Baxter International Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2023

There are 13 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to Baxter International's Third Quarter 2023 Earnings Conference Call. Your lines will remain in a listen only mode until the question and answer segment of today's call. As a reminder, this call is being recorded by Baxter and is copyrighted material. It cannot be recorded or rebroadcast without Baxter's permission. If you have any objections, please disconnect at this time.

Operator

I would now like to turn the call over to Ms. Claire Trackman, Senior Vice President, Chief Investor Relations Officer at Baxter International. Ms. Trachman, you may begin.

Speaker 1

Good morning, and welcome to our Q3 2023 earnings conference call. Joining me today are Joel Maeda, Baxter's Chairman and Chief Executive Officer Joel Grady, Baxter's newly appointed Executive Vice President and Chief Financial Officer and Brian Stevens, Baxter's Senior Vice President, Chief Accounting Officer, Controller and former Interim CFO. On the call this morning, we will be discussing Baxter's Q3 2023 financial results along with our financial outlook for the Q4 and full year 2023. Please note that we closed the sale of our Biopharma Solutions or BPX business at the end of the 3rd quarter and results in the current and prior periods have been adjusted to reflect VPS as discontinued operations. Restated schedules reflecting that discontinued operations presentation are included in the appendix to our earnings presentation and available in the IR section of our website.

Speaker 1

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 2023, new product developments, including the impact and status of pending regulatory approval The status and potential impact of our ongoing strategic and recent pricing actions, business development, Regulatory matters in the macroeconomic environment, including commentary on continuing supply chain challenges and evolving customer capital spending trends, contain forward looking statements that involve risks and uncertainties. And of course, our actual results could differ materially from our current expectations. Please refer to today's press release and our SEC filings for more details concerning factors that could cause actual results to differ materially. 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 the accompanying investor presentation and in our earnings release issued this morning, which are both available on our website.

Speaker 1

Now, I'd like to turn the call over to Joe. Joe?

Speaker 2

Thank you, Claire, and good morning, everyone. We appreciate you taking the time to join us today. I am pleased to be joined this morning by Chief Accounting Officer And to welcome our new Chief Financial Officer, Joe Graddy to the call. I will also share perspective on the progress and potential of our proposed Kidney Care spin off, Including some context around recent developments in that therapeutic area, Brian will provide a more detailed account of Baxter's 3rd quarter and financial outlook. And as always, we will close with your questions.

Speaker 2

To get started, Baxter reported solid 3rd quarter results that came in ahead of our projections, both on the top and bottom line. Sales from continuing operations rose 3% on a reported basis and 2% on a constant currency basis. As Claire noted earlier, sales from continuing operations exclude Baxter's Biopharma Solutions or BPS business, which Baxter divested at the close of the quarter. Sales in the aggregate, including discontinued operations, Also increased 3% on a reported basis and 2% on a constant currency basis. Our better than expected top line performance was driven by positive demand for many of Baxter's products combined with continued abatement of supply chain challenges.

Speaker 2

On the bottom line, 3rd quarter aggregate adjusted Earnings per share totaled $0.82 comprising EPS of $0.68 for continuing operations and $0.14 for discontinued operations. Adjusted EPS from continuing operations exceeded The top end of our outlook range of $0.65 to $0.67 driven by end market Stabilization and good sequential margin improvement across our business, which reflects strong execution against our strategic priorities. Overall, and especially when compared to what we've seen in recent quarters, We view the current market environment as relatively stable, though we continue to monitor hospital capital Spending particularly in light of an elevated interest rate environment. While we have seen sequential improvement in orders within our Care and Connectivity Solutions division, we continue to expect hospitals to exercise some degree of caution with their capital budgets. The momentum we are building in financial performance It's also reflected in the progress we're experiencing across the strategic priorities we laid out for you earlier this year.

Speaker 2

These initiatives in combination are focused on enhancing strategic clarity, increasing operational efficiency and accelerating innovation to deliver greater value for all of our stakeholders. During the Q3, we achieved some pivotal milestones towards driving this improved performance. First, we've been hard at work realigning the businesses to simplify and streamline our operating model. These efforts are resulting in a more agile Company with better visibility to our global markets and customers. In line with this realignment, today is the first time we formally report our results Under the new operating model is 4 global vertically integrated business segments: Medical Products and Therapies, Healthcare Systems and Technologies, Pharmaceuticals and Kidney Care.

Speaker 2

Each segment now has global profit and loss accountability, Dedicated commercial operations and fully aligned research and development, manufacturing, Supply chain and functional support teams. This reorganization is already creating meaningful advantages in helping us set priorities, Build alignment and operationalize our strategy. Advantages they have already and are expected to continue to pay dividends going forward. Our new segments are also a reminder of our highly diversified portfolio with strong brands, a global presence And high trust among clinicians and patients, the diversity and durability of our portfolio focused on essential healthcare needs Helps fuel sustained demand on multiple fronts, allowing us to better weather challenges that can emerge while continuing to deliver on our mission of Saving and sustaining lives. As discussed, this quarter, we also completed the divestiture of our biopharma solutions business, Further streamlining our focus on our core businesses, we are deploying substantially all of our estimated net after tax cash Proceeds of approximately $3,700,000,000 to pay down debt in accordance with our stated capital allocation priorities.

