Baxter International Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
October 27, 2021

There are 11 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Good morning. Welcome to Baxter's International Third Quarter 2021 Earnings Conference Call. Your lines will remain in a listen only mode until the question and answer segment of today's call. At this time, As a reminder, This call is being recorded by Baxter and is copyrighted material.

Operator

It cannot be recorded or rebroadcast with Baxter's permission. If you have any objections, please disconnect at this time. I would now like to turn the call over to Ms. Claire Trachtman, Vice President, Investor Relations at Baxter International. Ms.

Operator

Trachtman, you may begin.

Speaker 1

Good morning, and welcome to our Q3 2021 Earnings Conference Call. Joining me today are Joe Almeida, Baxter's Chairman and Chief Executive Officer and Jay Sekharo, Baxter's Chief Financial Officer. On the call this morning, we will be discussing Baxter's Q3 2021 financial results and 4th quarter and full year 2021 financial outlook. With that, let me start our prepared remarks by reminding everyone that this presentation, including comments regarding our financial outlook for the Q4 and full year 2021, the pending acquisition of Hill Rom, New product developments, business development and regulatory matters contain forward looking statements that involve risks and uncertainties. And of course, Results to Differ Materially.

Speaker 1

In addition, on today's call, non GAAP financial measures will be used to help investors Understand Baxter's ongoing business performance. A reconciliation of the non GAAP financial measures being discussed today to the comparable GAAP financial measures is included in our earnings release issued this morning and available on our website. Now, I'd like to turn the call over to Joe. Joe?

Speaker 2

Thank you, Claire. Good morning, everyone, and thank you for joining the call. As usual, I will begin with an overview of Baxter's 3rd quarter performance. Jay will take a closer look at the financials and outlook for the rest of then we'll close with your questions. Clearly, the most notable highlight from the quarter is last month's announcement of our agreement to acquire Hurom, subject to the approval of Hurom shareholders and other customary closing conditions.

Speaker 2

I recently made site visits to select Hill Rom locations as part of our integration planning process, and I was joined by other members of our senior leadership team. Team. Meeting face to face with Hurom's dedicated employees and touring the facilities only underscored our confidence and and enthusiasm for the proposed acquisition of Hurom. Upon closing of the transaction, we plan to bring a broader array of products and services patients and clinicians across the care continuum and around the world. We are focused on identifying opportunities to further accelerate innovation to address the rapidly evolving needs of our customers.

Speaker 2

The teams are working diligently on plans to bring Together these 2 complementary portfolios to deliver enhanced value for our stakeholders. We look forward to updating you on these acceleration opportunities following the close of the deal. Earlier this month, the hard scarrodino or HSR waiting period in the U. S. Expired with no issuance of a second request by the FTC.

Speaker 2

While the SEC reserves its right to take further action. This is a key milestone to clear the way for a successful closing. We are in the process of securing all remaining global regulatory approvals required for closing and the Hurom Shareholder Meeting to vote on the transaction is currently scheduled for December 2. In addition, our integration planning management office is up and running with teams from both organizations preparing for a swift effective combination once the deal closes. We will expect to close by early 2020 Moving on to the Q3 financial performance, I'm pleased to report solid ongoing momentum as we make our way toward the close of the fiscal year.

Speaker 2

Baxter delivered 3rd quarter sales growth 9% on a reported basis, 7% at a constant currency and 6% operationally. Like last quarter, growth was impacted by the continuing, if somewhat erratic based off COVID-nineteen pandemic recovery. While the pandemic still represented a headwind to top line sales in the quarter, The magnitude of this headwind has continued to decline reflecting the improved rate of hospital admissions in the U. S. As well as ongoing pandemic recovery in international markets.

Speaker 2

This resulted in a favorable comparison to the same period last Cheer. On the bottom line, 3rd quarter adjusted earnings per share were $1.02 up 23% and exceeded Our Q3 guidance. Positive mix and disciplined expense management drove the favorability. As you saw in our earnings release, all of our geographic segments and product categories contributed to the positive performance in the quarter. The pace of pandemic recovery continues to vary by both therapeutic and geographic market.

Speaker 2

Our broad global footprint and diverse portfolio of essential products combined to help mitigate to variability and shore up the strength of our overall enterprise. We also benefit from our resilience and agility, which have been greatly enhanced through our ongoing transformation. Looking at performance by business, Growth was led by biopharma solutions, which advanced 45% at constant currency rates. Performance was driven by revenues related to our manufacturing of multiple COVID-nineteen vaccines. Medication delivery grew at 11% Constant Currency, reflecting the improved rate of U.

Speaker 2

S. Hospital admissions in new infusion pump contract with a large health system in U. S. And increased demand for Baxter's small volume parenterals. With respect to our Novum IQ 510 submission.

Speaker 2

We are continuing to work with the FDA to address their questions on our submission. While we hope to receive clearance by the end of this year, it is possible it may shift into early 2022. In Pharmaceuticals, 7% constant currency growth reflects the benefit of our acquisition are specified rights outside the U. S. To Calyxt and Doxil.

