Hello, and welcome to BD's Third Fiscal Quarter 2026 Earnings Call. At the request of BD, today's call is being recorded and will be available for replay on BD's Investor Relations website, investors.bd.com or by phone at (800) 688-9445 for domestic calls and area code +1 402-220-1371 for international calls. [Operator Instructions] I will now turn the call over to Shawn Bevec, Senior Vice President, Investor Relations. Please go ahead.
Good morning, and welcome to BD's earnings call. I'm Shawn Bevec, Senior Vice President of Investor Relations. Thank you for joining us.
This call is being made available via audio webcast at bd.com. Earlier this morning, BD released its results for the third quarter of fiscal 2026. 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 Vitor Roque, Executive Vice President and Chief Financial Officer. Before we get started, I want to remind you that we will be making forward-looking statements. You can read the disclaimer in our earnings release and the disclosures in our SEC filings on our Investor Relations website.
Unless otherwise specified, all comparisons will be made on a year-on-year basis versus the relevant fiscal period. Revenue percentage changes are on an FX-neutral basis unless otherwise noted. Also, references to adjusted EPS refer to adjusted diluted EPS.
Financials discussed here and included in the earnings release and 10-Q are presented on a continuing operations basis. Prior periods have been recast to reflect the spin-off of our Life Sciences business in combination with Waters, which is now accounted for as discontinued operations. Reconciliations between GAAP and non-GAAP measures are included in the appendices of the earnings release and presentation.
With that, I will turn it over to Tom.
Thank you, Shawn, and good morning, everyone. We delivered a strong third quarter with revenue, adjusted operating margin and adjusted EPS all ahead of our expectations. This was our first full quarter operating as New BD.
And more importantly, the quality of this performance reflects our more focused portfolio beginning to demonstrate the growth and earnings potential we designed it to deliver. Performance was broad-based, reflecting commercial momentum across our key growth platforms, strong operational execution and the expanding impact of BD Excellence. Revenue was $5 billion, up 4.4% with more than 90% of the portfolio delivering high single-digit growth.
Performance continues to be driven by ongoing structural improvements across our key growth platforms, where we've been focused on enhancing commercial execution and driving product innovation. This includes double-digit growth across biologic drug delivery, advanced patient monitoring, PureWick and advanced tissue regeneration, along with strong performance in peripheral vascular disease and Rowa pharmacy automation. As these platforms continue to scale and growth outpaces the broader portfolio, they are becoming more meaningful drivers of top and bottom line performance.
We also saw strong U.S. performance in MDS and specimen management, driven by broad underlying utilization as well as share gains. Growth was partially offset by known dynamics concentrated in less than 10% of our portfolio, primarily the difficult prior year comparison in Alaris as well as vaccines in China, which all played out as expected. We delivered adjusted operating margin of 24.9% and adjusted EPS of $3.23, reflecting the increasing revenue contribution from our growth platforms as well as strong operational execution through BD Excellence.
Based on our Q3 performance, strong year-to-date execution and confidence in the continued momentum of New BD, we are updating our full year guidance. We now expect revenue growth toward the high end of our low single-digit range and are raising the midpoint of our adjusted EPS guidance. Turning to our New BD strategy.
We are increasing momentum across 3 strategic pillars: compete, innovate and deliver. Starting with Compete, we continue advancing commercial excellence with greater customer focus, stronger accountability and faster decision-making. Our goal is simple.
It's to convert the strength of BD's portfolio into faster growth, deeper customer partnerships and sustainable share gains. In Q3, this translated into strong outcomes across our growth platforms and a few to highlight. Within Connected Care, we're seeing the power of our portfolio with continued share gains in Alaris this quarter and over 200 basis points year-to-date.
APM continued to grow above market, supported by expanded adoption of HemoSphere Alta and double-digit growth in both Smart Recovery and legacy consumables. Our incremental commercial investments going into this year are contributing roughly 100 to 150 basis points to APM's growth rate. In BioPharma Systems, we continue to see pipeline momentum with new customer agreements signed across the portfolio.