Speaker 2

The 3rd transformational action we laid out at the start of the year was the planned separation of what is now our Kidney Care segment. We are making significant progress and currently expect to launch Kineke as an independent publicly traded company by July 2024. I continue to be impressed with the leadership of Christophe, who joined us in June as President of our Kidney Care segment and designated CEO of Ventev. In just 5 months, he has already proven himself as an astute, The size of engaged leader, he has already surrounded himself with an outstanding team of experienced Direct reports drawn from across Baxter and externally and we expect to finalize the organizational structure for the new company by the end of the year. Meanwhile, the hard work of separating Kidney Care from Baxter is ongoing across commercial, legal, regulatory, supply chain and numerous other key operational Just like Baxter post separation, KidneyCare will be positioned to benefit from heightened focus and the ability to pursue its unique investment priorities to serve patients and clinicians, drive growth and innovation and create Added value for shareholders.

Speaker 2

With this as context, I wanted to briefly share some perspective On recent headlines regarding GLP-1s, including Novo Nordisk's October announcement about its Flow study and broader speculation about the future of dialysis therapy. We, like the rest of the dialysis community, Continue to follow developments closely and we are eager to see the full study results which are expected to be published in the first half of twenty twenty four. Given Baxter's life sustaining mission, we welcome any new therapeutic approaches They have the potential to improve the lives of patients, particularly those with chronic conditions. We also believe that it is Premature to assume that these drugs, particularly given the full trial results have yet to be published, will bring about any material shift In the need for dialysis services from a global market perspective, we believe that dialysis therapy will remain In demand and a critical element of patient care for the foreseeable future, let me highlight a couple of data points that we believe are relevant. The existing data on demographics and disease patterns continue to consistently suggest The global incidence of end stage kidney disease or ESKD will continue to rise over the next 15 to 20 years.

Speaker 2

To provide a bit more context, current data suggests that the global ESKD incidents overall will continue to grow, Driven by a greater than 35% expected increase in the prevalence of diabetes by 2,040. At the same time, global demographic data show that the number of people over 65 years old should be increasing by approximately 75 globally between now and 2,040, which is also expected to increase the number of potential patients At risk of developing ESKD, collectively these macro changes suggest the global incidence of ESKD is expected to continue to rise over the next 15 to 20 years even with important innovations in CKD therapeutics. We also believe these new drugs are doing important work in raising the awareness and prevalence of Primary care discussions about CKD diagnosis and management. We welcome this focus because better informed And empowered patients drive better preparation for dialysis and studies have shown that the more informed the patient is about their The more likely they are to choose home dialysis over other forms of dialysis when given the option. To that end, we're looking forward to seeing the new study data and understanding how it may provide additional And benefits for patients with CKD.

Speaker 2

My excitement for the trajectory of kidney care remains high. Our thesis and sense of opportunity for an independent stand alone Kidney Care business remain unchanged from the day we first announced this spin. This has been a year of investment, of transformation, of important and sometimes difficult steps taken to strengthen our present And we define our future. We knew when we first laid out this transformation in January that we had to get it right and less than a year later our progress is evident And our path forward is clear. We have delivered on our BPS divestiture.

Speaker 2

We have implemented our verticalized Segment structure and we are well on our way toward achieving the planned kidney care separation. Our continued progress on this transformational journey is a credit to the exceptional hard work and commitment of our Baxter colleagues worldwide, who as always have my profound thanks. I'm confident these actions are strongly positioning Baxter and in turn KidneyCare to unlock meaningful long term value for all stakeholders. Now before we take a closer look at our Q3 financials and outlook for the remainder of the year, I want to recognize Brian Stevens for serving so well as Interim CFO for over the past 5 months. We're also pleased to welcome incoming CFO, Joe Graddy, whose Wide ranging experience and track record make him an outstanding fit at this time of transformation.

Speaker 2

I will first hand the call over to Joel for a few introductory comments before Brian then provides a more detailed overview of our results for the quarter. Thanks, Joe. Let me start by saying how excited I am to join all

Speaker 3

of you today for my first earnings call as Baxter's new CFO, And more importantly, how motivated I am to be joining Baxter during such an important point in its transformational journey. For many years, I've admired Baxter as an iconic company with an incredible mission to save and sustain lives. When the opportunity arose to join the team, I recognize that this is the right next step in my career. The position presented me with the ability to utilize my broad experiences in finance, operations, strategy and transformation to help the company deliver on its strategic actions that Joe outlined earlier. While early, I've been extremely impressed With the talented and dedicated employees at Baxter and their unwavering passion for and commitment to our mission.

Speaker 3

In addition, I'm very optimistic about the numerous opportunities that exist for the company to increase long term value for our stakeholders. Finally, I look forward to both speaking with and meeting many of you over the next coming months. Your perspective on our business and the surrounding market landscape will be incredibly valuable as we move forward in our transformation journey. With that, I'll turn it over to Brian to take us through the Q3 results. Brian, over to you.