Speaker 2

Adjusting Results for the acquisition, operational growth rose 1%. Year over year growth in the quarter reflects lower U. S. Sales in part due to a large pandemic related government order received in Q3 2020 and softness in inhaled anesthesia. This challenging comparison was offset by strong growth internationally, driven by our pharmacy compounding business.

Speaker 2

Our 3rd quarter launch of premix norepinephrine and other products that improve efficiency, particularly in the wake of the pandemic. This is a key strength of our pharma portfolio and we plan to continue launching more molecules with differentiated presentations or complex Formulations in the months to come. During the quarter, advanced surgery performance in the U. S. Was affected by lower Surgical volumes, which remain depressed versus pre pandemic rates.

Speaker 2

Procedure volumes were unfavorable to our prior expectations as hospitals delayed elective procedures in light of the Delta variant. This was more than offset by growth in the international markets, which could slowly recover from the effects of the pandemic. Growth in clinical nutrition reflected the benefit of our new product launches, particularly in international markets. Acute Therapies continues to perform very well. A year over year decline in U.

Speaker 2

S. Sales reflects a difficult comparison in the face of last year's surge in demand for continuous renal replacement or CRRT products. Again, this was offset by international growth. As an outcome of the pandemic, we now have many more CRRT devices in the field as well as heightened engagement and utilization on the part of clinicians, creating a platform for sustained momentum. Growth in renal care was driven by our home based Care to Neo Dialysis or PD products globally.

Speaker 2

As I have mentioned on past calls, demand does continue to be dampened slowdown in new patient diagnosis. We expect the ESRD market to gradually recover to pre COVID growth rates over the next 1 to 2 years. Our Renal Care team's global safe At Home campaign is dedicated to helping clinicians, patients and other stakeholders learn more about Benefits of Home Based Pedicare, especially in the context of today's pandemic conditions. From an ESG perspective, I'm pleased to highlight a new partnership between UNICEF USA and the Baxter International Foundation to improve access to safe water in La Guajira, Colombia, one of the country's most water challenged regions. A $1,500,000 foundation grant is helping fund 3 year program.

Speaker 2

This quarter, we're also honored to be included on Forbes' latest list of the world's best Employers and America's Best Employers for Women. In addition, we're recognized as a leading organization on Seramounts Q1 Inclusion Index. Looking forward, we continue to navigate with some uncertainty on the horizon. The overall trajectory of pandemic recovery appears more clear, but the new geographic contours remain inconsistent. Related to this last point, we are not immune to inflationary pressures and the rising cost of raw materials, Commodities Components, Fuel and Ongoing Supply Chain Disruptions.

Speaker 2

While we are actively working to address these rapidly rising costs. We recognize these factors may continue to impact our operations into 20 22. Amid these challenges, we are on pace for a strong close to the year. This translates into momentum as we get set to execute on the vast potential of our proposed Hurom acquisition and launch the next phase of our transformation journey, fueled by the commitment of our outstanding global team. Now I will pass it to Jay for a closer look at our financial results and outlook.

Speaker 3

Thanks, Joe, and good morning, everyone. As Joe mentioned, we're pleased with our strong Q3 performance. 3rd quarter 2021 global sales of $3,200,000,000 advanced 9% on a reported basis, 7% on a constant currency basis and 6% operationally. Sales growth this quarter reflects the benefit from revenues associated with the manufacturing of COVID vaccines, strength in medication delivery and OUS sales of Calyxt and Doxil, which totaled approximately $32,000,000 in the quarter. On the bottom line, adjusted earnings increased 23% to $1.02 per share, exceeding our guidance range, driven by a favorable product mix, primarily from better than expected sales of acute therapies and biopharma solutions, as well as disciplined operational execution.

Speaker 3

Now I'll walk through performance by our regional segments and key product categories. Starting with our regional segments. Sales in the Americas increased 7% on both a constant currency and operational basis. Sales in Europe, Middle East and Africa grew 7% on a constant currency basis and 3% operationally, and sales in our Asia Pacific region advanced 8% on both a constant currency and operational basis. Moving on to performance by key product category, note that for this quarter, constant currency growth is equal to operational sales growth for all global businesses except for our Pharmaceuticals business for which we will provide both constant currency and operational growth Adjusting for the acquisition of rights in select territories outside the U.

Speaker 3

S. For Calyxt and Doxil. Global sales for Renal Care were $981,000,000, representing 1% on a constant currency basis. Performance in the quarter was driven by global growth in our PD business, where we experienced year over year improvement in global patient volumes Despite the negative impact on volumes resulting from the pandemic, including increased mortality rates in ESRD patients, delays in new patient diagnoses and market wide staffing shortages. PD growth was partially offset by declining international sales in our in center HD business and renal care clinics.

