Becton Dickinson and Co

NYSE:BDX

Earnings Call Analysis

Solid Q4 Performance and Positive FY'24 Outlook

The company concluded FY'23 on a high note, with robust organic growth driven by key product demand and strategic simplification efforts. Quarterly adjusted diluted EPS leaped by 24% and operating margin improved substantially. Free cash flow surged by over $600 million with another double-digit increase anticipated in FY'24. Debt was reduced by $700 million, bolstering the balance sheet for strategic acquisitions. Despite macroeconomic headwinds and a flat outlook for China, the company provides an optimistic guidance for FY'24: organic growth at 5.75% and a progression towards a 25% operating margin goal.

A Year of Strategic Growth and Operational Excellence

In the latest fiscal year, the company demonstrated strength through their BD 2025 strategy, bringing forth new innovations and leveraging a diverse business portfolio to meet the healthcare challenges of today. This enabled the firm to deliver consistently strong performance despite global economic uncertainties.

Early Achievement and Future Simplification Initiatives

Significant progress has been made in portfolio simplification, achieving a 20% reduction in SKUs ahead of schedule. This, combined with advancing operational simplification initiatives aimed at organizational complexity reduction, has put the company on track toward their 25% operating margin goal. Dividend payouts were increased for the 52nd consecutive year, maintaining their stance as an S&P 500 Dividend Aristocrat.

Sturdy Fiscal Performance with Promising Outlook

The company reported revenue of $5.1 billion for Q4, with a full fiscal-year revenue of $19.4 billion. They sustained strong organic growth and have managed to execute well, despite macroeconomic factors such as inflation and geopolitical uncertainty. Their adjusted effective tax rate for the upcoming fiscal year is anticipated to range between 13% and 15%.

Earnings Growth and Guidance Amidst Foreign Exchange Headwinds

For the upcoming fiscal year, the company expects adjusted EPS growth before currency impact to range between 8.25% and 10.25%. This outlook includes the absorption of negative impact from divestitures and foreign exchange rates fluctuations, projecting a strong continuation of performance into the future with notable revenue and EPS growth.

Commitment to Long-term Strategy and Investment Confidence

A consistent two-thirds to 70% of the planned savings initiatives have already been realized in the current fiscal year. These cost reduction measures and strategic investments align the company to meet its financial targets and strengthen its competitive position for future years.

Earnings Call Transcript 2023-Q4

[Operator]

Hello, and welcome to BD's Fourth Quarter and Full Year Fiscal 2023 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 and area code (1402) 220-1347 for international. I will now turn the call over to Greg Rodetis, Senior Vice President, Treasurer and Head of Investor Relations.

[Greg Rodetis, executive]

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 fourth quarter and full year of fiscal 2023. 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 call are Tom Polen, BD's Chairman, Chief Executive Officer and President; and Chris DelOrefice, Executive Vice President and Chief Financial Officer. Tom will provide highlights of our performance and the continued execution of our BD 2025 strategy. Chris will then provide additional details on our Q4 and FY '23 financial performance and our 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 basis of presentation slide, which defines terms such as base revenues, and the non-GAAP reconciliations included in the appendix.

With that, I'm very pleased to turn it over to Tom.

[Thomas Polen, executive]

Thanks, Greg. Good morning, everyone, and thank you for joining us. Earlier today, we reported our results for the fourth quarter and full year of FY '23, a year characterized by strong differentiated performance driven by our BD 2025 strategy in action, impactful new innovations and our diversified business portfolio designed to help our customers navigate today's challenging environment.

The diversification of our portfolio offers both durability through our leading positions and consistent demand for products essential to everyday patient care and strong growth through a purposeful shift into higher-growth markets, anchored against 3 irreversible forces we see shaping health care: connected care, new care settings and chronic disease.

Additionally, we have built capability and fostered a culture of operational excellence, where we make disciplined and strategic capital allocation choices, proactively address macro headwinds through our simplification programs and execute with speed and agility, all of which have and continue to play a key role in delivering strong consistent performance. This unique profile can be seen in both our current and 2-year performance and where our purposeful shift into higher growth markets has enabled us to drive the plus side of our targeted 5.5% plus revenue growth profile.

In FY '23, we delivered 7% base revenue growth with base organic growth of 5.8%. Our team drove significant margin expansion and delivered $12.21 in adjusted EPS, which represents double-digit currency-neutral growth of 11%. Over the past 2 years, we have made excellent progress toward our BD 2025 financial targets, delivering a 7% base organic revenue CAGR and 390 basis points of operating margin expansion. We are now over 70% of the Wave 2 and tracking ahead of our 25% adjusted operating margin target by FY '25.

As a result, on the bottom line, we delivered an implied base EPS CAGR of 20% currency neutral. We also ended FY '23 with strong execution of our strategic priorities. First, we delivered our #1 priority, obtaining FDA clearance for the updated BD Alaris infusion system. Post clearance, our priority remains remediation, scaling up manufacturing and engaging with customers on the many benefits of the updated system that include advanced cybersecurity, wireless connectivity and other clinical and patient safety upgrades.

We are confident in our remediation plan and have begun the process prioritizing our existing customers. We are making good progress with active contracting and shipment of our first units to customers taking place ahead of schedule at the end of September. We are excited to deliver the benefits of the updated Alaris system to our customers and their patients, including the power of one integrated infusion platform with a centralized user interface for all major types of infusion, as well as the value added through interoperability and other innovations that connect data from Alaris, Pyxis and the rest of our medication management offering into the industry's only end-to-end solution for safer, simpler and smarter medication management from the pharmacy to the floor, to the bed side.

The clearance of the BD Alaris infusion system gives us further confidence in our ability to achieve our BD 2025 strategy and financial targets. Second, we significantly advanced our innovation pipeline, launching 27 key new products that benefit researchers, providers and patients, integrating AI, robotics and other advanced technologies. Our products are helping researchers gain deeper insights faster, like our FACSDiscover S8 Cells Sorter with CellView image technology and FACSDuet premium sample preparation system, which apply novel technologies like high-speed cell imaging and liquid handling robotics, and our BD Horizon real yellow and real blue reagents, which were developed using AI guidance.

Our pharmacy automation business continues to grow double digits and it's helping our customers serve patients more efficiently and with fewer errors across various care settings. Our robotic microbiology platform, BD Kiesrta, hit record sales this year, and we continue to drive strong double-digit growth in our BD COR and BD MAX molecular platforms, leveraging our growing installed base through menu expansion that includes our new vaginal panel and our Onclarity HPV assay thin prep on BD COR and now greater than 20 assays on BD MAX.

We continue to enable the care shift in new settings, including at home, through innovations such as our PureWick system franchise for urinary incontinence that we expanded to include solutions for male patients. PureWick Male has been one of the fastest ramps of a new product in our history and continues to exceed our expectations. Given the strong adoption, we have now designated this as a greater than $50 million incremental growth opportunity.

Pharmaceutical Systems, which achieved 13 consecutive quarters of double-digit growth, continues to empower the delivery of new biologics, many administered by patients at home, such as the growing drug class of GLP-1 for diabetes and weightloss and other molecules, which will be delivered through our self-injection solutions. We are playing an increasing role in addressing chronic diseases like peripheral arterial disease and improving outcomes in tissue reconstruction.