Speaker 3

Thanks, Joel, and good morning, everyone. I'm happy to

Speaker 4

be joining the call this morning to provide some additional details on Baxter's 3rd quarter financial performance as well as commentary on our updated financial outlook. As Joe mentioned, we are pleased with our Q3 results, which came in ahead of our expectations. 3rd quarter 2023 global sales included $3,710,000,000 from continuing operations and $191,000,000 from discontinued operations. Sales in the quarter increased 3% on a reported basis and 2% on a constant currency basis and compared favorably to our guidance. Sales performance in the quarter benefited from better than expected sales in medical products and therapies, particularly our Infusion Systems and IV Solutions products as well as continued strength in our Pharmaceuticals business driven by injectables and drug compounding.

Speaker 4

On the bottom line, adjusted earnings from continuing operations totaled $0.68 a share, decreasing 4% versus the prior year period and reflecting the ongoing operational improvements, primarily offset by the impact of increased interest expense. Adjusted EPS from continuing operations for the quarter came in ahead of our expectations of $0.65 to $0.67 per share, primarily driven by sales and operational performance and partially offset by higher than expected tax rate. In the aggregate, inclusive of both continuing and discontinued operations, adjusted EPS was flat year over year and totaled $0.82 per share. Now walk through the performance by our new reportable segments. Sales in our Medical Products and Therapies segment were 1,260,000,000 Increasing 4% on a constant currency basis.

Speaker 4

Within Medical Products and Therapies, sales from our Infusion Therapies and Technologies division, which includes our former Medication Delivery and Nutrition businesses, totaled $1,000,000,000 and increased 4% on a constant currency basis. Sales in the quarter benefited from strong growth in our infusion systems portfolio, driven by continued demand for our infusion pump hardware, including the Spectrum LVP. Sales from Advanced Surgery totaled $255,000,000 and grew 3% on a constant currency basis, in line with expectations in surgical procedure growth. Moving on to Kidney Care, sales in the quarter were $1,100,000,000 and were flat year over year on a constant currency basis. Within Kidney Care, global sales for chronic therapies were $921,000,000 declining 3% on a constant currency basis.

Speaker 4

Sales performance in the quarter was impacted by a difficult comparison to the prior year period, which benefited from certain discrete items that totaled approximately $20,000,000 In addition and consistent with our plans to enhance performance in our HD business, sales in the quarter reflect the exit of a distribution agreement in the U. S. Earlier this year. Finally, performance in chronic therapies continues to be impacted by government based procurement initiatives in China and the lower patient census in the region due to the pandemic. We estimate that, collectively, these region specific factors negatively impacted sales by more than $40,000,000 in the quarter.

Speaker 4

Sales in our Acute Therapies business were $188,000,000 representing growth of 12% on a constant currency basis With double digit growth across all regions and reflecting a more stabilized environment for this business following significant heightened demand during the pandemic. For our Healthcare Systems and Technology segment, sales in the quarter were $744,000,000 and were flat to the prior year on a constant currency basis. Within this segment, sales in our Care and Connectivity Solutions division, which includes our former Patient Support Systems and Surgical Solutions businesses, were $443,000,000 decreasing 4% on a constant currency basis, primarily driven by a lower contribution from rental revenues and lower hospital capital spending as compared to the prior year period. Orders within our Care and Connectivity Solutions division continue to improve sequentially, increasing more than 10% as compared to the 2nd quarter. Frontline Care sales in the quarter were $301,000,000 increasing 8% on a constant currency basis and reflecting the continued benefit of easing supply constraints.

Speaker 4

During the quarter, the business was able to continue to reduce its backlog We expect to exit the year with a more normalized backlog level. Sales in our Pharmaceuticals segment were $580,000,000 increasing 9% on a constant currency basis. Performance in the quarter reflected continued strength in our U. S. Injectables portfolio driven by new product launches as well as continued strong demand for our services within our hospital compounding portfolio internationally.

Speaker 4

Other sales, which represents sales not allocated to a segment and primarily include sales of products and services provided directly through certain of our manufacturing facilities, declined more than 50% during the quarter. This lower level of sales reflects reduced demand in 2023 for certain contract manufacturing volumes and the termination of the royalty arrangement following our acquisition of the rights to the underlying products. VPS 3rd quarter sales Reported as discontinued operations were $191,000,000 increasing 11% on a constant currency basis. Now moving through the rest of the P and L. Our adjusted gross margin from continuing operations totaled 41.7% and represented a decline of 70 basis points over the prior year, but improved 130 basis points sequentially.

Speaker 4

The year over year decline in gross margin reflects the impact of higher costs for raw materials overhead and labor, Driven by the elevated inflationary impacts we've absorbed over the last couple of years, we were able to partially offset these cost increases through pricing and ongoing margin improvement programs in our integrated supply chain network. Adjusted SG and A totaled $820,000,000 or 22.1 percent of sales, a decrease of 50 basis points versus the prior year period. Performance in the quarter benefited from our ongoing transformation initiatives to enhance operational efficiencies, partially offset by higher bonus accruals under our annual employee incentive compensation plans compared to the prior year. Adjusted R and D spending in the quarter totaled $161,000,000 and represented 4.3% of sales, an increase of 20 basis points versus the prior year. We have ramped up our R and D efforts, particularly increasing our investments in advancing our Connected Care Technologies and like SG and A, R and D expenses include the impact of higher employee incentive accruals as compared to the prior period.