Speaker 3

We continue to monitor the impact of excess mortality among ESRD patients and delays in new patient diagnoses resulting from the pandemic and expect the market to return to pre COVID growth rates over the next 12 to 24 months. Sales and distribution delivery of $747,000,000 increased 11% on a constant currency basis. Strong global growth in this business reflects continued recovery in the pace of hospital admissions as well as increased demand for large volume infusion pumps, IV Solutions and Small Volume Parenterals. During the quarter, we estimate that U. S.

Speaker 3

Hospital admissions were down approximately 4% compared to pre COVID levels, a significant improvement from the same quarter last year, which saw U. S. Admissions down approximately 6% versus pre COVID levels. In addition, during the quarter, we executed and began delivering infusion pumps under contract with a large health system in the U. S, which resulted in our highest number of quarterly pump placements in over 5 years.

Speaker 3

Pharmaceutical sales of $589,000,000 advanced 7% on a contribution from OUS sales of Calyxt Doxil. Growth in the quarter also benefited from increased sales of Dexmed and our portfolio of premixes as hospitals continue combating the COVID-nineteen pandemic and look toward premix formulations and its workflow efficiencies. This growth was partially offset by declines in our U. S. Business related to lower surgical procedures and a government order of approximately $20,000,000 and Q3 2020.

Speaker 3

Moving to Clinical Nutrition, total sales were $244,000,000 increasing 3% on a constant currency basis. Performance in the quarter was driven by the benefit of new product launches within our Broad Multi Chamber Product Offering. Sales in Advanced Surgery were $249,000,000 increasing 5 procedures estimated at 95% of pre COVID levels, a sequential and year over year decline in surgical procedure volumes due to the impact of the Delta variant and staff shortages. This was below our previous procedures returning to pre COVID levels during the 3rd quarter. Sales in our Acute Therapies business were $185,000,000 advancing 3% on a constant currency basis and were favorable to our expectations.

Speaker 3

Performance in the quarter continued to benefit from elevated demand for CRRT, particularly given the rise in COVID cases associated with the Delta variant. Biopharma Solutions sales in with $206,000,000 representing growth of 45% on a constant currency basis reflecting incremental sales related to the manufacturing of COVID vaccines, which totaled more than $50,000,000 in the quarter. Moving through the rest of the P and L, our adjusted gross margin of 44% increased by 140 basis points over the prior year, reflecting a favorable product mix and operational improvements in manufacturing. Adjusted SG and A of $640,000,000 increased 11% as compared to the prior year period and was favorable to expectations driven by disciplined expense management, which more than offset increased supply chain and logistics expenses recognized in the quarter. Adjusted R and D spending in the quarter of $129,000,000 increased 6% versus the prior year period.

Speaker 3

Both adjusted SG and A and R and D spending reflect at a somewhat more normalized level of spend as certain expense categories were depressed last year as a result of the pandemic, particularly those related to employee bonus accruals. This improvement in gross margin coupled with The continued OpEx management resulted in an adjusted operating margin in the quarter of 20.2%, an increase of 100 basis points versus the prior year. Adjusted net interest expense totaled $32,000,000 in the quarter and other non operating expense was $12,000,000 in the quarter. The adjusted tax rate in the quarter was 14.8%, a decrease over the prior year, driven primarily by a favorable change in earnings mix. And as previously mentioned, adjusted earnings of $1.02 per diluted share exceeded our guidance of $0.93 to $0.95 per diluted share.

Speaker 3

With respect to cash flow, year to date, we've generated $1,500,000,000 in operating cash flow. Free cash flow totaled over $1,000,000,000 and represented growth of nearly 50% as compared to the prior year period. I would like to take a moment to reiterate our excitement around our recent announcement to acquire Hill Rom. We believe the strategic rationale and underlying financials of the combination are compelling and provide us with a meaningful opportunity for value creation. Our integration teams are hard at work and we look forward to finalizing this combination by early 2022.

Speaker 3

In the meantime, we continue to follow a strategic approach to capital allocation that is founded on accelerating growth, driving innovation and returning value to our shareholders. Let me conclude my comments by discussing our outlook for full year 2021. For full year 2021, we expect global sales growth of 7% to 8% on a reported basis, 5% to 6% on a constant currency basis and 4% to 5% and on an operational basis. This assumes a benefit of approximately 100 basis points to both reported from foreign exchange on reported growth. Our expectation remains that on a full year basis, hospital admission rates in the U.

Speaker 3

S. Will remain below pre COVID levels, exiting the year down low single digits. Although surgical procedure data in the U. S. Declined sequentially Q2 to Q3.

Speaker 3

Our current expectation is that U. Surgical procedures will improve sequentially and return to pre COVID levels in the Q4. We are continuing to monitor this assumption in light of potential impacts from COVID outbreaks and hospital staffing shortages. Moving down the P and L, we now expect adjusted operating margin to expand more than 60 basis points. For the year, we now expect an adjusted tax rate of 16.5% to 17% and a full year diluted average share count of approximately 510,000,000 shares.

