2011 annual meeting are available for inspection. I recommend that we dispense with the reading of the minutes. Hearing no objection, we'll move to the proposals included in the proxy statement. Each item will be discussed after it has been moved and seconded. Please hold all comments and questions, which do not relate to the proposal under consideration for discussion later in the meeting.

If you wish to speak, please move to the closest microphone, wait to be recognized and then give your name and number of shares you own or represent. To ensure adequate time for all persons to participate, each speaker will be allowed 3 minutes in which to present his or her questions and comments. In consideration of your fellow shareholders, please limit your time accordingly.

Proposal one, election of directors. The first proposal is the election of Basil Anderson, Henry Becton, Jr., Edward DeGraan and Vincent Forlenza, Claire Fraser-Liggett, Christopher Jones, Marshall Larsen, Adel Mahmoud, Gary Mecklenburg, James Orr, Willard Overlock, Jr., Bertram Scott, Alfred Sommer and myself to serve as directors for a term of one year. I will entertain a motion and second to put this proposal to a vote.

Is there any discussion of these nominees? If there's no further discussion, we'll move on to the next item of business.

The second proposal is the ratification of the selection of Ernst & Young to be the independent and registered public accounting firm for the company for the 2012 fiscal year. I will entertain a motion and a second to put this proposal to a vote.

Mr. Peter Tryhane and Ms. Patricia Janicek of Ernst & Young are here to respond to questions. Are there any questions for them or any discussion of this proposal related to auditor ratification? Okay, good.

Proposal number three is the approval of an advisory vote on executive compensation. I will entertain a motion and second to put this proposal to a vote. Is there any discussion of this proposal? Okay.

The next item business is a shareholder proposal for Mrs. Evelyn Y. Davis related -- relating to cumulative voting. The Board of Directors opposes the proposal for the reasons given in the proxy statement. I will entertain a motion and second to put this proposal to a vote. Is there any discussion of this proposal? Okay, that finishes our proposals for voting.

Shareholders who have already voted by proxy need not cast ballots unless they wish to change their votes at this time. Shareholders -- okay, sorry, I'm taking your line.

Gary M. DeFazio

Shareholders who are not shareholders of record, but instead hold their shares in street name must present a valid proxy from their bank, broker or other non-medium in order to vote now. If anybody wants a ballot, please raise your hand.

Edward J. Ludwig

Okay, we're getting a ballot for you in just a second. While the vote is being tallied, Vincent Forlenza will make a presentation on the operations of BD. Vince?

Vincent A. Forlenza

Sure. Good afternoon, everyone. But before I get started, we have the controller for the slides up here. You can advance it from the back, so do it from the back. Thanks.

Okay, so anyway, good afternoon. As always, it's a pleasure to be here and welcome our BD family of shareholders, associates and friends.

During today's discussion, we may make forward-looking statements and it is possible that actual results could differ from our expectations. Factors that could cause such differences appear in our fourth fiscal quarter press release and in the MD&A sections of our recent SEC filings.

I will also discuss some non-GAAP financial measures with respect to our performance. A reconciliation of GAAP measures can be found in our press release and its related financial schedules and investor slides. Copies of the release, including the financial schedules and the slides are posted on the Investor page of our website.

Now, today, I'll cover 4 topics: First, I will discuss BD's overall strategy, then I will briefly review our historical performance and our fiscal 2011 results. I will also review and describe in more detail our midterm growth drivers based on our strategic focus for innovation and growth.

Back in November, we announced solid earnings results for the fourth quarter and the full fiscal year 2011. As we had stated on our earnings call, we are operating in an ongoing challenging business environment. Despite the headwinds facing BD and our industry, we continue to invest in high-growth areas. We believe that we have the appropriate strategy in place to be able to compete and prosper in this increasingly challenging environment.

It's imperative that we complete the programs we've started. In fact, we've already made progress delivering against our strategy to date. In 2009, 6.3% of our total revenues were derived from new product platforms. In 2011, they accounted for 8.5% of revenues. Emerging markets account for 21% of total company revenues and grew about 11% in fiscal year 2011. We have also identified key products in each of our segments that we expect will, standing alone, collectively deliver about 250 basis points of growth by the end of fiscal year 2014.