Speaker 4

These factors resulted in an adjusted operating margin of 15 point 2%, a decrease of 50 basis points versus the prior year, but a sequential improvement of 200 basis points in operating margin as compared to the 2nd quarter. Operating margin came in ahead of our expectations, primarily driven by top line performance and enhanced execution on our initiatives focused on driving improved operational efficiency. Net interest expense totaled $128,000,000 in the quarter, an increase of $24,000,000 versus the prior year, driven by the impact of higher interest rates on our variable rate debt. Adjusted other non operating income totaled $7,000,000 in the quarter compared to $4,000,000 in the prior year period. Results were unfavorable to expectations, driven mostly by losses in foreign exchange.

Speaker 4

The adjusted tax rate in the quarter was 21.8% compared to 22% in the prior year period. The year over year decrease as well as the unfavorability versus expectations was primarily driven by changes in geographic earnings mix. And as previously mentioned, adjusted earnings from continuing operations totaled $0.68 and declined 4% versus the prior year, primarily reflecting the increase in cost of goods sold due to inflation as well as higher interest expense and foreign exchange headwinds. With respect to our prior guidance, earnings favorability was driven by better than expected sales operational efficiencies, partially offset by negative impacts from FX and a higher than expected tax rate in the quarter. Total company adjusted earnings of $0.82 per diluted share, which includes discontinued operations, was flat versus the prior year period.

Speaker 4

With respect to cash flow, in the 1st 9 months of 2023, we generated free cash flow of $666,000,000 including discontinued operations compared to $293,000,000 in the prior year period, and we remain on track to more than double our free cash flow in 2023 from prior year levels. Now let me conclude my remarks by discussing our outlook for the Q4 and full year 2023, including some key assumptions underpinning that guidance. For full year 2023, Baxter expects total sales growth from continuing operations of 1% to 2% on a reported basis And approximately 2% on a constant currency basis. Foreign exchange is expected to be an approximate 50 basis point headwind to reported results on a full year basis. On a continuing operations basis, we expect full year adjusted operating margin of 14.3% to 14.5%.

Speaker 4

With the closing of the BPS transaction and related debt pay down, we expect a reduction of net interest expense of approximately $45,000,000 in the 4th quarter. For the full year, we expect net interest expense to be approximately $450,000,000 We anticipate a full year adjusted tax rate of 20.5 percent to 21%. And lastly, we expect a diluted average share count of 508,000,000 shares. We now expect full year adjusted earnings from continuing operations of $2.57 to $2.60 per share. Specific to the Q4 of 2023, we expect global sales growth of approximately 1% to 2% on a reported basis And approximately 1% on a constant currency basis.

Speaker 4

And we expect adjusted earnings, excluding special items, of $0.85 to $0.88 per diluted share. With that, we can now open up the call for Q and A.

Operator

Thank you. We will now begin the question and answer to 1 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 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 Baxter International website for 60 days at www.baxter.com.

Operator

Your first question comes from the line of Matt Miksic from Barclays. Your line is open. Thanks

Speaker 5

so much for taking the questions and congrats on a really strong quarter here. Appreciate all the color around dialysis and your position on all these concerns around GLP-1s, that's super helpful. Wondering if you could talk a little bit about the hoops and hurdles such that they are In front of you still to complete this spin of KidneyCo, that if you could maybe just

Speaker 2

Thank you, Matt. Good morning. Matt, our preparations for the proposed spin off of the Kid and Care segment Into its own company, Ventev continues to progress well. We've made significant progress In the Inventive's operating model, we are designing the organization, finished actually, And we are allocating personnel to the company in all operational levels. And so it continues to progress Well, but consistent with Board's exercise of its fiduciary duties, we'll continue to pressure test the related financials, Including as a result of the evolving market conditions to ensure we proceed in the interest of maximizing shareholder value.

Speaker 5

Of course. And the timeline for that sort of approval and presentation, does that happen in The first half of next year at the around the time of the Board meeting, which week's

Speaker 2

Matt, July 2024 is the end of July 2024 is where we stand today As the date. As far as we know today, the plan is July 2024.

Speaker 5

Fair enough. And then maybe just if I could ask a business line question. The Hill Rom businesses had been kind of Under some pressure last year, obviously everyone is aware of that for a variety of reasons. Just wondering if you could speak a little bit about how The back half is shaping up relative to your expectations and if we should expect things to continue to improve into year end, if you Can you give us some idea of a cadence into the Q4 here or any sort of puts and takes or updates as to how the sort of The bounce back in that company in that part of the business has progressed. Thanks.

Speaker 2

Yes. We Matt, we've made a lot of progress. We redesigned the organizations. We put some really good people. We had to replace key positions as we thought That we needed higher caliber in some areas of the business and we have those folks in place.

Speaker 2

We put Riaz Rozo as the Segment President. We have Julie Brewer Came in and brought a new team in place. So we feel that we've seen steady momentum In our Front Line Care business as well, the Front Line Care managed by Jim O'Connell is doing well With improved supply chain availability for electromechanical components up 8% in the quarter and 7% year to date And it's doing well. CCS, which is the we have the PSS and GSS In the Care Communications, the former group that we used to call is called CCS today, as you see in your financials, Has been impacted by lower rental revenues and a bit of softness in the capital spending, we're seeing improved in order sequentially and expect That will continue in the Q4 into 2024. We have increased our investments in HST.