This year, we expanded the impact of new products such as our rotor ex atherectomy system, Venovo venous stent system and Venclose RF ablation catheter, helping to address an area of high unmet need for the 10 million patients each year who are suffering from venous disease.

In Surgery, our teams accelerated the growth of Phasix mesh to allow more patients to benefit from tissue repair performed with our resorbable synthetic biomaterial. And of course, we continue to drive a relentless focus on improving clinician and patient satisfaction with PIVO Pro and BD Nexiva with near port IV access, a core element of our One-Stick hospital Stay vision that enables needleless blood draws, which is a major satisfaction for patients.

And BD Pyxis ES 1.7.4, which now fully integrates our C2 Safe system into the Pyxis ES platform, enabling security and automated controlled substance management for pharmacists. I'm really pleased with how our R&D team executed in FY '23. Again, reaching a new record level of on-time milestones and launches.

Our enhanced focus on programs with the potential to move the needle in terms of growth has positioned us well to drive our WAMGR expansion. We are on track to buttonhole target of over 100 new product launches by FY '25 and our new product revenue contribution target, as outlined at Investor Day, creating a new wave of margin-accretive growth for BD.

Third, in addition to our investments in R&D, our tuck-in M&A strategy has been very impactful. Targeted in higher-growth markets, M&A is complementing the plus side of our 5.5% plus growth profile and also contributing to growth on an organic basis as we anniversary those assets. This includes our acquisition of Parati Systems, which is part of our pharmacy automation business that is growing double digits. At nearly $700 million in revenue, BD Pharmacy Automation is one of the largest robotics and health care process automation businesses in med tech, focused on improving pharmacy labor efficiency and reducing errors. There's never been a greater need for these solutions.

Fourth, we continued our simplification initiatives in FY '23 and actively managed our portfolio, divesting our surgical instrumentation business and executing a program of strategic portfolio exits, allowing us to continue to reallocate our resources into more strategic, higher growth areas and further reduce complexity across our company. We also progressed our Project Recode network and SKU rationalization programs, exiting more than 2,300 incremental SKUs in FY '23 and are pleased that we have now streamlined our portfolio by 20% compared to 2019, achieving our goal laid out at Investor Day 2 years early.

We are seeing the benefits in our manufacturing plants and in our simplified portfolio with customers. We will continue to advance this initiative as we keep executing BD 2025. In addition, we initiated our operating model simplification initiative to reduce our organizational complexity and increase agility. As a result, we were able to absorb continued outsized inflation during the year as planned and advanced operating margins towards our 25% target.

And lastly, we strengthened our balance sheet, inclusive of executing on our planned inventory reductions and maintaining a disciplined and balanced capital deployment framework. This allows us to support organic and inorganic investments in growth while returning capital to shareholders.

We've just announced our 52nd consecutive year of dividend increases, continuing our long-standing recognition as a member of the S&P 500 Dividend Aristocrats Index, a distinction that reflects the consistency and reliability of our dividend policy.

Lastly, I'm also very pleased with how we've advanced our ESG strategy and goals. In July, we published our 2022 ESG report, which provides details about our strategy and progress against our 2030 plus commitments. Highlights include progress in health equity and diversity as well as improving our environmental footprint, which included a reduction of Scope 1 and 2 greenhouse gas emissions by 10% and having generated 34% of our electric power from renewable energy.

In FY '23, we submitted our GHG emission reduction targets to the science-based target initiative for verification. I'm quite excited by our innovative circular economy pilots we did this past year. They were the first of their kind in our industry. Recycling medical waste, like used syringes and back containers, and converting these materials back into usable resins. We'll be advancing this work further in FY '24 as we continue to tackle end-of-life GHG emissions and seek to lead circular economy innovation within our industry.

We also continue to pioneer products and solutions that address health and equities like our efforts to detect HPV infections and diagnose cervical cancer through at-home sample collection. We're proud that our progress continues to be recognized externally, with BD most recently named among the 100 Best Corporate Citizens by 3BL and among the top 2 in the health care equipment and services industry.

Before I turn it over to Chris, I'd like to provide some perspective on the macro environment and BD 2025 as we look forward to FY '24. Starting with the macro environment. The complexity facing all companies will likely persist and, in some cases, is accelerating. With China responding to economic pressures and elevated levels of geopolitical uncertainty occurring in multiple markets, inflation has moderated from the peak high levels overall, but remains elevated compared to pre-pandemic norms, including higher labor rates in transportation and manufacturing, higher costs of energy and certain raw materials.

While there continues to be a heightened degree of macro uncertainty ahead into FY '24, consistent with what we have done in the past several years, we have positioned BD to deliver strong performance through this environment. As we move forward, you can expect to see continued execution of BD 2025 with a focus on the bold actions that position BD strategically for the future. These include continuing to advance our strong organic portfolio of programs in high growth spaces that are transforming health care. This includes launching another 25 key new products, including our Phasix ST umbilical product that will provide patients a reliable alternative to permanent mesh, bringing the benefits of our bioresorbable Phasix material into one of the most common abdominal wall hernia procedures.

The BD multimodality vacuum-assisted biopsy, Vice, which is expected to be the first VAB system designed to work across all 3 imaging modalities of ultrasound, CT and MRI, allows our customers to consolidate capital equipment, standardize consumables and simplify physician and nurse training. Our next-generation PureWick incontinence solution for the hospital and the home will be launching in FY '24. And our FACSDiscover S8 Cells Sorter 3 and 4 laser configuration that will expand our new-to-world cell-sorting instrument to the mid-parameter segment to help more researchers drive new discoveries. We'll also launching our Libertas 5 mL device that will provide a wearable option for higher viscous drugs that tend to require longer dosing times.

And finally, our BD Nexus next-generation infusion pump for Europe. These are just a few examples of the 25 key new product launches planned for FY '24. We will also continue to simplify our organization this year to enable operational excellence and agility, fuel investment and deliver on initiatives that will help us achieve our 25% adjusted operating margin goal in FY '25. This includes our Project Recode initiatives, where our network optimization efforts will start generating savings in FY '24, as we drive plant efficiencies and our operating model efforts where we are seeing positive early results from outsourcing certain back-office functions.

As we accelerate our focus on BD Excellence, our unique business performance system, we will increase the adoption of lean principles beyond manufacturing with pilots outside of operations this year. I see our BD excellence system as an important new lever we're building as we look ahead and think about our strategic plans beyond BD 2025.

And lastly, we expect to continue our balanced approach to capital deployment. This includes ongoing transformation of our portfolio by deploying capital towards larger tuck-in acquisitions and in higher growth categories, we can scale and leverage to support our growth and margin goals.

As I said at the top of the call, in fiscal 2023, our teams demonstrated exceptional agility and strong execution, advancing our BD 2025 stage. We are delivering consistent, durable performance in a challenging environment, which we expect to persist several years to come. Our continued track record, combined with our growing pipeline and shift into higher growth markets, is propelling us into a more innovative leader. It is making a profound impact on advancing health care globally.

We are advancing into FY '24 with clarity, focus and a growth mindset as we seek to do great things for those who rely on us: our customers, patients, associates and shareholders.