Speaker 3

Based on these factors, we now 2020 1 adjusted earnings excluding special items of $3.58 to $3.62 per diluted share. For the Q4 of 2021, we expect global sales growth of 3% to 4% on a reported basis, 4% to 5% on a constant currency basis and 3% to 4% on an operational basis, and we expect adjusted earnings, excluding special items, of $1 to $1.04 per diluted share. With that, we can now open the call up to Q and A.

Operator

If you are using a speakerphone, please lift the handset to ask your question. So that we may be respectful of everyone's time, Please limit your comments to one question with one follow-up question if necessary. We appreciate everyone's patience and would like to provide as many of you as possible the opportunity to ask a question. We will pause for just a moment while the list is being compiled. I would like to remind participants that this call is being recorded and a digital replay will be available on the Baxter International website for 60 days at www.baxter.com.

Operator

Your first question comes from Robbie Marcus of JPMorgan. Your question please.

Speaker 4

Maybe to start, Jay, you talked about volumes recovering to pre COVID levels in 4th quarter. I think it'd be good just to run through how you're coming up with that assumption. Is that what you're seeing today? Is that what you expect given trends that you're seeing in the U. S, is it different U.

Speaker 4

S. To Europe and just sort of how you're coming up with that?

Speaker 3

Sure. For procedures and volumes, the comments really relate to the United States Because outside the U. S, we are seeing more variability. But from a U. S.

Speaker 3

Standpoint, our expectation is By year end, we'll be down low single digits. And in the quarter, we'll be down low single digits from an admission standpoint. Again, A third quarter, we were down 4%. And we're seeing that in the marketplace today so far. Things are tracking broadly in line with expectations.

Speaker 3

For procedures, we were a little bit disappointed with procedures in the 3rd quarter, but came in below our expectations, down 5%, but we are seeing some recovery and we expect that to continue so that the year end assumption, the Q4 assumption It's flat procedure volumes relative to prior year. Now I will tell you there are risks that we're monitoring with respect to this. One of the certainly there's the COVID factor, but another one that's acute and we have to be mindful of is nursing and staffing shortages in hospitals. We were just having conversations with our U. S.

Speaker 3

Sales force. I mean, frankly, this is a factor that's coming into play. I don't necessarily think at this point it's a meaningful factor relative to the expectations that we've shared. But as far as risks go moving into November December, We will continue to monitor that.

Speaker 4

Great. And maybe to tie in that point, You had really good expense management down the P and L both on SG and A and R and D, a little lighter On gross margin and what the Street was thinking. So as you think about expenses, both in 4th quarter and from High level going forward. Where do you think you are in terms of percentage of normal spend? Meaning how much is held back here because of the lower revenues due to COVID or The environment you're spending in and where do you think gross margin could go from here, given that there are some higher cost inputs.

Speaker 4

Thanks.

Speaker 3

Sure. A lot a number of components to that question. First, I'll address the SG and A piece. SG and A in the second half of the year will be sub-twenty percent. And certainly as we look at that number, I would expect to see some elevation of that as we move into next year.

Speaker 3

We're going to resume more normal activities. We've still been very limited on a travel basis. We've still been very limited on a promotional basis in light of the COVID environment that we're faced with. And so we'll expect to resume normal activities as we move into next year and there will be some uptick in SG and A percent of sales is our current expectation. So that's I think that's one thing to consider.

Speaker 3

As we look at The gross margin, this is a more interesting one for me. From our standpoint, gross margin came in broadly speaking in line with our expectations in the quarter. In Q4, we don't have tremendous surprises, but embedded in that, we are seeing some material and wage inflation. We're also seeing some planning of fulfillment costs in excess of our expectations. So those factors have been a drag Frankly, on our gross margin in Q3 and Q4.

Speaker 3

And as we look to next year, one of the big uncertainties that we're facing on our new categories of spending. How much is inflation sustained versus temporal? How much disruption continues to exist in the supply chain. These are key factors that we're currently evaluating as we look at the plan. And it's a very dynamic environment.

Speaker 3

If you think about This year, we've had things like the Suez Canal, the Houston freeze disrupting logistics and also the resin market. But more recently, Hurricane Ida Has put a fragile resin market under real pressure. And so how that evolves over the coming months is going to be a critically important input as we look at our 2022 operating plan.

Speaker 4

Great. Thanks for all

Speaker 5

the color.

Speaker 3

Thanks, Robbie.

Operator

Bob Hopkins of Bank of America Securities is online with a question. Please state your question, please.

Speaker 6

Thank you. Can you hear me okay and good morning.

Speaker 2

Good morning, Bob.

Speaker 6

Good morning. So, yeah, I think just to pick up a little bit on that last thread there. Jay, your comments on watching inflation and supply chain, I Completely understand and appreciate that. But it was only in September that you guys provided some preliminary thoughts on operating margin targets for the Company. And I was just wondering, did those targets that you provided for standalone Baxter, do those still hold?