The company's long-term strategy remains in place. Our strategy is to apply technology and clinical knowledge to make health care more effective, efficient and safe. Our 5 areas of focus are: First, safe and effective parenteral drug delivery; second, accurate and faster diagnostics; third, tools and technologies that facilitate the basic understanding of the cell, cellular diagnostics and cell therapy; fourth, enhancing disease management in diabetes, women's health and cancer and infection control; and fifth, improving clinical laboratory and research practices in emerging markets.

We're confident that these areas of focus are rich with opportunities for BD to add value to health care worldwide. We plan to deliver against and succeed with our strategy by investing in growth and innovation, build a new customer focus capabilities, driving operational excellence and by effectively deploying our capital.

Now let's move onto the second topic of today's presentation, which is a brief review of BD's historical results. As you can see, we have increased our revenues from $5.5 billion in fiscal year 2006 to $7.8 billion in fiscal year 2011 with a compound annual growth rate of 6%, currency-neutral, over this time period. This is the result of solid growth in all 3 of our segments in conjunction with strong growth in our safety products and emerging markets.

You will note that our adjusted earnings per share growth has been strong over the past 5 years with a compound annual growth rate of 10%, currency-neutral, over this time period. We were able to achieve this through solid revenue growth, margin improvements, disciplined spending and a consistent share repurchase program.

Now as you can see on this next slide, cash flow from operations has been strong over the last several years, growing from $1.1 billion in fiscal year 2006 to $1.7 billion in fiscal year 2011. We are financially well positioned with a strong balance sheet and very solid credit ratings.

BD has a strong record of returning free cash flow to shareholders. Over the past 5 years, we have returned more than 90% of our free cash flow from operations to shareholders through dividends and share repurchases.

We've increased our dividend for 39 consecutive years, and we returned $1.5 billion in cash through share repurchases in fiscal year 2011.

In November, we issued new long-term debt of $1.5 billion in 5- and 10-year notes. Our balance sheet remains strong, and we have maintained solid credit ratings with Moody and Standard & Poor's. We believe that we have an optimal capital structure that provides us with strategic flexibility for acquisitions.

Next, I'll briefly review our results for fiscal year 2011, which are on a currency-neutral basis. We will discuss our first fiscal year -- fiscal quarter 2012 results on our upcoming earnings conference call next week on February 7. I hope you'll be able to listen to that broadcast.

On this slide, you will see that our revenue growth was 2.9% or 4.9% when excluding the impact of the pandemic flu-related sales, stimulus and supplemental spending that occurred in fiscal year 2010.

In our medical segment, growth was primarily driven by strong sales in the diabetes care unit with continued strong sales of pen needles and solid growth in the pharmaceutical systems unit.

In our diagnostics segment, revenues reflected solid growth in both the women's health and cancer and the infectious disease product offerings within the diagnostic systems unit.

In our bioscience segment, revenues reflected strong instrument and reagent sales in the cell analysis unit. In addition, we had solid safety growth of 5.4%, driven by a range of safety products.

Turning to the next slide, we will review our geographic revenue results. For the total year, U.S. revenue grew 2.1% with medical increasing 1.8%, diagnostics increasing 2.6% and biosciences growing 1.9%.

International revenues grew 3.6% on a currency-neutral basis. When excluding the impact of the pandemic flu-related sales in fiscal year 2010, international revenue growth was 5.1%, emerging markets grew about 11% over the prior year and we continue to see double-digit growth in the number of key markets, with China growing at about 26%.

The next slide recaps the total year income statement and highlights our foreign currency-neutral results. Revenue growth was 2.9%, and gross profit growth was 3.2%, due to increased productivity in ReLoCo, our cost-reduction program, which more than offset raw materials and pension cost increases.

Moving down the income statement. SSG&A increased 4.9% with the main drivers being increased investments in emerging markets and higher pension and EVEREST costs. Acquisition-related expenses and a provision for a European receivable also contributed to the increase.

These increased costs were partially offset through efficiencies in our G&A infrastructure and other cost-savings programs.

For the total year, R&D increased 7.7%, currency-neutral, which was in line with our expectations. We increased our R&D as a percent of sales by 20 basis points as we invested in new products and platforms.