With that, let me turn it over to Chris to review our financials, guidance and outlook.

[Christopher DelOrefice, executive]

Thanks, Tom. We delivered strong, consistent results this fiscal year, which reflect the diversity of our portfolio and our BD 2025 strategy in action. Beginning with our revenue performance.

We delivered $5.1 billion in revenue in Q4, exceeding our expectations with base organic growth of 7% and total base growth of 6.3%, which reflects the impact from the surgical instrumentation divestiture.

For the full fiscal year, we delivered $19.4 billion in revenue with base organic revenue growth of 5.8%, that is 100 basis points higher than our initial guidance. Total base revenue growth was 7%, driven by strong performance in BD Medical and BD Interventional. Base revenue growth was strong regionally as well with high single-digit growth in EMEA and Latin America and mid-single-digit growth in the U.S. and Greater Asia despite low single-digit growth in China.

Our revenue performance continues to be supported by our durable core portfolio and an increasing contribution from higher growth spaces that are driving the plus side of our targeted 5.5% plus revenue growth profile. We also continue to benefit from the organic contribution from tuck-in acquisitions we anniversaried, which was about 40 basis points for the full year.

Over a 2-year period, we drove a strong base organic revenue CAGR of about 7%, which is well above our long-term target. Let me now provide some high-level insight into each segment's performance in the quarter. Further detail can be found in today's earnings announcement and presentation.

BD Medical revenue totaled $2.6 billion in the fourth quarter, growing 6.2% with strong performance in Medication Management Solutions and Pharmaceutical Systems. BD Medical performance reflects a decline in medication delivery systems resulting from softness in China driven by market dynamics, including some impacts from volume-based procurement. This was partially offset by strong performance in catheter solutions in North America and Europe through continued execution of our vascular access management strategy.

MMS delivered exceptional growth of 13.7%, driven by double-digit growth in both dispensing and pharmacy automation as customers focus on solutions which improve workflows and efficiencies and help pharmacies address rising costs and labor shortages.

Pharmaceutical Systems delivered another quarter of double-digit growth of 10.6% and driven by continued strong demand for prefillable solutions for biologics, partially offset by a slowdown in China exports of anticoagulants. BD Life Sciences revenue totaled $1.3 billion in the fourth quarter. Excluding COVID-only testing, Life Sciences base revenues grew 3.8% driven by strong double-digit growth in Biosciences.

Life Sciences base business growth reflects IDS based business growth of 0.6%, driven by continued adoption of our BD Kiestra microbiology lab automation solution and strong IDAST instrument placements and continued growth of our molecular IVD assays, leveraging the BD COR system and our expanded BD MAX installed base.

Growth was partially offset by the comparison to prior year COVID-related recovery in China and a decline in specimen management that was driven by distributor and customer stocking in the prior year. BDB grew 11.7%, driven by strong demand for our recently launched BD FACSDiscover S8 Cells Sorter that is enabling an entirely new level of biological depth of speed, ease of use and solution integration for researchers across fields like immunology, cancer research and cell biology.

BDB's performance also reflects strong growth in clinical reagents, leveraging our increasing installed base of FACSLyric analyzers and FACSDuet automation. BD Interventional revenues totaled $1.2 billion in the fourth quarter, growing 9.6% and 12.8% organic. The strong double-digit organic growth was driven by surgery growth of 5% or 15.1% organic which excludes the impact from the divestiture of the surgical instrumentation platform of 10.5 percentage points.

Organic growth reflects strong market adoption of our leading Phasix hernia products in our advanced repair and reconstruction portfolio and strong demand for our ChloraPrep infection prevention solution. PI grew 11.7%, which reflects strong performance in peripheral vascular disease driven by global penetration of the rotor atherectomy system and our venous portfolio in China.

Growth was aided by improved supply and distribution stabilization in EMEA following a new ERP implementation in fiscal '22. Urology grew 11.7%, primarily driven by continued strong demand for our PureWick chronic incontinence solutions in both the acute care and alternative care settings.

Now moving to our P&L. Q4 adjusted diluted EPS of $3.42 reflects strong double-digit growth of 24% or 25% on a currency-neutral basis. Gross margin increased 20 basis points to 52.6%, and as anticipated, we delivered very strong margin improvement with adjusted operating margin of 25.4%, up 340 basis points.

As expected, margin improvement was driven by leverage on our strong revenue performance, our ability to offset outsized inflation lower SSG&A driven by our simplification initiatives, moderated R&D expense as a percent of sales due to investment timing and a favorable comparison to last year's COVID profit reinvestment.

Full year adjusted diluted EPS of $12.21 grew 7.6% or 11% currency neutral. This includes delivering an additional $0.14 of currency-neutral earnings versus our original guidance. Additionally, we absorbed almost 400 basis points associated with reduced COVID-only testing, combining base currency-neutral EPS growth of approximately 15%.

For the full year, gross margin of 53.5% was flat to the prior year to site absorbing over 200 basis points of outsized inflation and cost of goods sold. Operating margin of 23.5% was up about 90 basis points or 110 basis points when excluding the 20 basis point impact from the accounting treatment of an employee benefit-related item, exceeding our margin goal for the year. The employee benefit item is recorded in G&A and is fully offset in other income with no resulting impact to EPS.

While delivering our margin goals, we also maintained investment in R&D at 6% of sales or about $1.2 billion to advance our pipeline of innovation programs that will support our strong growth profile in fiscal year '24 and beyond.

As anticipated, we've made significant progress towards achieving our pre-pandemic margin improvement goals. Our FY '23 adjusted operating margin is ahead of our 2019 spin adjusted margin which is particularly significant given it includes overcoming 500 basis points or almost $1 billion of outsized inflation in the past 3 years.

Over the next 2 years, we remain well positioned to return to our targeted 25% operating margins. Regarding our cash and capital allocation. Cash flows from operations totaled approximately $3 billion in FY '23. As expected, cash flow accelerated over the back half of the year and was strongest in Q4 due to normalization of working capital, including continued moderation of our inventory balances. We remain focused on free cash flow conversion and as anticipated, delivered a step-up in FY '23 with free cash flow increasing by over $600 million.

We are planning another step improvement in FY '24 and expect free cash flow to increase double digits. This will be achieved through further duration of inventory levels by the end of the year and continued discipline around CapEx investments through focused prioritization and areas of targeted reduction both of which we expect to more than offset cash investments to support the Alaris remediation.

As we execute against our BD 2025 strategy, we remain well positioned to achieve our long-term cash conversion target of around 90%. Beyond our investments in growth, we paid down over $700 million in debt this fiscal year and returned $1.1 billion in capital to shareholders through dividends. We ended the year with cash balance of $1.4 billion and a net leverage ratio of 2.6x. This is our strongest net leverage position since FY '21, which positions us well to capitalize on opportunities to accelerate our investment in higher-growth categories through our tuck-in M&A strategy.

Moving to our guidance for fiscal '24. For your convenience, the detailed assumptions underlying our guidance can also be found in our presentation. As demonstrated by our results over the past 2 years, BD has the ability to deliver strong performance in the most challenging times. Our performance reflects strong execution of our BD 2025 strategy, the benefit of our diversified and durable portfolio our simplification and outsized cost improvement programs and bold, purposeful capital allocation and investment decisions, all further optimized by our ability to execute with agility.