Speaker 6

Do you think those might be a risk Based on what you're seeing kind of more recently on the inflation and supply chain front.

Speaker 3

At this point, there's no change to the information that we shared in early September related to our projections. So we don't have any expectation of change. But what I will say is Hurricane Ida in September did change the dynamic in short term in the inflation Related to certain critical raw materials that we're watching. But to be clear, Bob, we're not changing our projections at this point, and we're going to continue to work and evaluate over the coming months.

Speaker 6

Okay. Thank you for that. And then just like one other quick follow-up on that is, You guys were nice earlier in the year and on the Q2 call to kind of specifically quantify headwinds related to inflation supply chain and you threw a couple of other things in there. I apologize if I missed that, but I'm just wondering If you could give us kind of an updated thought on what that headwind will be for the year. I think originally you called it out as maybe $70,000,000 then it bumped it up to 130 I apologize if I missed that, but where does that stand today?

Speaker 3

Sure. As we look at Q3 and Q4, Supply chain and logistics expenses has been a key driver that's deteriorated relative to those expectations. And I would estimate that we're off those projections by $0.05 or $0.06 related to planning and fulfillment costs, use of expedited freight, use of premium freight related to really trying to get our product to the right spot where it's needed And when? It's been incredibly challenging for us to address the needs in this volatile supply chain environment. So those that's really the key factor that's playing into our numbers today.

Speaker 3

As we think about inflation, some of the recent moves actually don't roll out until next year because as you know, we purchased the product, we manufactured the product, it sits in inventory and then sold. And once sold, that's when we reflect the impact in our financials. So the impact in Q3 and Q4 on our integration is more limited, But that's the piece that we're watching as we move to next year.

Speaker 7

Great. Thank you for the color. Sure.

Operator

Larry Biegelsen of Wells Fargo is online with a question. Please state your question.

Speaker 7

Good morning. Thanks for taking the question. One on the revenue outlook, one on the margins. You're guiding this year, I think, to 4% to 5% underlying growth, and that's the same as the LRP you provided us in September. How are you feeling about achieving that in 2022?

Speaker 7

And if you're not willing to kind of bless that now, What are some of the puts and takes we should think about? For example, will BPS and acute therapies be a headwind and next year I have one follow-up.

Speaker 3

Sure. I will stop short of doing a detailed review on 2022, but The compounded growth of 4% to 5% for the next several years is something that we feel comfortable with. As we look at 2022, there are a couple of factors and I highlighted some of these on the September call. And really it relates To the delta variant and the continued, COVID situation that could be disruptive. Right now, our sense and view is that The COVID variants are progressing in a positive manner, meaning I think that our Assumptions underlying our long term guidance are intact and not disruptive, or not disruptive, I should disruptive,

Speaker 5

I should say. And then from

Speaker 3

a vaccine standpoint, certainly we're expecting some reduction in vaccine sales. We had very large sales this year that will abate to some extent, But still be a large component of the overall sales mix of the company.

Speaker 7

That's helpful. And Joe, you guys have seen kind of what The Street has been writing on Hill Rom. I'm curious, now

Speaker 3

that you've learned more, and what

Speaker 7

do you see as some of the misunderstandings or things that are underappreciated right now by investors on the Hill Rom acquisition? Thanks for taking the questions.

Speaker 2

Larry, I just want to make sure that we clarify that at this moment, which is between starting and closing, we're in planning phase and meeting with our future colleagues here on a planning purpose only. We are Absolutely not involved in their day to day activities. So we want to make sure that they are winning the company as the best as of their ability, and we are not Involved in that at all. But I can tell you based on the meetings that we had, the visits that we had, that we feel that the Street Has missed what they have done in the last 2, 3 years in terms of connecting their products and going into some very specific Markets primarily in the frontline care, and also the evolution of what used to be just a hospital bed or a capital purchase by the hospital for being a part of the ecosystem that goes from patient safety to patient diagnostic and communication between The patients and the clinician. So there's a lot going on there.

Speaker 2

I was pleasantly surprised going to the sites what we're able to

Speaker 5

see. Thank you, Joe.

Operator

Vijay Kumar of Evercore ISI is online with a question. Please state your question.

Speaker 5

Good morning, Joe and Jay. Hey, Jay. Nice steady quarter. Joe, I think you guys called out the mid delivery strength in the quarter, highest quarterly comp placements. Was this a timing element or perhaps Are we seeing some share shifts in the market?

Speaker 5

Some commentary on the market would be helpful.

Speaker 2

Vijay, good morning. We are seeing shift in share. Some of those pumps were competitive pumps, And we don't want to get into share percentage. I think we had those conversations a few years ago. We always get into what is to share our perception versus other people.

Speaker 2

So I was just going to say to you that sufficiently that A lot of those pumps were competitive accounts.