As a result, operating income increased 0.2%, which reflects lower-than-historical revenue growth and increased SSG&A and R&D expenses to fund our growth strategy.

EPS growth was 8.1%, currency-neutral.

I'd like to now move on to the fourth and final topic of today's discussion, which is BD's midterm growth drivers. You will see several examples of growth drivers in the medical segment. BD is committed to providing patients and practitioners with access to safe and reliable parenteral drug delivery devices wherever they're needed. BD has also committed to healthcare worker safety for the last 2 decades and is a leader in this area.

This was a critical factor behind our decision to acquire Carmel Pharma last August as the acquisition expands the scope of BD's healthcare worker safety emphasis to include hazardous drug exposure reduction. The BD PhaSeal system is the leading closed system drug transfer device for the safe handling of hazardous drugs that are packaged in vials. It minimizes the risk of exposure to potentially harmful liquids and vapors from toxic drugs such as those used in the treatment of cancer.

In diabetes care, we are extending our leadership in pen needles, as well as innovating with new safety-engineered pen needles. We plan to build our recent -- upon our recent success to accelerate first-to-market innovation in this particular category, bringing continuous differentiation to the pen needle platform.

Additionally, we will be entering the infusion -- insulin infusion category, bringing new ideas and improvements to that specific application.

We're also partnering with the Juvenile Diabetes Research Foundation, and we'll be leveraging our expertise as a leader in insulin delivery and acute care infusion to develop new products that we will -- that we believe will improve the patient experience and therapy outcomes for insulin pump users.

At our BD Analyst Day in November, we announced our new Self Administration of Injectables Systems, or SAIS, initiative. SAIS will make it safer and easier for patients to take medications while reducing health care costs and easing the burden on the health care system by allowing patients to self-inject rather than rely upon doctors or health care workers.

New delivery technologies for BD are products such as customized pens, innovative MicroInfusors and we continue to develop our autoinjector platform. Additionally, we have a great opportunity to expand our international medical business through our reliable low-cost or ReLoCo program, which we've been talking about for a couple of years. In short, ReLoCo is a global, cross-functional business initiative established to sustain our low-cost capability and advantage for our medical systems unit. This low cost will enable us to penetrate lower-priced segments in the emerging world.

Now I'd like to highlight some of the midterm growth drivers in the diagnostics segment. We're strengthening our leadership in microbiology while investing in innovation to expand our position in molecular and cancer diagnostics.

One example of this is BD MAX, our new automated molecular diagnostic system, which was launched as we -- as an open system in May of 2011. It's performing very well and we've received very positive feedback from our customers. The more significant BD MAX, MRSA assay, has already launched in the EU in Europe and is scheduled to launch later in 2012 in the U.S.

Over the last 6 months, we've gone from having 3 assays in the pipeline for MAX to more than 15 today, and we're looking to make another similar increase in our menu pipeline this year.

Beyond BD MAX, we're continuing to invest in the BD Viper XTR System with fully automated specimen processing and the smaller Viper LT System to replace ProbeTec for sexually transmitted disease testing. Our new Viper LT platform will allow us to enter into the large HPV market and new screening application for Trichomonas. BD is currently working on an automated solution for HPV testing that will be the most automated -- more automated than any platform on the market today, processing patient samples from start to finish with no intervention from the user.

In our women's health and cancer platform, we're excited about the BD SurePath Plus, our new molecular Pap system. SurePath Plus starts with the traditional BD SurePath slide and then adds proprietary biomarkers that are highly specific to cervical cancer cells. The SurePath Plus test would be establishing an entirely new market for molecular Pap tests. This test is in the data analysis phase of its clinical trial.

We're also very pleased with the progress that has been made with the BD Veritor System, a rapid testing system of flu A and B for point-of-care sites. This newly designed system incorporates BD's Nano Detection Particle and Adaptive Read Technology. The Veritor System offers a convenient workflow and easy steps requiring very little sample preparation. This is just a 10-minute period for the test to run and 10 seconds of instrument read for final results.

We recently received 510 clearance and CLIA waiver from the U.S. Food and Drug Administration for flu A and B. This is the first rapid influenza test system that incorporates a digital readout of results to receive CLIA waiver.