We're achieving high win rates across the biologics market, including GLP-1s, and we now have approximately 100 agreements signed across novel and biosimilar GLP-1 programs. That demand is being supported by the capacity investments and innovative drug delivery technologies we've built over time. This includes a new collaboration with EMS, one of Brazil's leading pharmaceutical companies and the launch of a semaglutide therapy, utilizing our Vystra injection pen in one of the region's largest health care markets.
In Interventional, our incremental commercial investments coming into the year are translating to stronger growth with PI demonstrating another consecutive quarter of acceleration. In UCC, our incremental investments in the VA channel for PureWick continue to build momentum and contributed to another quarter of double-digit growth in the platform. Together, these results demonstrate that our compete strategy is a positive accelerator for New BD.
We're winning more consistently, scaling our growth platforms faster and strengthening our position with customers around the world. Our second priority is Innovate. We're focusing our pipeline in attractive markets where health care needs BD most, connected care, enabling the shift to lower-cost settings and advancing treatment of specific chronic diseases.
Our innovation momentum continued in Q3 with BD Excellence increasing the cadence and the speed of launches. We expanded our vascular portfolio in PI with the early European launch of the differentiated Liverty TIPS Stent Graft, entering a market that's seen limited innovation for many years. BD Liverty brings enhanced ease of use, the broadest range of lengths available and compelling clinical trial results.
This launch broadens BD's presence in the approximately $2 billion global venous market, which is growing high single digits. We also launched the Elyra Thulium Fiber Laser System, expanding our kidney stone portfolio and presence in endourology. Early customer reception has been strong with placements accelerating since launch.
The endourology market is approximately $1.5 billion and increasingly driven by disposables, a model that plays to BD's strengths. Finally, we continue to expand our noninvasive monitoring portfolio in APM with the launch of the Acumen IQ Plus Finger Cuff and Smart Pressure Controller, which pairs with our HemoSphere Alta platform and brings enhanced usability and advanced AI features to customers. This advancement in our noninvasive portfolio allows us to continue expanding our reach to underserved OR and ICU patients.
These technologies are commercially available now in both the U.S. and Europe. We're investing behind markets with attractive growth, strong clinical demand and clear competitive advantages. Collectively, these launches demonstrate a more focused innovation model that's strengthening the long-term growth profile of the company.
Our third priority Deliver is about operational excellence at scale, improving quality, service, productivity, margin and cash flow. Through BD Excellence, we've built one of the most resilient supply chains in our industry with back orders at record lows and service levels at record highs. Our scale, combined with BD Excellence embedded across our manufacturing network is a growing competitive advantage that translates into efficiency, resiliency and consistency for our customers.
Again, this quarter, we delivered approximately 8% gross productivity in our plants with service levels above 90%. That progress was driven by plant consolidations, raw material savings, waste reduction and higher efficiencies on our critical lines and processes. We've also begun investing in the deployment of a standardized digital platform designed to run AI across BD's end-to-end supply chain.
And we believe this represents another meaningful runway for productivity and service improvement over time. Turning to capital allocation. Our disciplined framework remains unchanged, and our improving free cash flow is giving us more firepower to execute.
We remain committed to returning capital to shareholders, including through share repurchases, investing selectively in high-growth tuck-in M&A and driving towards our 90% free cash flow conversion target over time. With that, I'll turn it over to Vitor to provide more detail on our financial performance and updated guidance.
Thanks, Tom, and good morning, everyone. We delivered a strong third quarter with $5 billion in revenue, up 4.4%, reflecting broad-based growth across the portfolio and disciplined execution through a dynamic environment. As Tom highlighted, performance was broad-based, driven by continued double-digit growth in several of our key platforms and strong performance in the U.S., partially offset by a difficult prior year comparison in Alaris and continued pressure in vaccines in China, all consistent with our expectations.
Medical Essentials grew 3.2%. In MDS, strong U.S. performance benefited from share gains across Vascular Access Management portfolio and utilization recovery related to last year's fluid shortage. This was partially offset by continued pressure in China.
In specimen management, we delivered high single-digit growth, driven by share gains across the BD Vacutainer portfolio, improved supply and incremental demand as customers work through competitor back orders. Connected Care grew 4.4%, led by double-digit growth in advanced patient monitoring on strength in consumables. MMS grew low single digits, led by double-digit growth in dispensing and continued strength in Rowa Pharmacy Automation.