Speaker 5

That is Chris here. Thank you.

Speaker 1

Related to so these days, I'm sure you saw in the prepared remarks, this related to a contract that we signed and delivered those pumps during the quarter with a large health system here in the U.

Speaker 5

S. Understood, sir. Thank you. And Jay, one for you. Could you just remind us on the Q4 operational growth guidance of 3% to 4%, we just did 6 in 3Q.

Speaker 5

What changes Q on Q? The U. S. Admissions, it seems like that's improving Q on Q. Thank you.

Speaker 3

Sure. From Q3 to Q4, one of the big drivers relative to our prior expectations is the removal of Novum IQ from the 4th quarter sales. So We had roughly $30,000,000 expected in the 4th quarter and we've taken that those sales out. We do we're confident in this product launch and very excited about it. It will be coming to market hopefully soon.

Speaker 3

But as far as prudence, It made sense to take out that. So that's really the largest change relative to our expectations from the 3rd to the 4th quarter. We'll see some improvement globally in renal on the back of the HD business. Our acute business will decline in the 4th quarter is our expectation. Medication delivery will also Lower from the 11% that we saw globally in the 3rd quarter to a mid single digit number in the 4th quarter.

Speaker 3

So those are a few of the factors that come into play, but I think the biggest change from our own internal expectations relates to the pump. Thank you, guys.

Operator

Travis Steed of Barclays is online with a question. Please state your question.

Speaker 8

Hi, thanks for taking the question. Just a follow-up to Larry's question earlier. As you had time to spend more time on the Hill Rom acquisition, just Curious if you had any updated thoughts on where things stand on revenue synergies and cost synergies. Anything that Learned on that front, you can articulate would be helpful.

Speaker 2

We are where we said we're going to be on the cost synergies. We are putting together an organization structure. We're making sure we understand more in-depth the products. And when we come out with on Investor Day later in 2022, We'll give you that perspective. It's a little too early for us to jump into that.

Speaker 2

We have an idea what we think we can do, But it's not the right time, and we want to make sure that the transaction closes and when it closes, we have now full ability to go in and understand the R and D capabilities and what investments we need to do to bring that together with a new product offering, if that is the case.

Speaker 8

All right, great. That's helpful. And then given all the time you spend with hospitals and touching Around the world every day and Jay given all the modeling and forecasting you guys do, just curious to think about over the next 12 months, you know, How much better do you think hospitals are prepared for another COVID rebound? And we're hearing from some management teams that they have cautious optimism at least that COVID could be less impactful next year. I know it's a little bit of uncertainty, but curious to kind of see what your outlook is on the next 12 months from capacity perspective.

Speaker 2

I'll take this on. We believe and stuff we're not the forecasters of COVID-nineteen response by hospitals, but I believe that what you still have is the factor that Many people in the United States

Speaker 8

are not

Speaker 2

vaccinated, and that has proven to be the Achilles heel of the recovery in 2021 was the lack of vaccination that caused the issue. 2nd, hospitals have responded very differently upon The regions of the country, they've got hit the hardest. So it's tough to sit here and predict. I'm sure everybody learned a lesson, But until you get to a point that this moves from a pandemic infection to an endemic Infection is going to be tough to predict. I believe what you are what we are seeing, what needs to be considered, and I'm sure you've heard this from other companies is the labor shortage in hospitals, the issues with nursing availability to travel nurses are very expensive, so inflation in hospital costs as well as The availability of nurses to be able to perform procedures.

Speaker 2

Some hospitals are doing just day procedures, No overnight. Some hospitals are cutting the day short because lack of support. So this is not Across the board everywhere, it is very regional, sometimes very local, depends upon the hospital. So I want to make sure that We're not the COVID predictors. I'm sure the country has learned a very tough lesson, hospitals and everybody is much better prepared But a lot of the issues that you saw during summer and beginning of the fall were related to unvaccinated people and that is a different subject.

Speaker 2

I don't want to get

Operator

Danielle Ottofey of LVB Leerink has a question. Please state your question, please.

Speaker 9

Good morning. Thank you all so much for the question. Just a quick question on med delivery. You guys are already gaining share. You have Novum coming.

Speaker 9

How Midterm outlook for that business. Thinking about how sustainable above market growth is there over the midterm given the current share dynamics and the upcoming new product launch. And then I have one follow-up.

Speaker 2

I would say that when we look at competitive accounts and contracts coming up, More so age of the fleet in the United States. It looks positive to us with a good very solid product right now, but a launch coming up. We are not Predicting gains and things above normal, but I'd say that we will be competing more effectively in the replacement market for competitive accounts because we will have a syringe pump, which is something we don't have today. So we will have a more complete portfolio of brand new product. But nevertheless, we are competing very effectively today with our current product.

Speaker 2

So it is a positive outlook for this market for us. Got it. Look for this market for us.