As we look to fiscal '24, while the macro landscape has evolved since our last earnings call, I'm pleased to share we remain committed to the revenue growth profile we previously outlined. And at the midpoint of our guidance, we expect to deliver another year of organic growth of our 5.5% plus profile. Let me share some of the key puts and takes contemplated in our guidance.

First, we see strong momentum in many parts of our business. We have 6 key areas in our portfolio now totaling over $5 billion or 25% of sales that we expect to deliver high single to double-digit growth. These include our farm systems pre-fillable syringes, which are benefiting from the strong trends in biologics; our bioscience business; our peripheral vascular disease platform; our Medication Management Systems business, including pharmacy automation and infusion, given the recent Claire Delaris pump; urinary incontinence supported by our PureWick franchise; and finally, our molecular diagnostic platforms.

This allows us to deliver strong results despite some heightened macro dynamics affecting many industries, most notably in China, along with increasing risk and complexity as the result of the war in the Middle East and other geographies.

Specific to the health care industry, providers continue to feel the pressure of elevated inflation and labor dynamics. And while they remain very focused on cost and working capital management, our portfolio has proven to be more resilient in this type of environment, given BD's essential role in the health care ecosystem in our ability to transform health care processes and drive efficiencies.

As it relates to BD, the largest headwind we anticipate from these macro dynamics is in our China business, where we see market softness and increased levels of volume-based procurement predominantly impacting our MDS business along with some impact in systems and reduced demand as our Chinese pharmaceutical customers export business slow.

As a result, we are projecting China to be flat to modest growth in FY '24, which creates nearly a 75 basis point headwind to our revenue growth this year. Taking these factors into account, we expect to deliver base organic growth of about 6% at the midpoint, which is consistent with the view we provided on our last earnings call. We still expect COVID-only testing to step down from the $73 million reported this year and result in a headwind to organic growth of over 25 basis points. This brings the midpoint of our total organic growth to 5.5% within our 5.25% to 6.25% range.

To help simplify our reporting, unless there's a significant change in the COVID-only testing market. Effective this year, we will no longer be reporting base organic growth that excludes COVID-only testing However, it was important to give us context with our initial guidance. As a reminder, while the sale of the surgical instrumentation platform that closed in Q4 FY '23 does not impact our organic growth will have nearly a 75 basis point impact to total revenue growth in FY '24 and is accounted for in our total currency-neutral revenue growth guidance of 4.5% to 5.5%.

Moving to margins and earnings. We plan to deliver another year of strong growth, including progressing our adjusted operating margin towards our FY '25 goal of 25% and while generating cash flow improvements to support our strong and reliable growth profile. On gross margin, we expect to be about flat year-over-year on a reported basis, including the impact of currency headwinds of approximately 75 basis points.

Excluding the impact of currency, we expect gross margin to improve with our simplification strategy more than offsetting 150 basis points of headwinds from outsized inflation of about 100 basis points and another 50 basis points from inventory reduction efforts that occurred in FY '23 and that we plan to further moderate down by the end of FY '24, which will improve cash flow.

The value from simplification programs continue to be driven by our Recode network optimization, SKU rationalization and operating model simplification programs. Additionally, our BD Excellence program, which focuses on the application of lean principles is driving productivity gains across our operations. As it pertains to OpEx, we anticipate SG&A expense leverage on strong revenue performance and continued benefit from our operating model simplification programs.

After 3 consecutive years of investing in R&D at over 6% on average, in FY '24, we anticipate a consistent year-to-year dollar spend R&D that is needed to advance our pipeline, which will result in some modest leverage. As a result, we expect adjusted operating margin to improve by around 50 basis points on a reported basis over the 23.5% reported in FY '23, primarily driven by SSG&A leverage. This puts us well on track to achieve our 25% margin goal by FY '25.

For tax, assuming no major legislative or regulatory changes, we expect our adjusted effective tax rate to be between 13% and 15%. As a reminder, it would not be unusual for our tax rate to fluctuate on a quarterly basis given the timing of discrete items. Given all these considerations, we expect adjusted EPS growth before the impact of currency of 8.25% to 10.25% or 9.25% at the midpoint. This includes absorbing about a 75 basis point headwind from the divestiture of the surgical instrumentation business and as a result, implies double-digit earnings growth, excluding the divestiture of 10% at the midpoint and within a range of approximately 9% to 11%.

Let me now walk you through the estimated impact from currency. As a reminder, we manage our business and provide guidance on a currency-neutral basis to best represent underlying performance, but provide perspective on currency using current spot rates, consistent with what other companies are discussing in their forward outlook, we are accounting for a headwind to our reported results as we translate currency to a stronger U.S. dollar, along with normal FX translation, given our global manufacturing and distribution footprint, we also faced the impact of currency fluctuations in our P&L, including the impact from the sourcing, timing of inventory production and movements throughout our network.

Since our last call in August, the U.S. dollar significantly strengthened against most major currencies, and the change over this time period accounts for nearly 2/3 of the expected FX impact. Additionally, as it relates to sourcing from Mexico, where we have a large manufacturing footprint, the dollar weakened versus the peso by about 10%, taking the average rate over the last 4 months ending in October versus the average over the first 9 months of fiscal year '23 with the peso achieving peak rates that in that timeframe have not been seen in well over 5 years.

Based on current spot rates, for illustrative purposes, currency is estimated to be a headwind of approximately 75 basis points to total company revenues and approximately 375 basis points to adjusted EPS growth on a full year basis. All in, including the estimated impact of currency, we expect revenues to be between approximately $20.1 billion to $20.3 billion and adjusted EPS to be in a range of $12.70 to $13, which represents growth of 4% to 6.5%.

As a reminder, currency can fluctuate over time, and it would not be prudent to deviate from our investment profile that is resulting in consistently strong base organic growth, which is delivering an expected 3-year base organic CAGR of about 6.8%, well above our 5.5% plus growth profile. We continue to deliver margin improvement, resulting in earnings growing 1.3x the rate of sales. And with our focus on improved cash conversion, we expect to deliver double-digit free cash flow growth.

As you think of fiscal '24 phasing, the following are considerations for Q1 in context on how revenue and margin will index through the remainder of the year. As it relates to Q1, we expect organic revenue growth to under-index the full year by over 200 basis points, and we expect a decline in adjusted EPS versus the prior year of about $0.55 to $0.60.

There are 3 key items to consider. First, sales is driven by the prior year base and COVID-only respiratory testing comparison, along with the market dynamics in China. These impacts are about equally weighted and primarily impact the IDS and MDS business with a modest impact in farm systems associated with China.

We also expect Alaris revenues to ramp over the year and be weighted to the second half. Second, we expect operating margin to decline by around 350 basis points on a reported basis in Q1 with 200 basis points driven by inventory-related FX dynamics and another 200 basis points from the negative absorption impact from our planned inventory reductions, which we expect to partially offset through our simplification and cost mitigation initiatives while also overcoming outsized inflation.