We also saw a strong infusion set performance due to higher utilization versus last year's fluid supply disruption and pull-through from Alaris share gains. This was partially offset by difficult prior year comparison in Alaris capital. BioPharma Systems grew 5.2%, driven by continued double-digit growth in biologics, led by GLP-1s.
This was partially offset by lower demand for vaccine products. Excluding the impact of vaccines, BioPharma Systems grew in the mid-teens. Interventional grew 5.5% with solid mid-single-digit growth across the segment.
In PI, growth was led by oncology and peripheral vascular disease, reflecting strong commercial execution and new product launches, partially offset by China market dynamics. UCC was led by continued double-digit growth in PureWick. Surgery performance was driven by double-digit growth in infection prevention and advanced tissue regeneration.
Turning to the P&L. Adjusted gross margin was 54.3% and adjusted operating margin was 24.9%, down 100 and 130 basis points, respectively, versus the prior year. Margins benefited from productivity gains through BD Excellence and favorable mix. These benefits were offset by approximately 110 basis points of tariff impact.
We also continue to invest in selling and R&D to support our long-term growth strategy. Adjusted EPS was $3.23, up 4.9% and ahead of our expectations, reflecting our strong revenue performance. Turning to cash flow and capital allocation.
Year-to-date, free cash flow was $1.7 billion, an increase of 45% versus the prior year. This reflects improved working capital and lower nonoperating cash items, including Alaris remediation outlays. Year-to-date, we returned $3.1 billion to shareholders, including approximately $2.3 billion in share repurchases and $0.9 billion in dividends.
We ended the quarter with net leverage of approximately 2.9x and remain committed to our 2.5x long-term net leverage target. Moving to our updated fiscal '26 guidance. We now anticipate revenue growth to be toward the high end of our low single-digit FX-neutral range.
Based on current spot rates, currency is now estimated to be a tailwind to revenue of about 100 basis points. Moving down to the P&L. We continue to expect adjusted operating margin of approximately 25%, inclusive of the impact of tariffs. Our adjusted effective tax rate is expected to remain between 16% and 17%.
Given our Q3 performance and continued productivity through BD Excellence, we are increasing the midpoint of our adjusted EPS guidance and updating our range to $12.62 to $12.72. With that, I'll turn it back to Tom.
Thanks, Vitor. Before we open the call for questions, I want to recognize Mike Garrison, EVP and President of the Medical Essentials and BioPharma Systems segments, who recently announced his intention to retire after more than 20 years with BD. Mike has been an impactful leader and trusted partner, and we thank him for his many contributions to the company and wish him all the best in his retirement.
As we continue to lead BD into its next chapter, I also want to welcome Peter Menziuso, who joined BD on June 1 as EVP and President of BD Interventional. Peter brings more than 30 years of global health care leadership and a strong commercial and operational mindset is well aligned with the operating system we're scaling across New BD. I also want to recognize our associates.
Our results reflect what we can deliver as a more focused med tech company. Operationalizing our New BD strategy following the Life Sciences separation has taken a tremendous amount of work across the organization. And all of this happens because of the dedication and execution by our associates, and I want to thank them for their many contributions.
With that, let's start the Q&A session. Operator, can you please assemble the queue?
[Operator Instructions] We'll take our first question from Travis Steed with Bank of America.
Congrats on a really, really nice quarter here. I guess I wanted to ask about the strength in the quarter. There was a lot of momentum in a lot of the businesses here.
And I think some of -- the 90% of the business that usually grows mid-single digits was above trend. I don't know if there was anything onetime that you'd call out and kind of how you thought about the revenue guidance and being able to move that up to the high end of the low single-digit range? And how much of this kind of carries into '27?
Travis, thank you. Great to connect. We're really pleased with the growth in the quarter, as you said.
And I think it's really exemplified by the momentum that you're seeing in our growth platforms. Those are areas that we've been very actively building over the last 5 years. I think you're really seeing them pay off in the -- and exemplify the power of the New BD.
This is our first quarter as a focused med tech company. Those growth platforms, we had actually 4 of them growing double digits, the rest all growing high single digits in the quarter. And whether or not it was very great growth, very high double-digit growth in biologics, specifically in GLP-1s, even at the higher side of that, to what you're seeing in pharmacy robotics with Rowa to our APM business continuing to build momentum, including we're seeing the benefits of some of the commercial investments that we made there as well as in UCC and in other places, right?
