Jay Saccaro
CFO at Baxter International
Thanks, Joe, and good morning everyone. Despite in-line sales results, our fourth quarter earnings performance came in below our expectations. This variance was primarily driven by foreign exchange losses and product mix in the quarter. As Joe mentioned, we're not satisfied with our results and as such, we're taking a number of actions to improve our performance. Some of these initiatives are already underway, and will be further enhanced with the cost-reduction program that we are in the process of finalizing in parallel with our operating model redesign.
These are necessary and are expected to accelerate future performance. Collectively, these actions are expected to deliver more than $300 million in savings in 2023. Turning to our financial performance. Fourth quarter 2022 global sales of $3.9 billion, advanced 11% on a reported basis, 17% on a constant-currency basis and 2% operationally. Sales performance in the quarter continues to underscore the strength of our broad portfolio of core therapy and connected care offerings across the care continuum.
As we've discussed previously, supply for select products remains constrained and we estimate that these constraints impacted our revenues by approximately $50 million in the quarter or approximately 140 basis-points. These supply constraints are a mixture of electromechanical components and shortages from other third-party suppliers. On the bottom line, adjusted earnings decreased 15% to $0.88 per share outside our guidance range of $92 to $0.99 per share.
As mentioned earlier, this was due to unfavorable product mix and an approximate $0.04 headwind from foreign exchange losses on balance sheet positions, primarily due to the devaluation of the Russian ruble during the quarter. Now I'll walk through performance by our regional segments and key product categories, note that constant-currency growth is equal to operational sales growth for all global businesses and Baxter's three legacy geographic regions.
Starting with sales, by operating segment. Sales in the Americas were flat to the prior year-on a constant-currency basis, sales in Europe, Middle East and Africa grew 5% on a constant-currency basis, and sales in our APAC region increased 2% constant-currency. Quarterly sales in the region reflected strength in geographic segments sales, offset by relatively flat growth in China due to the impact from various government-based procurement initiatives being implemented in that market.
Moving on to performance by key product category, global sales for Renal were $981 million, increasing 3% on a constant-currency basis. Performance in the quarter was driven by solid growth in our PD business, where we observed an increase in PD patients globally, particularly in the US, which saw a sequential improvement in growth of 100 basis-points and ended the year with patient growth of approximately 4%.
Mid-single-digit PD, growth in the quarter benefited from incremental revenues of nearly $20 million, resulting from a customer that was looking to build out the new business and did not meet its contractual minimum purchase requirements. This arrangement has been terminated and the related revenues will not recur in future periods. Performance in the quarter was partially offset by lower in-center HD sales due to HD monitor and associated consumable component supply challenges.
Sales in medication delivery of $745 million declined 2% on a constant-currency basis. Performance in the quarter was impacted by a difficult comparison to the prior year which benefited from higher levels of infusion pump placements. Demand remained strong for Baxter's smart infusion pumps, and as we have discussed is currently outpacing our ability to supply, given continued challenges sourcing components.
Our IV therapy portfolio grew low-single digits globally driven by strong demand internationally. During the quarter, we did not see pronounced impact from flu related cases which although reported case numbers high did not translate into increased hospital admissions. Pharmaceutical sales of $552 million, declined 1% on a constant-currency basis. Performance in the quarter reflect the continued impact of generic competition in the US, which was partially offset by increased demand for our drug compounding portfolio internationally.
Moving to clinical nutrition, total sales were $243 million, increasing 6% on a constant-currency basis. Performance in the quarter was driven by demand for our broad multi chamber [Technical Issues] product portfolio. Sales in Advanced Surgery were $260 million, advancing 8% on a constant-currency basis. Growth in the quarter reflects an improvement of elective procedures globally. Surgical volume recovery was strong across all regions.
Sales in our Acute Therapies business were $182 million, declining 3% on a constant-currency basis and reflecting a tough comparison to the prior year where we had experienced elevated demand for CRT, given the rise in COVID cases. BioPharma Solutions sales in the quarter were $153 million, increasing 12% on a constant-currency basis. Demand for non COVID services more than offset the decline in COVID vaccine-related revenue compared to the same-period last year.