Speaker 9

Got it. Thank you for that. And then Jay, one quick question for you. Just thinking about the exit rate for margins heading into next year, can you help us Can you help frame that for us? Thanks so much.

Speaker 3

Sure. Thanks, Danielle. We'll end the year, the second half margin should be over 20%, which is really a nice achievement in the context of the environment in which we're operating. So as we move to next year, really there are a few factors in play. Every year, the second half margin is ahead of the first half margin, in part because of larger sales contribution in the second half versus the first half.

Speaker 3

And in addition, we had a lot of spending that's concentrated in the first half of the year relative to promotional activity. So those things sort of lower the first half margin relative to the second half. But there's a couple of other things that will happen next year that we'll be mindful of. First, I mean, I referenced this earlier, there will be a normalization of operating expenses as we resume activity, promotional activity and travel, And that's our current expectation. But then the final piece and this is the piece as I referenced earlier, we'll have a lot of work to do on is the inflationary impact that I referenced and Joe referenced in his prepared remarks.

Speaker 3

The impact of material inflation and wage inflation has increased throughout the year And we had the Hurricane Ida disruption. So the full magnitude of this is something we're currently quantifying and carefully watching and The sustained nature of it, we've seen resin prices, abate a little bit, but how that emerges, that's and cost category for us. All of those things will impact, 2022 and so we'll watch those things very carefully.

Speaker 9

Thank you, guys.

Operator

Matt Taylor of UBS is online with a question. Please state your question.

Speaker 5

Hi, guys. Thanks for taking the question. You guys are ending the quarter. I wanted to Just follow-up on some of those thoughts on how cost development could play out in 2022. Previously, you had talked about some of the COVID related manufacturing costs winding down in the second half of this year.

Speaker 5

Could you give us an update on how much of those are lingering or expected to linger and when they could abate? And what are you watching to predict How some of your input costs like materials inflation, shipping and labor could last through either

Speaker 3

Sure. It's a good question, Matt. We have seen improvement in terms of COVID related expenses this year. But I will tell you that we still have some significant lingering costs, even in Q3. But part of the improvement from first half to second half relates to a reduction in COVID related costs.

Speaker 3

Now the key question for us is what happens through to next year. So we're watching very carefully the evolution of the pandemic and that will be an important input as we model out COVID related costs for next year. What we've always said is we expect roughly $30,000,000 of sustained costs. And I believe in the past we've talked about up to $150,000,000 of total COVID related costs impacting our numbers. So we expect some sustained level of cost and frankly we could have some costs remain in the first half of next year depending on how things emerge.

Speaker 3

The critical variable for us and we've seen very volatile movements in this are some of the raw material costs related to resin and packaging and also accessibility of components. And so we spend a lot of time analyzing the indices, But I think the quality of the forecast of these industries only goes out so far. And what we've seen thus far is, you can probably have reliable data for a few months. But beyond that, You have to take the position in terms of improving or dis improving. And so this is going to be an important part of the guidance that we put forth.

Speaker 3

Frankly, we'll study this for the next couple of months heading into January when we ultimately give guidance because it is such a volatile input and such an important input for us because a lot of our costs are related to resin, the cost of freight, the price of fuel, All of these things are key drivers for us.

Speaker 5

And can I just ask one follow-up, Jay? Thanks for that. That was a good color. But Just wanted to know if you had any ability to pass some of those costs through to customers through price raises. I know in the

Speaker 3

past you've talked about some

Speaker 5

of your contracts being longer term and having like CPI and players in Medell, for example. Could you give us any sense for that at a company level or any specific examples?

Speaker 2

Matt, we don't comment at all on our price strategy. We do have just to confirm, We have adjustments built into contracts, but our pricing strategy is not public. Thank you.

Speaker 5

Thanks, Joe. Thanks, Matt.

Operator

Hamran Zafar of Deutsche Bank is online with a question. Please state Your question.

Speaker 2

Hi, good morning. Thanks a lot

Speaker 3

for taking my question. I wanted to get

Speaker 2

a little bit more color around the renal business,

Speaker 3

first in the U. S. Regarding the sequentially slower growth. Could you talk a little bit more about relative impact of the various Living parts, new patient growth, excess mortality from COVID. I think you mentioned staffing shortages being a factor.

Speaker 3

And then my second question is on the OUS renal business. Can you talk about New PV patient trends in some of the key geographies. And then I guess question 2b is the weakness in in center HD. Is that from Mike's question or from share loss in dialyzers? Thank you very much.

Speaker 3

Sure. So overall, the renal business in the 3rd quarter Grew approximately 1% and we're expecting to see that improve to the 4th quarter, a couple of 100 basis points. So we are seeing we expect to see a recovery in the renal business. And if we look at it, our PD business was sort of mid single digit growth And we did see declines in HD. In the Q4, we'll expect to see mid single digit growth again in PD and it will also be matched by an improvement in in center HD.