Speaker 2

As you notice, our research and development Has increased. We're going to continue to increase to get more innovation out, but I have to say that the whole overall business of HST is going to have A very large Q4 in terms of growth compared to the rest of the year and bring them more in line with our Expectations including its profitability, which will increase in the Q4 as the rest of the company.

Speaker 5

Great. Thanks for the color. A lot to cover, but I'll leave it there with you. And thanks again for taking the questions.

Speaker 1

Thanks, Matt.

Operator

Your next question comes from the line of Vijay Kumar, Evercore ISI. Your line is open.

Speaker 6

Hi, Joe. Good morning and thanks for taking my question. I had one on a financial question and one on fiscal 'twenty four. On the updated guidance here, what is Q4 assuming for interest expense? Is that stepping down?

Speaker 6

I'm getting to implied operating margins close to 18%. That's a pretty big sequential step up. Does that math make sense to you?

Speaker 4

Yes.

Speaker 1

So, Vijay, I'll just quickly obviously, interest expense would be kind of a below the line item, So it would not be part of our operating margin, but we are expecting I'll let Brian get into the details in terms of what we're expecting. But As we said in the prepared remarks, we expect interest to be down about $45,000,000 net interest expense about $45,000,000 in the 4th quarter.

Speaker 4

Yes. And speaking to operating margin, you're correct. Our full year operating margin guidance that we gave of 14.3 percent to 14.5 percent implies a 4th quarter adjusted operating margin that exceeds 16% versus the 15.2% Adjusted operating margin we landed at in the 3rd quarter, really the primary driver of that increase is the sequential improvement in our sales, which is Typical seasonally, that provides us a lot better operating leverage against our cost base, and we're really encouraged to see the progress we've made in significantly expanding our margins In the second half of the year compared to the first half and as we discussed on our last two earnings calls, that expansion is driven not just by the higher sales, But I'll spike cost favorability in our supply chain network as we sold through a lot of our higher cost inventory during the first half of the year and we're starting to see the Savings from our margin improvement initiatives, we think is going to begin to slightly outpace inflation starting in the 4th quarter. And then finally, driven by cost savings from the operational efficiency initiatives we've been undertaking in recent periods.

Speaker 6

Understood. And maybe just off of that question, Joe, for you on fiscal 2024. Can you talk about the Big variables like what gets better, what gets worse in 2024, when can Bakshi get back to that mid single LRP thesis, I think the Street is modeling 100 basis points of margin expansion Based on some of Joel's comments here, does that seem reasonable to you for the Street to be modeling 100 basis points margin expansion?

Speaker 2

So, Vijay, let's start with the top line. We see stability in the market, In admissions, market growth rates, you saw some of the published numbers from other companies and hospitals. We're starting to we see that as well. And we continue to have a pretty stable top line growth and consistently into 2024. So I'm confident about that.

Speaker 2

We have ex our kidney care, the other three businesses of Baxter Have steady growth into next year. They will probably be higher than in 2023. Talking about the bottom line, if you see the sequential improvement in our bottom line, that will continue into 2024 We continue to have cost reductions in our manufacturing facilities. We also get more stable volume and growth in volume Absorption of overhead and some pricing opportunities in couple of our businesses. I just highlight, For instance, the turnaround that we're seeing in our pharmaceutical business that will continue with new product launches from 'twenty three Into 'twenty four and also the good demand for a Sigma Spectrum pump from 'twenty three into 'twenty four, just to mention a couple of things.

Speaker 2

And also stabilization of our HST business that we see in terms of anniversarying some of The differences in end of fiscal years between TROM and Baxter, we start seeing the stabilization And the successful launch of our progressive plus just to give you a couple of things that give us more confidence in 2024 in terms of top

Operator

Your next question comes from the line of Rick Wise from Stifel. Your line is open.

Speaker 7

Good morning, everybody. Good morning, Joe. It's a funny place to start maybe, but and I know that Joel It is fairly new to the job, but it's hard to resist asking both from your perspective, Joe, What did you charge Joel? What are you tasking him? Maybe talk about your request of him as he steps into the role.

Speaker 7

And Joel, I'd be curious to hear What kind of special sauce you're going to bring to the job and where your priorities lie and just your initial thoughts

Speaker 2

Rick, good morning. Good to hear your voice. Listen, when We're in the process of selecting the CFO for the company. We're looking for the ability for the person to get Operationally into the details and continue to help the transformation of the finance organization. And if you look back at the Across the board, also the development of new talent, the culture and the people are very important to Baxter.

Speaker 2

So Joel coming to the company Need to understand that we are a complex operating company. We have a lot of manufacturing sites. We have a significant amount of R and D sites across the globe. It is a company that spans over 100 different countries in terms of sales and more than 25 to 30 countries in terms Manufacturing and Distribution alone. So somebody who had the intellect to combine that ability to understand complexity And get through it and get operational efficiencies out of it, but continues to transform the finance organization and bring the talent And the culture to the point that we needed the agility and the ability to cope with different Imports also experienced in the M and A space that we continue to rotate the portfolio of Baxter, Look at opportunities to transform Baxter's WAMGR into a higher WAMGR to better value for our shareholders.