Now in our biosciences segment, we have strong reagent and instrument opportunities. We continue to be the leader in providing researchers and clinicians with the tools they need to better and more fully understand the cell, and to be seen as the partner of choice in providing the answer to cell-based scientific challenges.

We're bringing our innovations to customers in the form of multiple new flow cytometry products, including advanced research and clinical analyzers, new clinical reagents, personal flow cytometers and a bench-top cell sorter, the smallest commercial cell sorter available.

While many new products will be contributing to our growth in this segment, I'd just like to highlight a few of them today.

The BD FACSVerse is a research analyzer and a good example of our innovative thinking. The Verse uses latest advances in technology to simplify research workflow.

Also this year, we plan to launch the next-generation CD4 analyzer for the developing world, the BD FACSClearCount. This instrument is an example of how we are innovating in multiple dimensions, in this case, using new design and technology elements to enhance ease-of-use and user interface for lab workers in remote settings.

The third area of growth for biosciences is expanding the relevance of flow cytometry to new applications in emerging markets with our Accuri instrument. BD will be expanding the use of flow into new areas of life sciences research with this instrument.

And finally, in 2012, we plan to launch the first commercially available personal cell sorter, the BD FACSJazz, to support genomics and proteomics research and next-generation sequencing. This is a significant opportunity to expand in these large and dramatically growing areas of research.

Now on this slide, you'll see a variety of awards and recognitions. We're proud of our accomplishments and we received several acknowledgments in 2011 that highlight the success of our business, our responsibility to the environment and our ethical standards. We believe this reflects the strong dedication of our employees and their commitment to BD values.

I'll now reiterate the key messages I'd like for you to take away from the presentation.

First, we believe that our strategy of investing in innovating for growth will succeed, and we have seen evidence that our strategy is delivering results.

Second, despite the changed and increasingly challenging environment, we will continue to invest in the company to drive revenue growth by increasing our presence in emerging markets, expanding addressable markets, developing new products and by acquiring new product platforms. Our goal is to complement organic revenue growth with strategic acquisitions.

Lastly, we are optimizing our spending in both R&D and SSG&A. We are reallocating those investments appropriately by globalizing R&D and increasing R&D spend in new product development and also by driving down G&A costs and focusing our resources on sales and marketing.

We are committed to deliver solid results in fiscal year '12 and beyond and believe that our strategy provides us with the foundation to grow and prosper.

Now I'd like to take a moment to thank Ed Ludwig for his contributions over his 12 years as Chief Executive Officer. Over the past decade, BD more than doubled its revenues, more than tripled its net income and nearly tripled its market cap. We also ranked in the top third among our peer group for total shareholder return during that time.

A quote from Mike Weinstein of JPMorgan sent to Ed after we announced the CEO succession plan last July captures Ed's leadership. "Real leadership is getting people to do something they've never done or aren't even sure is possible. It is by this measure that we, the analyst community, hold the past decade of Becton, Dickinson in such high regard. The transformation of BD from a $3.4 billion low-margin medical products company to a high-margin, $7.8 billion diverse global life sciences company is truly impressive. Employees and shareholders have been rewarded, and importantly, you put in place a leadership team to carry BD into the next decade, which will have its own set of challenges and opportunities." I believe that this quote accurately captures Ed, his accomplishments and all that he has done for BD. Ed has led the company through both prosperous and challenging times, always ensuring that we maintained our purpose of helping all people live healthy lives. He created a strong platform for growth, and we will continue to build off the key initiatives Ed put in place during his time as Chief Executive Officer.

Thank you.

Edward J. Ludwig

Thank you, Vince. Thank you, everyone. It was an honor to serve and I will stay in touch to see how the story ends.

So at this time, I declare that the polls are closed. We will take questions from the floor while the vote is being tallied. Please walk to one of the microphones, or I understand there are probably microphones around the room. Give your name, number of shares you represent, and we've allowed about 15 minutes for questions. Please remember to limit your questions and comments to 3 minutes and to allow as much participation as we need to have. So I will open the floor to comments and questions.

Question-and-Answer Session

Unknown Shareholder

My name is Mary [ph] Sheridan [ph]. I have about 10,000 shares in among my family. And my question is with the receivables reserve for Europe, could Becton, Dickinson just go over for us how the world looks to Becton, Dickinson on an economic basis? So I would just get an idea of the market?