That momentum, we're continuing to invest behind both commercially, and we're continuing to invest behind from an innovation perspective. We've actually reallocated a disproportionate amount of our R&D programs into those growth vectors. And as those grow, not only do they accelerate the revenue of the company, given they're in faster-growing markets and we're building leading positions in and have strong pipelines, but they also all have favorable mix benefits and can help fuel gross margin and ultimately, operating margin expansion as we look ahead.
So we're really pleased with what we're seeing there and what we're building, and we're going to continue to focus on executing that as we move ahead in BD.
And we'll take our next question from Patrick Wood with UBS.
Similar vein, you mentioned, obviously, share gains, and it sounds very clear like volumes across a lot of these categories are doing very well. So I guess my core question is, how much of this is that innovation pipe? Did you make any big changes to your commercial approach into the market that may have enabled your commercial teams to take more share?
Because a lot of these categories, you actually already have quite a high share in. So I guess, has the commercial approach changed? Or is this really just the innovation platforms coming through?
Patrick, it's a combination of both. So as we've launched our New BD strategy, what we call Excellence Unleashed inside of BD, we're hyper focused on driving excellence across those 3 pillars, which is commercial excellence, innovation excellence and delivery excellence. Delivery excellence is what you've seen us doubling down with BD Excellence on for obviously some time, and you've seen the benefits of that in our margin expansion.
You saw us appoint Mike Feld as our first ever in the company's history Chief Revenue Officer. And he just moved into that role full time really in February when we completed the transaction with Waters. As part of that, we've begun changing everything from the compensation system of our sales reps to the tools that our teams have, including beginning to deploy AI into their hands to better prepare them for account visits and where to hunt.
We've been reallocating our commercial headcount into the highest growth spaces, and you saw us at the beginning of the year, discuss making about a $35 million incremental investment in very targeted areas. So we grew the APM sales team by about 15% in the U.S. and we announced this morning that about 100 to 150 basis points of the APM double-digit growth this quarter came from that investment already just in the first couple of quarters, and we're seeing that continue to accelerate. We did the same thing in UCC.
We put more sales headcount down. We've been investing in market development for PureWick and seeking reimbursement across a broad range of areas. And we had earlier gotten reimbursement in the Veterans Administration.
And so we put in a dedicated sales team to pursue that opportunity at the beginning of this year. And again, we're seeing that pay off with already a well over $1 million a month run rate in that category built this year through those investments. We did the same thing.
We grew PI sales team by 15% this year in the U.S. And you're seeing, again, strong consecutive growth in that business quarter-on-quarter, driven by that commercial focus. So we think there's a really continued opportunity for us as we drive towards being the best in med tech commercially. And that's going to be a hyper focus for us over the next several years.
And we're complementing that again with our work in innovation. We've spent a lot of time over the last several years, shifting our innovation portfolio into the highest growth sectors associated with the areas that we see transforming health care. We really look back many years ago, and we recognized that health care was going to be undergoing one of the most significant transformations in its history.
It's becoming more connected, more automated, more personalized. And we were very purposeful in shifting our innovations into those areas. And now you're seeing those, which are our growth drivers starting to pay off.
So we appreciate the question and look forward to continuing to update you on those. We will have an Investor Day now that we've got Vitor on board, and we will be sharing the date on that forthcoming.
And our next question comes from Larry Biegelsen with Wells Fargo.
Tom, I don't want to take away from the strong quarter here. But on the Q3 calls, you've typically given some helpful color on the following year. So my question on fiscal '27 is, in the past, you said top line growth similar to that in fiscal '26 and the Street is at about 7% EPS growth next year.
So given the strength you're seeing in the business, could revenue growth next year be closer to the high end of low single digits? And what are some of the puts and takes we should consider next year for the P&L? Can you -- for example, can you grow operating margins next year?
Yes. Sure, Larry. Let me turn that over to Vitor.
Yes. Larry, thanks for the question. Of course, we are very proud of the results in Q3 and the momentum that we have.