Speaker 3

The improvement in in center HD relates to the timing of tenders that we see in our senior region. But I think your question is a good one related to the trajectory in this business. Obviously, we're incredibly excited about the renal business, in particular as it relates to AAKHI, Advancing American Kidney Health Initiative, which we believe will provide a great incentive for movement to the home in the coming years, along with patient dynamics. So long term, very excited about this and this is an important component of the long range plan that we shared. But we are seeing in the short term some real disruptions in the marketplace.

Speaker 3

And what I would say is there's really three factors, excess mortality, That's these are very vulnerable patients and very unfortunately, we saw a lot of patients die related as a result of the COVID pandemic. And then the second thing relates to slower patient starts. And this is really a global phenomenon. People have been reluctant to go to doctors and hospitals, and these catheter insertions in some cases Have been deprioritized or other procedures are favored relative to that in today's environment. But then the final factor is one that Impact a number of our businesses, and I referenced this earlier related to advanced surgery, but I think there is a significant nursing shortage that we won't that our country and internationally will need to be addressed.

Speaker 3

Nurses Short supply and that's another factor that's impacting treatment. So frankly, we've seen a challenging patient environment in the U. S. We did gain patients globally, but the vast majority of those came from China. Outside China, we were essentially flat Q2 to Q3.

Speaker 3

So these are all factors that ultimately we believe will correct in the coming months years as we referenced earlier. But in the short term, this market is going to continue to be a challenging one.

Speaker 2

I just I would add that AAKI in the U. S. Is a particularly point of interest because that effort will yield a good future for penetration in the U. S. And adoption of the peritoneal dialysis modality in the U.

Speaker 2

S. It is depressed because COVID, but as Jay mentioned, we had growth in that business on a global basis, much greater than HD. And HD is the modality in the U. S. That not in home HD, but HD in clinic is the one that So what I think the outlook for the business is positive.

Speaker 2

It is going to be a 12 to 24 month climb because the death that we Because these patients are actually sick, patients are chronic disease and they were affected by the virus, the death It was higher amongst that population, but we feel very positive on AAKHI going forward as we climb out of this. We believe that that's something that is here to stay. It's just that COVID caused us to have a deep tour on the trajectory. Great. Thank you so much.

Speaker 2

Thank you.

Operator

Joshua Jennings of Cowen is online with a question. Please State your question.

Speaker 10

Hi, good morning. Thanks for taking the questions. I wanted to just ask a quick one. I have one On the Baxter, Huron combination, I think MedTech acquisitions that have been challenged. Typically, there's There's disruptions that occur in the sales force attrition, ongoing products for a host of reasons.

Speaker 10

But can you help us understand from a high level why You think the Baxter Hormone combination can minimize business disruptions? And then my follow-up question is just On the staffing shortage headwinds that you guys are calling out and just with your broad reach, what are hospitals Capable of doing to rectify these shortages, if anything, what are they doing currently? And then just With your commentary, I think you're still optimistic that procedure volumes can get back to 2019 levels or Improved from 2019 levels in 4Q. So just was curious about that dynamic just in terms of your commentary on staffing shortages and and just your expectation for that recovery in Fort Keith. Thanks for taking the questions.

Speaker 2

Josh, On the Huron, when you acquire a company, you're acquiring the best assets of the company is the People and the culture of the company, followed by the product and markets, right? So you're buying that because of that. So When we look at the synergies that we can achieve with the acquisition hereon, none of those None of the sales and marketing and research and development are part of the synergies. But we want to make sure that we continue to thrive and grow and hopefully accelerate growth in the future, but it's not going to be A disruption to how they go to market and how they're doing their business there. Now we have synergies, of course we do.

Speaker 2

And those are duplication of functions, different ways of doing things. And we have several shared service centers across the globe. We are a larger company with different resources. Of course, we do have the ability to take cost out and make that Hence, synergies. But at the moment now sitting here today, we don't have any plans in the short term at all to make any change that would disrupt their go to market and serving their patients, because the focus is patients.

Speaker 2

That's what we do. On your other question about staff shortage, this is a comment not related to Baxter is a healthcare company with injectable pharmaceuticals and medical devices and therapeutic dialysis home products where nursing shortages affect the overall market. Hospitals are dealing with this very effectively in most cases, and their ability to deal with it depends upon your size and depends upon the original location. So I can't speak on behalf of our customers, But I can tell you that what we see is tremendous adaptability on their side. It does have an overall impact for the business, But no one that we can pinpoint.

Speaker 2

It's just a headwind that the industry is seeing. We're just repeating here to make sure you understand that we're not exempt of this headwind, but it's not a headwind that we can mitigate on behalf of hospitals, but we can actually with a very diverse portfolio, as we've proven in the past, be a more resilient company.

Speaker 10

Thanks, Joe.

Operator

There are no further questions at this time. Ladies and gentlemen, this concludes today's conference call with Baxter International. Thank you for participating.

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Earnings Conference Call
Baxter International Q3 2021
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