Lastly, we had a discrete tax item in Q1 of last year that creates a negative comparison. As you think about the remainder of the year, we expect organic sales growth to be higher than our full year range in the second half, partially driven by the ramp-up of Alaris. We expect our Q2 margins to expand significantly on a sequential basis, resulting in year-over-year operating margin being nearly flat on a reported basis or slightly up on a currency-neutral basis.

In closing, we are very pleased with our performance this past year, particularly given our ability to navigate another year of significant macro complexity and inflationary pressure. The momentum in our durable and strong portfolio, along with our track record of successfully executing and delivering against our commitments, gives us confidence in our ability to continue this momentum into FY '24 and create long-term value for all of our stakeholders.

Let me take a moment to thank our talented employees across BD, who through growth mindset and an unwavering commitment to our purpose are core to delivering this performance. With that, let's start the Q&A session. Operator, can you assemble our queue, please?

[Operator]

[Operator Instructions] And our first question comes from Robbie Marcus with JPMorgan.

[Robert Marcus, analyst]

I wanted to start on how you think about reported EPS growth. Because the range of $12.70 to $13 is just slightly higher than the original guidance for fiscal '20 of 12 -- I believe, $12.50 to $12.65. So just thinking about how you're managing reported EPS versus underlying organic constant currency EPS and how we should think about your ability to deliver the double-digit reported EPS growth going forward?

[Christopher DelOrefice, executive]

Robbie, thanks for the question. First of all, our guide range obviously reflects -- we basically try and match the top line. So if you look at the top line, you've got about 1 point on the range in total. I mean you dollarize that, take the dollar of sales, take margin drop-through on that, it basically mirrors kind of the number of earnings that you have on either side. So there's symmetry between the sales the drop through at some margin level that's between, call it, GP and EPS. So it contemplates both upside on sales and reinvesting back in the business. We're vice versa on the downside, basically the opposite.

So I mean that's the logic for the range. I think it's pretty consistent with -- it modifies year-over-year depending on how you actually set those wings and what each point is worth. I think more importantly, Look, our commitments, we can't control currency, first of all. So we always think of things on an FXN basis.

If you look at our FY '24 guide this year, I think there's a lot of strong things. The underlying performance of the business is really strong. Let's start with the top line. So if you remember, last quarter, we talked about delivering 6% organic growth. That was excluding the impact of the COVID-only testing, which we expect to step down by about 25 basis points. That would establish a midpoint range of, call it, 5.75%, which is very strong. It's above our 5% plus average.

Our 2-year average heading into this year, plus this year at the midpoint, would imply a CAGR of just under 7% organic growth. When you think about from the time that we mentioned kind of the direction we were heading 3 months ago, where we are now looking at the top line, the macro environment certainly got more complex. I think for us, China was one of the dynamics that we called out. There's about a 75 basis point headwind that we're contemplating in our guide that's actually absorbed in that growth rate. So it actually implies excluding that organic growth of north of 6%.

So really strong to be able to absorb that. I think this shows the resiliency of the BD portfolio, the diversified nature and all the work they're willing to drive growth in these transformative spaces. We've talked about 6 key areas that as we think of our guide in both, one, they're helping deliver the midpoint there, can create opportunity for upside. So that's pharma systems, that's our MMS portfolio, including pharmacy automation on the back of Parata, our Rowa business, infusion, obviously, with the clearance of Alaris now, our bioscience research, peripheral vascular disease, molecular diagnostics in urinary incontinence.

From an earnings standpoint, again, on an FXN basis, it's extremely consistent with what we shared last quarter. There's a couple of small puts and takes here. But basically, excluding our divestiture of Mueller, we're anchored right at double-digit growth at the midpoint. At the top end, we're actually 11% excluding the Mueller divestiture. So even with that divestiture, we have double-digit EPS growth in the top end of our earnings range. Again, there's 2 things that I would say that are different from last time. That includes us again absorbing the China headwind, which actually comes with some pricing dynamics.

So really think of stronger underlying earnings to offset and absorb that. Plus, we've been very focused on cash. So with our strong margin profile, we made an intentional decision to continue to drive inventory levels down. especially in an environment where you have cash earning at high interest, it creates an opportunity and you have inflation flowing through inventory, keeping your inventory levels lower, create strong value creation. That creates a 50 basis point headwind through the year on margin, but that's an intentional choice and we're doing that because we have a strong cost to win program, leverage on our top line growth that we've consistently been driving and we can still drive towards our 25% goal by 2025.

I think that focus on cash, one thing that even despite the FX. Remember, FX, we don't control FX. I think a couple of the dynamics to think about. We literally had a 5% FX movement across our 5 major currencies since the last guide. It's unprecedented that they all go the same way. On top of that, we had a dynamic where some of our core, call it, expense-only sourcing locations, think of Mexico, where we have a huge manufacturing organization. We saw a 10% movement in that currency, where the peso actually strengthened against the dollar. We're not alone in this.

Every company has been talking about it in Q4, adjusting their Q4. We're one of the first to report a full fiscal year. Many have signaled that, that will be coming in their results as well. The good news is one of the reasons that we focus on underlying is FX is not a true cash for cash impact. Some of this FX is pure translational. It does not affect our underlying cash. As a matter of fact, when you think of cash flow to BD that we're thinking of in 2024, because of that strong FXN earnings growth profile on the back of strong top line growth and the continued cash conversion that we want to improve, we're going to drive double-digit cash flow from a free cash flow standpoint. So ultimate value creation happens with cash, and it's one of our core focus areas going forward.

So I think FY '24, again, it's actually outsized versus our top line commitments that we've made as part of our Investor Day. We continue to drive margin improvement. We continue to deliver double-digit FX and earnings growth, and we actually outsized cash flow growth. The FX is, unfortunately, it's unprecedented. We don't control that. I think we're focused on continuing to drive long-term value. It would actually be value destructive to take outsized actions and try and cover that. So hopefully, that context all helps.

[Robert Marcus, analyst]

Yes. Very helpful. And you talked a lot about operating margins. It came in below the Street in fourth quarter and just below the fiscal '23 guide. And first quarter is coming in pretty far substantially sequentially down. How do we think about your confidence levels for being able to achieve the stated operating margin guidance in the back half of the year?

[Christopher DelOrefice, executive]

Yes. Great question. So first of all, '23, I mean, look, we delivered exactly against our commitments from the beginning of the year. As a matter of fact, we increased our organic growth by over 100 basis points from our original guide. We increased our earnings $0.14 on an FXN basis, taking out the currency noise, which actually was favorable as that we advanced through the year. Margin we fully delivered.

Remember, there's a small accounting adjustment from employee benefits that actually gets adjusted in another line item. We're actually over our commitment when you think of that. So we're really pleased with what we did on FY '23. I think the last I looked, there's maybe less than a handful of companies, 2 or 3 that are able to drive margin improvement from the start of this outsized inflation. So over the last 3 years, we've absorbed $1 billion of outsized inflation while improving our margin by almost 400 basis points. So really proud of the organization and strong commitment to executing against that. It's a great question on '24. I actually view '24 in some ways, DREs.

So here's the criteria as you think of; 24. So one, we have another 100 basis points of outsized inflation. Most of that is in labor. There's some other input costs, some packaging fuel. We have 50 basis points that we've actually made the choice around this absorption from lowering our inventories to drive outside cash. So that's an intentional choice that's in our plan because we do have such a strong cost improvement program in place to offset those and still achieve our long-term margin goals. And then we have 75 basis points of FX.