Regarding FY '27 outlook, I think we have consistently characterized FY '27 as low single-digit revenue growth and that is due to the Alaris remediation coming to an end in FY '26, which creates a 200 basis points headwind next year. And we believe that's still a reasonable framework as we head into FY '27 from a revenue... Now if it's related to the earnings, if we start on a low single-digit revenue baseline, we believe a good starting point is to expect like a modest leverage on that earnings, supported by our pricing actions, productivity gains from BD Excellence and our capital allocation strategy.
We will provide our formal guidance, as you mentioned, in full details on our November call. But I think important, our philosophy remains focused on establishing executable commitments and creating the opportunities for the consistent delivery against them. Thanks for the question.
And our next question will come from Vijay Kumar with Evercore ISI.
Maybe I'll focus one on the big picture. There's some concerns around utilization environment and CapEx environment. When I look at your APM business, I mean, that seems to be humming double digits, right?
So can you just comment on the broader utilization and CapEx outlook, please?
Sure. And thanks for the question, Vijay. Great to connect.
We obviously pay very close attention to hospital utilization. And we saw solid utilization across our portfolio. You can see that reflected in our Q3 results.
I think as you know, BD is very uniquely positioned because of the broad use of our products across essentially every procedure and care setting and our strong positions give us really kind of a bellwether view on indicators. And so things that we watch are blood collection tubes and syringes, catheters, those types of products, which are ubiquitous with just general health care consumption. And so you can see in our results, U.S. MDS up 6% in the quarter, indicative with strong catheter utilization, syringe, et cetera.
So we think that's a positive sign. In specimen management, so if there's one business that kind of maybe is not recurring at that rate, you saw the U.S. at 14% growth in specimen management. We're not declaring that's a 14% growth business going forward.
But they are executing phenomenally. They're taking share. Operationally, they're executing with Excellence, and we're able to capitalize on some competitive near-term supply issues.
But nevertheless, even if we take out kind of those benefits in the quarter, we still see strong utilization there. And in fact, one of the metrics we look at internally is what's the ratio between the number of needles we sell and the number of tubes we sell, which is kind of how much diagnostic testing is being done. And we have seen over the last couple of quarters, and we saw it again this quarter, an uptick in tube utilization versus needle utilization, which says more testing is being done per patient.
Whether or not that's higher acuity patients ending up in hospitals or you're seeing more testing going on because of new innovative cancer screening testing, et cetera. Nevertheless, the testing we are seeing trending up with the number of tubes being drawn per patient collection. So those are some of the things that, again, we're going to continue to watch very closely.
But overall, we see utilization remaining solid.
We'll take our next question from Robbie Marcus with JPMorgan.
Congrats on the good quarter here. Tom, I'm sorry to take this angle. Travis asked about, I think, all the 90% of the business growing double digits.
I want to ask about the 10% that's clearly weighing on organic growth here. And what sort of -- any trends you could break out there? What's the visibility on to those ending?
You called out a 200 basis point headwind from Alaris next year. But what are some of the other line items that are dragging down growth? And what are some of the changing dynamics there and visibility to maybe an end in sight for those type of growth rates?
Rob, thanks for the question. So obviously, we've been talking consistently throughout the year on 3 specific headwinds: Alaris, which is extremely defined, China and vaccines. And so maybe I'll take those in a bit of reverse order.
So vaccines -- and by the way, all 3 have been playing out as we expected through the year. We spent a lot of time reflecting and actually adding and building some capabilities in our central organization. Just given how dynamic the markets are today, we really wanted to build some best-in-class capabilities on -- independently at a central company level, independent from the businesses, looking at markets where they're heading and looking further around the corner.
And so those -- that team and those capabilities, you're really seeing that play out, how do we look at that going into this year, and we got it right, right, in a dynamic environment. So vaccines we're seeing play out again as expected. As we said, I think, on our last call that we expected by the end of the summer to start getting some view in terms of what that's going to look like going forward.
I think on a -- it's still a bit early. We're not quite at the end of the summer, but we're seeing positive signs, right? We're seeing stabilization, I think, in that.
We're going to start lapping the vaccine headwind as we go into next quarter. And I would say at this point, again, we're not through the end of the summer, but preliminary feedback that we're getting and preliminary order patterns that we're seeing aren't certainly showing a repeat of that level of headwind in '27. We'll obviously give an update on that as we get into our guidance, but we're seeing positive stabilization there.