Speaker 2

But I pass on to Joel to answer The other side of your question.

Speaker 3

Thank you. Great to be with all of you this morning, and I really look forward to meeting all of you in person Hopefully in the near future. So look, it's 1st of all, really excited to be here. I think all the things that I thought about when I was going through the process with Joe and with the team I've only been reiterated to me as I've gotten here and realized the wonderful opportunities that we have here at Baxter. Yes, I'd say early impressions certainly, as I said, lots ahead of us.

Speaker 3

There's lots to do, but we have great people here and incredibly passionate people As it relates to the mission of this company and again, really a

Speaker 5

lot of talent as well as

Speaker 3

my early view. I'd say my early focus, first of all, is about learning the business. I'm newer to the industry, but certainly, I'm going to be focused heavily on making sure I understand and learn this complex Interesting business, so I can really make the best decisions to support the team. And from there, we're going to focus a lot on how we continue to accelerate growth, I'd accelerate consistent execution of things and how do we think about where those mechanisms are to ultimately fund growth and value creation. Certainly, we'll be spending time understanding our talents and really just the focus of the organization.

Speaker 3

As Joe said, the background I've gotten both been grounded in finance, Ops, strategy, M and A and transformation. And so bringing all those things to the table here for all the opportunities we have at Baxter, just We're really thrilled to be here and those are some of the areas I'm going to be spending time focusing on looking forward.

Speaker 7

That's great. And one quick follow-up if I could. So picking up on BJ's question earlier on 24. Just from one angle, When we think about current consensus ex KidneyCo, how do we think about the impact of the spin Relative to dissynergy, does consensus adequately reflect numbers Inclusive of the dissynergy costs for when you think about the separation of the 2 companies and standalone stand up costs Said differently, well, numbers need to come down. That's what I think people are that's what I'm concerned about.

Speaker 7

I think that's what folks are concerned about. Thanks, Joe. Appreciate it.

Speaker 4

Rick, maybe a few comments on that. As Joe mentioned earlier, the process of the spin is going between now and we're planning to wrap up in July of 2024. All the models are still in progress and we are refining our dissynergy and standalone cost estimates. We do plan to be providing additional information on this in connection with our 2024 guidance that we provide at year end, as well as in connection with an Investor Day that we intend to have in advance of that spin taking place. So No specific guidance on the particular quantification of the synergies at this time.

Speaker 2

And I want to underscore the fact that We're going to continue to see progress on Baxter's top line and bottom line ex those synergies Because we continue to accumulate the cost improvements that we've put in place, also margin improvement programs, new product launches, the turnaround Pharmaceuticals and the great demand that we're having for our Cygnus fraction pump. So there are some really good catalytic Catalyzers, I would say, in place that will make 2024 a better year than 2023. But I want to make sure that you understand that we will have the dis synergies we're in process of putting them in place.

Speaker 7

Thank you, Joe.

Operator

Your next question comes from the line of Peter Chickering from Deutsche Bank. Your line is open.

Speaker 8

Good morning, guys, and thanks for taking my questions. On the Novo MyQ pump, you now have 2 competitors with the With the ExGen pumps in the market right now, your pump sales remain pretty robust in the quarter. At what point do you get worried about sort of losing market share to the other pumps. And then on your pump approval, any updates there? Is it worth pulling the 510 and refiling helps you with the process or any updates there?

Speaker 2

On the current infusion market, we have really good demand, Really, really good, Emmanuel. We haven't lost a 1% of market share at all. As a matter of fact, we gained market share. Our growth, our Fusion Hardware growth has increased in the mid teens. And for next Here, there is the demand is pretty solid for our product.

Speaker 2

Remember, our product has Sigmisburg has the right Precision, the pump has the right precision and it has what is very well liked in the marketplace. So we continue to get significant Income interest from competitive accounts to our pump, okay? On the specifically On the specifically Novum, I want to make sure that we continue to work with the FDA. We have Given them all the information required, we submitted with a package. We also Give them all the incremental changes that we've made to the product And we are in continue and regular conversations with them during their review period.

Speaker 2

This is where we are with Nova. But I just want to let you know, we really want to get this pump approved. We're doing everything we can. But in the meantime, we have a very capable and really good pump out there that continues to gain market share and has very good demand as you see this year and you're going to see next So it's altogether a good situation for Baxter. Of course, we are working very hard To have the other pump approved, we want to have that approved.

Speaker 2

Okay.

Speaker 8

And then, next question, oil and diesel have been very volatile over the last few months And while you aren't giving 2024 guidance, if Oil and Steel stay in this range, can you help us quantify the headwind for 2024 As the costs roll through the balance sheet and on the P and L, any ways of how you can offset those costs? Thank you.

Speaker 2

Yes. We have put a significant amount of operational efficiencies in place, primarily in our logistics And Transportation and Supply Group, we see the headwinds in parts set by the programs that we put in place. So our initiatives are expected to, as I said, more than offset And incremental impact from rising of oil and diesel prices.

Speaker 7

Thank you.

Speaker 2

Thank you.

Operator

Your next question comes from the line of Robbie Marcus from JPMorgan. Your line is open.