We're going to more than absorb that with 225 basis points of cost to win price mix in GP. So gross margin for the year will be about flat. And then we have about 50 basis points coming from SG&A leverage and some of the benefits from our operating model simplification plan. So that's kind of the full year dynamic.

In the quarter, to your point, we talked about a 350 basis point headwind in the quarter. But you have 2 large onetime items. Almost all of the FX is indexed towards Q1 and almost 100% of that inventory choice is also happening in Q1. Those are about 200 basis points, respectively. The 100 basis points of outsized inflation is over-indexed in Q1 at about 175 basis points.

What that implies is we're actually driving underlying about 225 to 250 basis points of cost improvement that are offsetting those items. The other thing to think of is if you look at last year as an analog and for 8 quarters now, we've been very predictive in what our margin would do quarter-over-quarter, and we fully executed against the commitments we've made externally.

So one, there's credibility and that gives us confidence. But if you look at last year, we needed a little over 200 basis points on average in the back. And as everyone knows, it was weighted towards Q4. This year, you'll see a little bit more balanced in the second half, but we do need another year of a little over 200 basis points of margin improvement in the second half.

By Q2, we get back to flat. The good news is last year, we were absorbing 200 basis points of outsized inflation. This year, it's only 100 basis points of outsized inflation and a lot of that is happening in the front end, right? So the back end gets easier, and it's half of the challenge that we had last year when you think of outsized inflation.

So it's the same amount of margin improvement we need in the back half with half of the outsized inflation in the back half. And given the fact that we're already delivering about 225 to 250 basis points of cost to win pricing, mix benefits in if that continues throughout the year, which we have strong plans that execute against that, we feel really confident with our margin goals for the year.

[Thomas Polen, executive]

Robbie, this is Tom. Thanks to the good question. Just to add to Chris' excellent summary there. Just to call out, we feel great about the performance in FY '23 as well as our outlook for '24. And just to give a little bit more tail on that inventory number. So in Q3, you saw meaningful improvements in our cash flow, including a $200 million reduction in inventory. In Q4, if you haven't seen yet, a $300 million reduction in our inventory in Q4 that we just achieved.

Obviously, the inventory reduces within that quarter, the variance is then from producing less inventory from manufacturing caps and rolls into the first half of next year. And so just to put it in perspective the scale that we've been taking inventory down at. And obviously, that has a meaningful benefit to cash flow and why we see such strong cash flow growing nice double digits next year all in, which is really enables our continued strategy on our tuck-in M&A strategy, investing behind growth, by continuing to drive the flywheel. Thanks again for the question.

[Operator]

Our next question will come from Vijay Kumar with Evercore ISI.

[Vijay Kumar, analyst]

Sorry, there were a lot of numbers being thrown around. But if you can just -- let's start with Q1 on the top line comp. Your Q4 performance is pretty impressive. I think for Q1, you said 200 basis points below the annual guide. Your comps don't seem crazy, right? It's pretty easy. So what's changing here? What are you assuming for pricing China headwinds Aleris here for Q1?

[Thomas Polen, executive]

Sure. Thanks for the question, Vijay, and Chris will take that.

[Christopher DelOrefice, executive]

Yes, Vijay, thanks for the question. Yes. On sales, we indicated that our organic growth in Q1 was under-indexed by 200 basis points. There's really 2 factors, maybe 3. The key factors are, one, the respiratory testing dynamics, both in our base and the COVID only, which we're going to now just report as our base business, right? It was still more indexed in Q1 of last year.

So as that normalizes year-over-year. The other one is some of the China slowdown that I noted, which is mostly in our medical business, we're still seeing strong performance, in particular in BDI, which has been a source of strength for us. The good news is we've baked that into our planning by the time that we ramp up to the back of the year, that normalizes throughout the year. So those are the 2 small items.

The third one I would point to, of course, that we've articulated is Alaris. As that comes back, we talked about that being a ramp throughout the year. So those are probably the key 3 considerations. To your point, I think especially on the back of absorbing 75 basis points of China headwind in our growth rate, 5.75 really implies organic growth of 6 north. So it's just -- it's another year of really strong performance.

I think it's when you think of BD, we're not dependent on one area of growth. I think that offers a source of confidence in complex times like this. And I think the growth is broad-based, right? We talked about these 6 key areas within our portfolio that offer opportunity to deliver that outsized growth of either high single digits to double digits. So we continue to focus on that, transforming our portfolio through organic investments in R&D and the tuck-in work we've done. If you noticed '23, the impact from our tuck-in acquisitions are now contributing 40 basis points to growth after having anniversary them for 1 year.

[Thomas Polen, executive]

And Vijay, just to add on. Obviously, with Alaris, we've always said, of course, typically from when we start booking installations, then we get contracts into 3 to 6 months from then that we actually start doing the installations, et cetera. And obviously, we started just a little over 90 days ago engaging with customers.

And so we're really pleased. We're making solid progress with Alaris. Very constructive discussions. We started shipping. We've gotten our first contracts in place, but those will just take time to move through and therefore, we see the bigger ramp in the back half of the year. That's natural for that selling cycle.

The other thing is, as Chris mentioned, we've made some assumptions for Q1 on respiratory testing and COVID levels being notably lower than last year. Obviously, that's to be determined. That could be an opportunity there depending on how the respiratory season plays out.

[Vijay Kumar, analyst]

Understood, tom. And then one on margins here. I think in the Q1 gross margin is 350 basis points below. Just maintain your OpEx dollars, I still end up with an operating margin close to 21.5%. I think your guidance is implying sub-20% for Q1. So is there some investments that's being pulled forward into Q1, and I think you mentioned gross margin flattish year-on-year. Are you planning to exit at 55%. Like what drives the gross margin from 51% to 55% as the year progresses?

[Christopher DelOrefice, executive]

Yes, you're talking specifically about Q1?

[Vijay Kumar, analyst]

Q1 op margins, yes, and gross margin progression.

[Christopher DelOrefice, executive]

Yes. So again, I mean, Q1 had -- there's really 2 onetime dynamics in there. You have effects that's 200 basis points, and you have the inventory take down, right? So the onetime impact of taking on increased absorption in your cost base, it's 400 basis points all happening in Q1 that basically goes away.

The FX becomes much smaller and more normalized throughout the year. The inventory is predominantly done in Q1. That goes away. You also have the outsized inflation that on average through the year is 100 basis points, but Q1 is more elevated this carryover effect from last year. It's about 170 basis points.

The good news again is we have really strong underlying cost improvements. I mean, at this point, Recode, right, which is supposed to deliver about $300 million in savings as we enter into FY 2025. We're achieving about 2/3 to 70% of that savings in this year. So we've made significant progress.

We've actually fully completed the SKU rationalization program in terms of stimying our SKU portfolio. we're not stopping there. We're going to actually increase that goal. There's more opportunity to go.

So you have kind of 2 discrete onetime items in Q1, but the underlying cost improvement we're driving. We just need to maintain that throughout the year, and we'll be fine. Similar to what I shared before on Robbie's question was, last year, we had to deliver 200 basis points of margin improvement, a little bit north of that in the back half.