I think in China, the key thing there is now as part of New BD and the separation of Life Sciences, China is a much smaller portion of BD. It's going to be down to just 4% of New BD revenue, and it's going to probably drop into the 3s as the rest of the BD is growing faster as we get into next year. So we're going to continue to assume, right, a dynamic environment in China.
But I think we're going to end up seeing that just get incorporated in our outlook and kind of not as significant of a dynamic as we go forward. And then Alaris is really the one that we're going to have the last -- that's a very, very defined window. That's going to end next year in '27.
And we've known that for a bit of time. As we said at the start of this fiscal year, it was going to be a 100 basis point headwind this year. It's playing out exactly as we said.
And we said it's going to be a 200 basis point headwind next year, and it's playing out exactly as we said. And then it's not going to be a headwind anymore. And that 200 basis points will come off and lift, and we expect to be driving back to our mid-single-digit algorithm.
And all that remains exactly in line. So thank you for the update, Robbie, and we'll continue to obviously provide progress there.
And we'll take our next question from Joanne Wuensch with Citibank.
Just briefly for clarification. When you talk about modest EPS leverage in 2027, how do you define modest? And my second question really has to do more with products, and this may sort of grab some of the wind from your Strategy Day.
But anything in particular you'd like to call out as product drivers over the next 12 to 18 months that we should pay attention to?
Joanne, why don't I take the product piece first, and then I'll turn it to Vitor to share that. Again, just as a reminder, we're not looking to give '27 guide here. We'll do that in November, but I'll turn that to Vitor.
As we think about product drivers, expect those to be in our growth platforms continuing down the line. We've got additional launches, and we expect continued momentum in APM. The team there is doing a fantastic job.
Expected at Analyst Day for us to share more about some of the innovations that we told you that we'd be making, particularly beginning to connect our APM monitoring technology and our Alaris pump. We'll unveil what we've been up to there. The team has made phenomenal progress, but expect that to come up in that discussion.
Our tissue regeneration business, we continue to have -- expect strong growth going forward there and have quite a few clinical trials underway for new applications of that biomaterial into new indications to continue to expand our presence in those spaces. Pharmacy automation, as you know, we recently pulled that out of MMS and have that as a focused team underneath of Bilal. We brought in a new President of that category and are excited about the growth as we look ahead there.
In biologics, that's going to continue to be a strong growth performer for us. You heard us announce we're up to 100 deals in the GLP-1 space. And you saw us announce the first launch of a biosimilar and our new Vystra pen, which is at a higher value capture than when we just sell a syringe.
So we're excited about still the future there in biologics, not only biosimilars, but there's a number of new novel biologics that are coming down the pipeline that we have a strong presence in as well. Connected Care, you're seeing the power of our Pyxis Pro launch with dispensing growing double digits in the quarter. We are seeing positive market traction and adoption there.
And of course, the power of our overall portfolio combined with our Alaris and new AI platform, BD Incada. So I probably haven't mentioned everything there. Obviously, PureWick and -- which has new products launching also in the future, and I think we're up to over 35 consecutive quarters -- 37 consecutive quarters of double-digit growth in PureWick.
We've got a strong road map to continue momentum there, and we'll be unveiling some new products at Investor Day that will help fuel that as well as our continued efforts on reimbursement. We're in early stages of reimbursement for at-home and PureWick, and we see that as a really exciting vector for it going as well. So again, we've been doubling down on those growth platforms over the last several years.
You're starting -- you're seeing the momentum of those, and we've got a really exciting pipeline to back that up as we go forward.
Yes. And maybe, Joanne, just to complement what Tom was mentioning, if we go to the EPS, as I said, we gave early indications of where we see FY '27 starting. There will be more details on P&L specifics and numbers when we give our guidance in November.
But the modest [ learnings ] leverage is off the single-digit revenue growth baseline. It's an EPS starting assumption. That's what we are seeing this.