Speaker 9

Great. Thanks for taking the questions and congrats on a nice quarter. Maybe to start, I know there's been a couple of questions on 24 that have been centered around margins, but I wanted to ask on the top line. At the Analyst Day, your long range plan was for 4% to 5% Organic top line growth, The Street's modeling 4% next year coming off a year of around 2%. What's your confidence level in being able to reach your long range plan targets?

Speaker 2

Robbie, good morning. We expect, As I say, ex our Kinney business, that our margin will be in line with The expectations, okay, of the short term and our objective for mid to long term for The company is 4% to 5% as we improved our member as well. But we have plans ex Reno to get back at a growth Close to what we today expect. So it is a good story there as we have momentum In several different areas of the company with some product launches, as I said, one of the biggest headwinds that we had experienced in the past few years Had been our pharmaceutical business that we were able to turn around with great launches. So not giving guidance in 2020 But our expectations is to be around the expectations of the market in terms of growth and our mid to long term Our expectation is to be 4% to 5%.

Speaker 9

Great. I appreciate that. And I want to say it's really helpful to get the segment margins. Thank you for that. But I want to ask on sort of the trends here.

Speaker 9

We got year to date and third quarter and as well as 2022. How should we think about maybe some of the past few years and your expectations for margins in the segments here? And now with 4 segments and more ownership on the leadership within each, what are some of the examples of things they could do that weren't able to be done before to help improve margins on a segment basis? Thanks a lot.

Speaker 2

Robbie, we have a significant amount of programs in our Manufacturing team, logistics team, also pricing initiatives as well as new product Launches. So it's a mix volume and cost reduction story. We will be Improving sequentially our margins, as you've seen, as we said, remember, we're executing on everything that we said we're going to We are improving our margins. You're going to see that in the Q4 as we had in our we have guided As well as you're going to see that in 2024. So our confidence in continue to improve our margins and once We have the business spun off.

Speaker 2

The remaining backs, we will have even further ability to continue to grow its margins, Okay. So because it's all about mix and new products and also pricing. So Our story is about the same, is the aspiration to 4% to 5 And the bottom line continue to improve sequentially and continue to find ways of getting productivity Improvement through volume, mix and pricing.

Speaker 4

Yes. And Ravi, our plan right now, this 3rd quarter Completing our verticalization and reporting out segment profitability was a big milestone for us, and we're extremely excited to be able to share that with you. And I think our long term plan is when we get to year end and we're putting out information, we do plan to go back and provide supplemental information on history To provide some better comparability as we've done in other situations in the past. But I think the way to generally think about it, As you're looking at the overall directionality of where Baxter margins have trended from the first half of the year as we're selling through some of our higher cost Inventory to the second half of the year, pretty much across all of our segments, you're going to see sequential margin increases in the back half, Contributing not just to the items I've pointed out before, but also to additional operating leverage, just from higher sales in the back half of the year. So Stay tuned and we will be providing you more of that information.

Speaker 10

Very helpful. Thanks a lot.

Operator

Your next question comes from the line of Travis Steve from Bank of America Securities. Your line is open.

Speaker 10

Hey, Joe. Thanks for taking the questions. I just wanted to follow-up on something you said earlier in the call about on the renal spend pressure I assume, current market conditions, You're still okay with the renal spend going forward given you're still talking about it, but maybe just talk about what's left in analysis to pressure test the renal spend And kind of what you meant by that comment?

Speaker 2

Well, as I mentioned before, it's the same answer. We are Very much into the preparations. We have the team in place. We had put all the things in place. The company is working very hard.

Speaker 2

It is a complex separation primarily not from the point of view of Sales and marketing and the company itself, but it's all the manufacturing and distribution of it. So we're working on that. We have put people in place. We always, always have the fiduciary responsibility and duty as our Board has it as well To continue to pressure test the related financials and including as a result of evolving market conditions in the interest Of maximizing shareholder value to ensure that we proceed with that in mind. That is our number one responsibility when we do anything in Baxter.

Speaker 2

So yes, we're moving forward, but we are always making sure that that step is taken and being analyzed and checked. Travis, one thing I

Speaker 3

would just say, it's Joel. This is also an opportunity to get me up to speed on all this.

Speaker 10

Again, I think there's

Speaker 3

a good, again, very sound strategic rationale On the spin and obviously the team is taking me through a lot of the financials and a lot of those things. So part of this is also bringing me up to speed in terms of some of the No financial implications as well. So just to add that to this. Thanks.

Speaker 10

Helpful. Thanks for that clarification. And then On 2024, I guess it sounds like you're confident in accelerating growth kind of above this kind of 1% to 2% that you're doing now, But not quite back to 4% to 5%. So is there any examples you can give on reasons we should believe in kind of a little bit better growth in 2024? I guess Novum would be one of those.

Speaker 10

Anything else that I can really kind of point out that can give some confidence that 2024 revenue growth can be above this kind of 1% to 2% that you're seeing right now?

Speaker 2

Well, we're going to anniversary some headwinds that we had in HST, primarily in the CCS business is one of them. Then we have some good launches in our pharmaceutical business and we have continued demand increase for our Sigma Spectrum pump, Not even taking into consideration Novum on this, okay? Just by what we currently have today Give us confidence in our growth next year ex renal to be higher than what we have today across all the three segments, MPT, HST and Pharma.