Edward J. Ludwig

Sure, sure. And I think your particular question is with respect to Europe, which is going through some struggles and challenges?

Unknown Shareholder

Yes, but if you have any comments on India or China or Africa.

Edward J. Ludwig

Sure, I think I understand. Let me take a shot at this, and if we need further elaboration, I could ask David Elkins to comment. One of the hallmarks and strength of BD is that we have very, very strong country organizations, and these are typically run by the nationals over the country. So the business in Italy is run by people from Italy. The business in India by and large is run by people from India, et cetera. And so one of their jobs is to maintain a close relationship with their customers, with their supply chain and what's going on in the economic environment wherever that might be, all over the world. And so as a result of that, our management team in each country is in constant communication with David, our CFO, and the various other CFOs of the segments and businesses that work for him to, among other things, as you point out, make sure that the receivables we have on our books are indeed collectible. We have them taken some additional reserves in different parts of the world where there has been financial challenges. We've done that as a part of the usual course of business. The other thing to rest assured about is that our auditors, Ernst & Young, also have operations in each of these countries around the world and regions. And at the end of the year, they go in and verify that, in fact, the assets that we show is receivables in our books are indeed collectible and that we've provided sufficient funds for those that are not. And so the net amount represents a good collectible. So we're confident as a result of these efforts. And again, following good control practices throughout the company at the books of record, particularly focusing on the amounts that we show as receivables are accurate. Yes?

Unknown Shareholder

Larry [ph] Bolton [ph]. I have, I don't know, 200 or 300 shares. I don't keep track. I'd like to hear any comments you may have on any legal matters of significance as either defendant or plaintiff?

Edward J. Ludwig

Okay. Well, the legal matters that the company is facing are identified very extensively in the footnotes to our financial statements, which are provided with the proxy materials. And there's really no elaboration on that. We will obviously be updating that footnote and any other disclosures when we file our 10-Q in a couple of weeks. But really, there's nothing else to comment on other than what we've made public in our financial statements. Other questions? Okay, well, thank you very much. Let's make sure I'm not reading into someone else's line. If there are no further questions, we'll move to the voting results. Have the inspectors of election completed the tally?

Carlo Ciampaglia

Yes, we have, Mr. Chairman.

Edward J. Ludwig

Please report on the preliminary results of the voting.

Carlo Ciampaglia

We report the following preliminary results: On the direction -- on the election of directors, each director received a majority of the votes cast for him or her. On the proposal for the ratification of the selection of the independent registered public accounting firm, 176,852,200 shares or 99.2% of the shares voted thereon were voted for. And 1,163,773 shares or 0.7% were voted against. The abstention and non-votes totaled 228,252 shares.

On the proposal for the approval of an advisory vote on executive compensation, 143,104,781 shares or 92% of the shares voted thereon were voted for. And 8,121,874 shares or 5.2% were voted against. The abstentions and non-votes totaled 27,017,570 shares.

On the proposal relating to cumulative voting, 40,313,355 shares or 26% of the shares voted thereon were voted for. And 114,283,169 shares or 73.5% were voted against. The abstentions and non-votes totaled 23,647,701 shares.

That concludes our report.

Edward J. Ludwig

Thank you very much. Based on the report of inspector of election, I declare that Basil Anderson, Henry Becton, Jr., Edward DeGraan, Vincent Forlenza, Claire Fraser-Liggett, Christopher Jones, Marshall Larsen, Adel Mahmoud, Gary Mecklenburg, James Orr, Willard Overlock, Jr., Bertram Scott, Alfred Sommer and I have been elected to serve for a term of one year.

Second, the selection of Ernst & Young as the independent registered public accounting firm of the company for the 2012 fiscal year has been ratified.

The advisory vote on executive compensation has been approved. The shareholder proposal with respect to the adoption of cumulative voting has been defeated.

I will now entertain a motion to adjourn?

Unknown Attendee

I so move.

Unknown Attendee


Edward J. Ludwig

Hearing no objection, we are adjourned. Thank you very much for coming today, and we look forward to delivering great results for 2012 and seeing you again next year. Thank you.

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