And it reflects the Alaris flow-through and a dynamic environment, which we are actually working to offset via pricing actions that are already underway, some mix favorability with the growth drivers that Tom just mentioned, but also the BD Excellence productivity. We also plan to continue to invest in our commercial and innovation to fund ourselves and leverage that growth engine [ for '28 ] and beyond. So we'll give more guidance in FY '28, but those are like the key drivers inside that modest assumption.
And we'll take our next question from Matt Taylor with Jefferies.
I had kind of two, I'll just come upfront. So number one, if I take your guidance for top line quite literally, then the squeeze math would imply Q4 goes back to about 2.5% growth versus the 4.4% you just did. So I was wondering if you could comment on that and if that was any conservatism or other trends we should think about?
And just on next year, maybe you could just talk a little bit high level about inflation and headwinds that you're assuming to get to that modest leverage, given you're tied to oil-based resins on plastics and freight and how you're hedging against that?
I'll take the kind of the macro dynamics for '27 first and then turn it over to Vitor for Q4. So in terms of '27 on the macro, right, we want to take a conservative posture there. I think as you said on -- obviously, oil has been bouncing all over the place.
There's certainly -- even this past week has been a good example of that. We had shared before that if oil were to stay above $100, which is not there right now. But if it were back when it was, it would be about a $60 million to $70 million impact on COGS.
Just as a reminder, right, resin and molded plastic components, which obviously are byproduct of oil, they represent just about 5% of our COGS. And so we already are -- we're being very proactive in terms of the actions to offset that when oil was at its peak, right? We weren't just going to wait around and see where it was going to head.
We started taking actions back then, and that included additional pricing actions, which we continue to execute against, and we will continue to execute against those. We'd rather assume a higher input cost. And if it gets better, that can become a positive for us.
But that's our philosophy that we're taking there. When it comes to Q4, Vitor?
Yes. So I'll cover here Q4, Matt. So talking about Q4, you're correct.
So the calculation implies a step down in Q4 compared to Q3. And the major dynamic that the main dynamic reflects the Alaris comp dynamics. So we have highlighted at the beginning of the year that we're going to have higher compare -- a higher tough compare in Q4 because of the Alaris peak last year.
So that adds a point of pressure on Q4 versus Q3, adding to 200 basis points of total pressure. So we had 100 basis points in Q3, that jumps to 200 basis points in Q4. That's the major dynamic we have heading into Q4, different than Q3.
But I think the key takeaway for us is like we continue to guide and look at the Q4 as -- within a consistent full year framework. Like underlying the new momentum remains there. I think it's something that we have seen sustained and the sequential deceleration is just that time -- this headwind comparison of Alaris.
That's the main driver.
And our next question comes from Rick Wise with Stifel.
Tom, since you took over as CEO, productivity enhancement, efficiency, manufacturing consolidation, portfolio change, investing in innovation, all of these have been huge priorities. My question is, how much more is there to go in your mind and the implications for operating margins as we look ahead not to the next quarter or [indiscernible], but to the end of the decade. I mean I feel like your new AI productivity idea and so forth, the portfolio reshaping and the efficiencies so far all suggest to me that we should see accelerating margin expansion from here.
So -- you're in the mid-20s. It's bumped up a couple of hundred basis points over the last couple of years for all sorts of complicated reasons. Is dreaming of 30% in 2030 has a nice ring to me.
Is that too ambitious? Or do you need to invest more? Just help us think through the longer-term picture there.
Yes. Thank you for the question, Rick, and I appreciate the commentary. As we -- maybe just as we think about our algorithm down the P&L on margins, I can give an overview and Vitor jump in.
Obviously, that all starts with continuing to drive revenue growth. And I think you're seeing, right, this year, underlying strong mid-single-digit growth, just even ex Alaris remediation headwind, you're seeing us at mid-single-digit growth this year. And essentially, the LSD midpoint for next year with the 200 basis point Alaris puts us at that as a starting point as well.
So we're going to continue obviously focusing on driving revenue growth through any macro environment. As we go down the P&L on gross margin, as I mentioned before, those key growth platforms that we're driving have positive mix benefit, which is very purposeful, and we're going to continue to focus on accelerating those, which will help gross margin. We couldn't be more pleased with the momentum in BD Excellence.
Of course, that was -- is our operating system that we put in place just a number of years ago. And we've gone from 50 Kaizens a year to over 2,000 Kaizens this year. And you're seeing -- you saw that pan out in well over 500 basis points of margin expansion over the last several years.