Speaker 1

You know what, Travis, why don't I just add a little context here because the 1% to 2% you're pointing out, Remember, it does have some of the kidney care impact in it this year from some of those one time payments we received last year. So that is kind of putting some pressure if you think about just what how much kidney care it represents of Baxter contributing to that 1% to 2%. In addition, within our other segment, you'll see that down pretty significantly. So I think for the base Baxter Business, this is what Joe was alluding to. You are seeing nice progression this year.

Speaker 1

Within the HST business, I think you're seeing some Momentum within the frontline care, I think as we get to next year, within the CCS business, we'll see some of that momentum, going into 2024. Now with respect to Kidney Care in 2024, that's one of the businesses we will anniversary some of those one time payments, but we will have to continue to look at some of the other factors that impacted growth this year, including just sales within our China region that have been impacted by The government procurement initiatives as well as just the rebasing following the pandemic last year.

Speaker 2

It's underscoring that the growth is in the remaining part of Baxter ex Reno is steadily Improvement and our MPT business has been growing above market every quarter and continues to do well. So I want to make sure that You appreciate the momentum that we are embarking and we have shown with the Q3 results what we meant by that.

Speaker 10

Great. Thanks a lot for that.

Speaker 2

Thank you.

Operator

Your next question comes from the line of Joanne Wuenschop from Citi. Your line is open.

Speaker 11

Thank you so much and good morning and thank you for taking the questions. I have 2. The first one is when I take a look at medical products and therapies Year over year, the margin was down about 190 basis points. And I think someone was heading towards this question earlier. I'm trying to figure out Trend in that and if we should look at that continuing to be pressured as we look into next year?

Speaker 11

And then my second question has to do with some of your GPO contracts and pricing and how we should think about restructuring or renegotiating those and the potential for taking higher price. Thank you.

Speaker 1

So, Joanne, I'll first take the MPT question. I would say within this quarter, there was a little bit Of mix coupled with some increased investments within MPT, but we should see sequential improvement within that business as well as we go into the 4th quarter, Similar to what we will see with most of the businesses as well. So kind of following the general trend of Baxter. But this quarter on a year over year basis, if you look at it, just Face some differences within mix and some increased investments.

Speaker 4

Yes. And I think adding to that, as Joe mentioned, we have a strong pump On the market right now and we're seeing mid teens growth in some of the equipment sales that are coming through that business. So I think that is something that has That we'll be continuing to focus on next year. Regarding the second question on pricing, There are some puts and takes here. We do have some of our GPO contracts coming up for renewal and we are committed to negotiating pricing that reflects Current costs that have increased in recent years and it's fair to both parties.

Speaker 4

We did get some temporary price increasing During the in recent periods, it's going to be rolling off, but shortly after that, we'll be entering into negotiation stage. So stay tuned on that, But we are committed to focusing on pricing as one of our levers in the future.

Speaker 2

Just closing on the GPO contract, we're very engaged At the moment, they are for 2025. And as Brian said, we are looking at all the opportunities to compensate the company for the Significant cost increase that we had experienced in 2022.

Speaker 11

Thank you.

Operator

And your final question comes from the line of Danielle Antalffy from UBS. Your line is open.

Speaker 12

Hey, good morning, everyone. Thanks so much for taking the question. Joel, excited to meet you. You have a great team over there with Clare and So very excited to work together. My question is around the new operating model and how to think about From a tangible perspective, how this changes the way Baxter invests in R and D?

Speaker 12

Should we be thinking about The real benefit of the operating model more on the accountability and cost side or on the R and D side and Elevating the TAM and WAMGR of the company over the next few years. I guess I'm trying to get an understanding of where the real benefit comes from this new operating model. And that's it for me. Thanks so much.

Speaker 2

Thank you. It comes first from the accountability of each one of the segment presidents who are fully accountable for the profit and losses of their business, including all the allocations They got put on, as you saw, is a fully allocated P and L. So they make all the decisions on portfolio management within their spectrum of business. Also all the decisions in investment research and development, so you look at HST, this year we've been we are being investing Higher with higher intensity in the HST to get products faster out faster. There is no 2 different parties to talk to all states within the business.

Speaker 2

Also a great advantage is to have the manufacturing supply chain reporting Into this business, despite the fact we still have a coordination overall for the company, we do have This business, the plants and the heads of those plants in the business and they are on the same page. And that drives quite a bit of the cost reductions, the optimization of product design, because it's all within the same group. Some are fungible, some are not fungible. Some are qualitative improvements that we see by communication. The other is really communication when you have set growth targets for CAGR for the business.

Speaker 2

It's easier that way. There's no 2 different parties. We don't have a region of the world that will decide on growth versus a business line that goes across the globe, which is Trying to negotiate those numbers. So it's a very simple conversation. It's very easy to do it.

Speaker 2

And we're starting to see the In fact, in the creation of our annual operating plan at the moment is easier and better process.

Speaker 11

Thank you.

Speaker 1

Thanks, everyone. Rob, this can conclude our call.

Operator

Ladies and gentlemen, this concludes today's conference call with Baxter International. Thank you for

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Earnings Conference Call
Baxter International Q3 2023
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