We have to do the same thing this year. But last year, there was 200 basis points of outsized inflation. This year, there's half of outsized inflation. So we actually feel really strong. That's what's afforded us the opportunity to actually look at our inventory harder and maybe take some more aggressive goals, driving that down and driving improved cash. Again, FY '24 year that's going to have double-digit free cash flow growth year-over-year.

[Vijay Kumar, analyst]

Sorry, the OpEx dollars, are you expecting it to be constant sequentially? Or is that stepping up, Chris, for Q1?

[Christopher DelOrefice, executive]

We can follow up. But there are timing done. If you remember last year, I mean, there are some timing dynamics you're going to see. R&D, you're going to see is much more normalized this year. That's 1 area I would point to. So I think you should expect to see OpEx actually down a little bit in the first half of the year, partially because of that when you're looking at pure SSG&A spend and R&D spend, and then that will renormalize in the back half of the year.

We were very front-end loaded with R&D this year in '23, and then we moderated it back in the second half due to timing of programs, milestones and things like that. This year is more normalized, and we're going to spend about the same in R&D year-over-year from a dollar base. That's probably the one key thing I would point to.

[Operator]

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

[Larry Biegelsen, analyst]

Just I'd love to focus on China a little bit, 13% decline in Q4. What were the drivers of that? How much was the anticorruption initiative versus VBP? And how are sales going to be flat to up in fiscal '24, given the Q4 decline? And just 1 follow-up on fiscal '24, Chris.

The tax guidance, does that include the Pillar 2 changes? And how should we think about the tax rate going forward? And the FX headwind of 75 bps to sales, how can that be a 375 basis point impact to EPS?

[Christopher DelOrefice, executive]

Yes. Thanks, Larry. I appreciate the question. Let me take the last 2 first, I guess. First of all, BD, we started our fiscal year before everyone else. So Pillar 2 is not contemplated nor applicable to us in fiscal year '24. We continue to assess those dynamics. We expect a lot more information as this year progresses. We'll share more on that at a future date.

Obviously, our tax rate, we are planning for a step-up in tax that we've absorbed in our guidance. But I think more to come on Pillar 2, we'll see how this plays out for us. So we have time on that one.

The FX. So again, you have a combination of when every currency moves, so quickly in such a short period of time by a high degree. And I'd mentioned these examples of where you have pure sourcing locations, think of them as basically a cost center. Mexico is a good example where, actually, the peso strengthened against the dollar. You end up with cost dynamics that are also going away. So literally, every currency went the wrong way. And you also had timing about that FX flows through inventory and started last year. So it does create this disconnect that we have. It does normalize over time within our portfolio. And certainly, by the time we get out of Q1, you'll see a more normal drop-through on FX. I'll turn it over to Tom on China. Just 1 high-level comment because remember last year, we did have a comp from the recovery. So if you [indiscernible] next playing out there, but I think the Q4 result was also impacted by the comparison to last year.

[Thomas Polen, executive]

And specifically on China, I'd really focus on 2 key areas. One is BOBP and then the topic related to farm systems, which Chris mentioned, which obviously we overcame at a global level, but you see it acute the topic within China, and we ended up reallocating the supply to other customers that were outside of China.

So on the pharma systems, one is, as Chris mentioned in the prepared remarks, we're just seeing specifically within China, basically a slowdown in exports of pharmaceutical products, specifically anticoagulants from China and so lower demand as those companies are seeing significant drops in their exports. So that's really one again that ended up showing up in our -- it will show up in our China numbers as a decline, but that same volume that would have gone to them gets reallocated to other customers globally who are still have that business in their prefilled syringes for anticoagulants. And so we may -- you didn't see it at a pharmaceutical systems level. So that's one and was notable within the quarter.

I think the other one is really more BOBP. And again, primarily focused within the MDS business. We continue to see strong high single-digit, double-digit growth, strong double-digit growth in Interventional and high in life sciences. So really, they continue at our historically expected growth rates, not only in '23, but through as we look ahead towards '24, that's our outlook there as well. It's really acute within specifically the MDS business and then the continuation, annualization of what we're seeing in China around anticoagulants and exports.

So when it comes to anticorruption campaign, that's obviously a macro topic. We feel very strong about our compliance system, et cetera. Nothing we're worried about. I think we saw some stabilization in the market on that versus maybe when it first came out in customers' reactions, but I wouldn't overly attribute it to that topic as much as the other 2 that I mentioned.

[Operator]

Travis Steed with Bank of America.

[Travis Steed, analyst]

I'll ask the Alaris question. Are you still penciling in $2 million for the full year? And any help on maybe what you've expected in kind just to help with the ramp for Aleris? And is that -- when you think about margins, is that one of the drivers of the second half margin rate?

[Thomas Polen, executive]

Yes. It's -- I'll start and turn it over to Mike, just maybe start with the margin ramp. It's not part of the margin ramp. It's not accretive to BDX margin. I think we've shared that in the past, the capital itself is not.

Obviously, assumable associated with that tend to be, but not the capital itself. As we think about the 200 million, I may just share some broader context 90 days in, [indiscernible] progress we're at or ahead of our expectations there. But again, as we said, it's typically 3, 6 months -- it's a 3-plus month process once you get a purchase order to get the installs even it's more like a 6-month plus sales process started 9 days ago, right?

And some we are getting in earlier. We're getting contracts signed. We've already started shipments. But what we'll do is we'll continue to share our progress on that. We're not changing the 200 number now. And I think that was also, just keep in mind, that was something that we shared to give some color as related to clearance, but for competitive reasons, I wouldn't expect that we'll share a specific revenue number for Aleris going forward, just like we don't for any other product line. But we will make sure that we share color on our progress in terms of where we are relative to that absolute number. So maybe, Mike, other things to add.

[Michael Garrison, executive]

Just really pleased that we were able to manufacture and ship product to the first customers ahead of schedule. We had been sort of planning for that more in Q1 of this year, but the team was able to execute to be able to ship products in end of September, all I think, and we're able to start to for focusing on our existing customers for remediation out in the field.

The other point that I would make is that we continue to sort of make solid progress just working with the customers. And we've mentioned before how important interoperability was during COVID. And certainly, for a lot of our customers, that's a key consideration in the discussions that we're having with them. So that's good for health care. I think that's good for public health. And so we're really happy that that's a key consideration from their perspective and we're well positioned in that area.

[Operator]

Our next question comes from Matt Miksic with Barclays.

[Matthew Miksic, analyst]

Great. So with all the swing in FX and they're dominating the questions around the guide here. I have one sort of follow-up on that and then a follow-up on your growth and sort of growth priorities and other sort of investment prices you're making during the year. But at FX, the swing obviously is like running and we're starting to get a sense of that into year-end and early next year. But if you could maybe highlight the way that, that is managed through your P&L, how at all there's any elements to that, they're slightly different than other folks that in the space decisions that you make or make in terms of managing FX and as an I want to follow up.

[Thomas Polen, executive]

Matt, you were cutting out just a little bit there at the end. It was clear during the intro. But I think the question, just correct me if I'm wrong, is kind of on FX swing, how it's managed through our P&L, do we hedge at all, et cetera. Is that the question?