And how we get that within the plants, you heard us say we're at 8% productivity improvements essentially every quarter so far this year. We see that continuing. But also how we get that, we have a multiyear road map for that, right?
And so as we think about OEE, it was a key driver of that, right, how efficient we're running our lines. Then we started ramping up material changes and procurement savings as part of input costs. And we're starting to see this year actually, we saw a notable pop in that as a driver.
We still have much more runway there as we look ahead. And then you saw us announce AI and how AI can have a role in not only helping us on our gross margin side, but also on our cash flow side as we think about taking inventory down going forward. And so we also are applying that.
We've recently brought in a new leader of our GBS organization, which is looking at how do we continue to drive efficiencies in our G&A functions, right, so that we can, again, reallocate that money to be driving the top line equation on revenue growth and be more efficient from a corporate center perspective. And we're seeing, again, good momentum on that equation. And of course, all of that ultimately flows through to a combination of margin expansion as well as driving to our cash flow goals that we've got.
You saw good momentum in the quarter there on cash flow as well. So we certainly -- now is not the time to call out a long-term op margin target. But again, as I mentioned, expect -- we do have a date in mind already for our Analyst Day coming up, and we'll be sharing that quite soon.
And we look forward to sharing more long-term targets, specific ones at that meeting. So thank you.
And we'll take our next question from Josh Jennings with TD Cowen.
Nice quarter. I wanted to just follow up on Rick's questions just on margin. I mean I think the Alaris revenue headwind is -- your team has communicated very clearly.
But starting in fiscal 4Q, it seems like there won't be much of a margin hit. I just wanted to better understand those dynamics just considering when Alaris capital declined during the early days of the recall and then through the remediation that did have an impact on margins? And then how are you guys able to offset or what are you doing to offset maybe the margin impact from the capital comp that's in place starting fiscal 4Q and then through fiscal '27.
Sure. Thanks, Josh. We'll turn it to Vitor to answer.
We didn't get to Rick's question on Q4. So Vitor will tackle that and then address...
Sure. I think I can combine both into one here. Of course, we are seeing like our perspective of margin in Q4 is actually a very -- we have a very clear pathway and view of delivering Q4 margin enhancements that we have sequentially in Q4 compared to Q3 and the other quarters.
Despite the fact that we had the Alaris tick down and the high -- the biggest pressure on the revenue starting in Q4 and of course, heading into next year, the Q4 profile of margins is something that we already have good line of sight based on the productivity gains that we drove during the year across our several platforms and actually becoming as part of our P&L in Q4. So we feel very confident about the profile of what we head into Q4. Now if we go into '27, the pressure from Alaris is just the fact that the revenue is coming down significantly on Alaris and there is a natural drop-through on the bottom line that we are factoring into our assumptions.
Of course, as Tom mentioned, oil is a factor that we are monitoring very closely and the general market dynamics is still something that we are looking. But I think the most important is we are acting on it. We are not waiting and see this impact us.
We have pricing actions underway already. We have showed this in the past, and we continue to act on those pricing actions. The investment -- the commercial investments we are making today are actually a very intentional high-growth, high-margin areas that improve our mix as well.
And of course, as Tom highlighted, the importance of BD Excellence on our margins going forward. So those are the actions that we are going to -- that we are already underway that are going to help us kind of mitigate some of these market dynamics and the Alaris flow-through. But there is nothing special, I would say, about the Alaris flow-through.
It's just a natural take down in the revenue dropping to the bottom line at the end of the day. And the team will continue to work to offset and the guidance on the modest EPS, as I said, is a starting point, is that EPS starting assumption heading into next year with the philosophy of continue to commit to numbers that we can deliver consistently to investors. Thanks for the question.
And that will conclude today's question-and-answer session. At this time, I'd like to turn the floor back over to Tom Polen for any additional or closing comments.
Okay. Well, thank you, operator, and thanks, everyone, for your questions and continued interest in BD. We look forward to connecting with everyone again next quarter.
Thank you. This does conclude this audio webcast. On behalf of BD, thank you for joining today.
Please disconnect your line at this time, and have a wonderful day.
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