[Matthew Miksic, analyst]

Yes, that's the first question. And how it might be choices that you're making or not making, as Chris referenced.

[Christopher DelOrefice, executive]

Yes, Matt. So a couple of things. I mean I think -- no different from anyway. There's many ways that we mitigate currency dynamics, right? One, we're netting where you have crossed currencies. Two is we actually try and match sourcing location-wise to look at our manufacturing footprint. With that said -- and there's hedging that we do, of course, in particular, to preserve cash is the way we think of it.

I like anything translational has no impact to underlying economic value of the currency in the local market. It always really becomes a strategy of how do you match sources and uses of cash. And so those become some of our principles when we think of FX. At the end of the day, what we can control is the underlying business, and that's what we presented here was an extremely strong top line growth. Again, another year of margin improvement despite FX, by the way, right, 75 basis points of an FX headwind on margin.

So we've committed to the at least 50 basis points. So it's really north of 100 when you think of it that way. And then again, we're being super focused on cash, which is the ultimate thing that creates value, and we expect to have double-digit free cash flow year-over-year. What was the -- was there another part of the question?

[Thomas Polen, executive]

That was the key. And I know you had a part 2 to that maybe unrelated to...

[Matthew Miksic, analyst]

Yes. And that's kind of actually go tails nicely into Part 2, which is so you're making some choices that are impacting margins as you talked about inventory takedowns, which are -- have an absorption effect, which I think everyone would agree is those are solid fundamental cash-generative decisions. And just with the questions as I think everyone is seeing, there will be some -- there is some pressure here before the open and it kind of gives the impression of a company that is under some pressure or on a defensive posture, but your actions obviously are saying the opposite. And I was wondering if you can talk a little bit about some of your continued efforts to either invest inorganically or highlight some of the drivers that you think are going to be significant growth leaders in the early and mid part of the year in '24.

[Christopher DelOrefice, executive]

Yes, Matt, and Tom can expand on this, too, maybe on how we're thinking of tuck-in M&A. But to your point, throughout this timeframe, in addition to navigating significant complexity, absorbing outsized inflation we've actually been leaning in and making bold choices that are paying off growth and creating kind of a virtual cycle of strong growth, margin improvement.

So inventory is an example. It's an intentional added sort of pressure that we're putting on ourselves in terms of absorption because we know it actually creates net positive from a cash flow standpoint, and yet we're absorbing that. We know we have a strong portfolio of cost to win programs like recode, et cetera. So we're doing that from a position of strength and actually you should view that as a sign of confidence, especially in a high interest rate event, right? Cash is worth a lot more.

We're also setting ourselves up from a tuck-in M&A, right? We've talked about the ability to execute against larger tuck-in size deals. Our net leverage is down to 2.6x. We built strong cash throughout this year. So we feel really well positioned from that standpoint, and we'll continue to be disciplined, but strike on opportunities as they become available.

[Thomas Polen, executive]

And Matt, I think, as Chris said, we just set the inventory piece aside. We create awareness in that, but it's really irrelevant at the end of the day in terms of we're delivering, right, our 6% top line organic growth, and we're delivering double-digit EPS growth organic. And then it's really FX is what kept flow through, right? We're not going to cut R&D or cut other investments making to drive our strong growth profile, which is a 7% CAGR over the last couple of years. We're not going to cut that to do FX, and particularly when we look at the cash flow, which is what we used to invest behind that growth, has 0 impact from FX really that we see. We're continuing to drive actually outsized free cash flow.

Think about in FY '23, we grew free cash flow by $600 million in the year. That's strong free cash flow growth. And we expect continued strong growth as we look at '24 and beyond. I think in terms of we are extremely excited by our portfolio and what we have today. And I think you're seeing outsized performance across our different segments.

I mean, if you look at BD Interventional, the strong growth in surgery with our bioabsorbable materials really taking off. And you can see there's been several quarters of strong growth there.

PI doing well. And obviously, Berwick now with the Mail product. You heard us in our prepared remarks actually say,that's going to be a bigger product than we thought it was going to be. When we originally put out our guide and declared which products were going to be over $50 million, we just increased PureWick Mail to be one of those products that's going to be over $50 million, quite clearly. It's on one of the fastest ramps of any product we've ever seen at the company. It's doing extremely well, and we're adding capacity as fast as we can. Really strong adoption by nurses in particular.

In our Science business, great growth in Biosciences. I think you're seeing us be a standout within maybe peers in that area. The strength of our FACSDiscover platform, combined with our die has done really well. You saw that continue through Q4, and we expect continued strong growth. We see strong demand for that platform and our combination with the unique die to allow really another level of of multiplex testing as well as whole new insights into the cells that you can now visually see in addition to fluorescence.

Obviously, when it comes to BD Medical, that bold investment that we made in capacity right in the middle of COVID, we're seeing payoff with another just very strong performance in pharma systems. And we see just the durable trends there, whether or not it's the GLP-1s, other biologics that we're very well positioned from not only a portfolio offering and technology perspective, but from a capacity perspective, because of those bold investments. We're well positioned to continue to capitalize on those.

And of course, in MMS, what we've built now with a $700 million pharmacy robotics business. Really, if you look at across med tech, it's hard to name many automation or robotics businesses larger than our franchise that we've now built there in the pharmacy. And that's growing double digits. We expect that could continue through '24. And obviously, the run of Alaris has been our #1 goal here for a couple of years, and we couldn't be more pleased to achieve that goal at the end of and that gives us another curtailing and confidence in our long-term plan and our confidence in this year. So a lot of really good things happening.

When you think about M&A, you did ask the question. As Chris also mentioned, we ended '23 at strong leverage, 2.6x leverage, strong cash flow, increasingly strong cash flow as we go into '24. And so we have a strong robust M&A pipeline. We're still focused on larger size tuck-in M&A, which is still our priority, as we've shared, and we're not changing from that. We're going to continue to be very disciplined on the targets that we go after as we have been to make sure that they drive accretive growth and profitability for the company, and we see a number of opportunities to do that. So -- and I think we're really pleased with how we've executed on the M&A that we've done. We're really pleased with the track record that we've built there.

You can see, as Chris shared, basis points of underlying organic growth driven through the acquisitions that we've done over the last couple of years. And that's a lever we're going to continue to pull in a very systematic way. And I think you're seeing all the other actions that we're taking, including optimizing cash flow, fit into that growth algorithm. So thank you for the question. I appreciate the color.

[Operator]

All right. This does conclude the question-and-answer portion of our call. I turn the floor back over to speakers for any closing or additional remarks.

[Greg Rodetis, executive]

Thank you, operator, and thanks, everyone, for your time today. I'd like to take a moment and again, thank our global team of BD associates who are advancing our strategy and who are making meaningful impacts for our customers and the patients we mutually serve. Our BD 2025 strategy is demonstrating strong momentum. We're exceeding our commitments and have outlined a strong outlook for fiscal 2024. We look forward to connecting with everyone again on our next call, and thank you very much, and have a great rest of the day.

[Operator]

This does conclude the audio webcast. On behalf of BD, thank you for joining today. Please disconnect your lines at this time, and have a wonderful day.