COVID vaccine sales for the quarter totaled $22 million. Legacy Hillrom contributed $734 million in sales in the quarter compared to $212 million in the prior year period. After the acquisition closed on December 13, 2021. Hillrom sales included $360 million of sales and patient support systems, $293 million of sales in front-line care and $81 million of sales in global surgical solutions. Legacy Hillrom sales grew mid single-digits on a pro-forma and FX-neutral basis as compared to Q4 2021 This growth reflects demand for the physical assesments in cardiology portfolios within the front-line care business. Within the quarter, we were able to secure some additional electromechanical components on the spot market, which enabled us to address portion of the backlog associated with the front-line care business. Sales in patient support systems declined low-single digits in the quarter, primarily driven by lower rental revenues in the quarter as the prior year period benefited from more than $10 million in sales due to COVID related rentals. Moving through the rest of the P&L. Adjusted gross margin of 41.6%, decreased 270 basis-points versus the prior year, reflecting increased cost of goods sold, primarily driven by the factors we've discussed around inflation freight and supply-chain constraints. Adjusted SG&A of $797 million, represented 20.5 as a percentage of sales, an increase of 30 basis-points versus prior year, driven by the addition of Hillrom as well as higher freight expenses. Adjusted R&D spending in the quarter of $157 million represented 4% of sales, an increase of 10 basis-points versus prior year. Both SG&A and adjusted R&D reflected a benefit from lower bonus accruals under our annual employee incentive compensation plans, which are directly tied to Baxter's performance. These factors resulted in an adjusted operating margin in the quarter of 17.1%, a decrease of 310 basis-points versus the prior year. Adjusted net interest expense totaled $117 million in the quarter, an increase of $73 million versus the prior year, driven by higher outstanding debt balances related to the acquisition of Hillrom and the impact of interest rates on the variable-rate debt. Adjusted other non-operating expense totaled $12 million in the quarter, a decrease of $9 million versus the prior year, driven primarily by amortization of pension benefits. As I mentioned earlier, non-operating expenses were unfavorable to our expectations, primarily due to foreign exchange losses. The adjusted tax rate in the quarter was 16.1% compared to 18.6% in the prior year period. The year-over-year decrease was primarily driven by statute expirations on certain tax positions, partially offset by an increase due to a change in geographic earnings mix, following the Hillrom acquisition. And as previously mentioned, adjusted earnings of $0.88 per share declined 15% versus the prior year period. Earnings in the quarter reflected the increase of cost of raw materials, freight and labor, as well as the impact of rising interest rates and foreign exchange headwinds. Turning to full-year 2022. Sales of $15.1 billion increased by 18% on a reported basis, 23% on a constant-currency basis and 20% operationally. Legacy Hillrom front-line care patient support systems and global surgical solutions businesses contributed $2.9 billion to full-year sales on a reported basis. On a pro-forma basis and after adjusting for foreign-exchange, full-year legacy Hillrom sales were flat as compared to the prior year period, primarily reflecting the impact of supply constraints for electromechanical components. On the bottom-line, Baxter's adjusted earnings decreased 3% to $3.50 per diluted share, reflecting the impact we just highlighted. On a full-year basis, we generated operating cash flow from continuing operations of $1.2 billion and free-cash flow of $532 million. Throughout 2022, we remain focused on debt repayment while more Hillrom acquisition with $900 million paid towards deleveraging. We also returned approximately $600 million to shareholders through dividends and share repurchases. As we execute on our strategic actions outlined in the beginning of 2023, we are first and foremost, committed to meaningfully improving our cash flow generation. Our priorities for cash deployment are focused on salaries [Phonetic] repayment maintaining our dividend and resuming share repurchases over-time. We are also actively pursuing strategic alternatives for our BioPharma Solutions business, while continuing to assess additional inorganic growth factors for products, therapies and connected care platforms for our new streamlined operations. As we progress towards the proposed spin-off of kidney care company, we'll look to utilize proceeds from these actions to accelerate Baxter's debt repayment schedule. We remain committed to an investment-grade credit rating profile including taking actions towards achieving our previously-stated commitment to achieve 2.75 times net leverage. Although, current business conditions might challenge our ability to satisfy that commitment by the end of 2024, we do expect to make significant progress towards achieving the target during 2023 and 2024. Additionally, given the proposed spin-off and potential sale of BPS, we expect to provide additional information regarding our forward-looking outlook for both Baxter remains in Kidney Co. at a Capital Markets Day. Prior to completion of the proposed spin-off. Let me conclude my comments by discussing our outlook for the first-quarter and full-year 2023, including some key assumptions underpinning our guidance. On the top-line, 2023 is expected to benefit from underlying volume growth, the pricing actions taken last year, as well as new product launches across our GPUs. Some of these new planned product introductions include more than five injectable drug launches, our next-gen ICU bed, exactly mix pro nutrition compounder continued rollout of our Novum IQ LVP and syringe pump in Canada and launch of the Novum IQ syringe pump in the US. At this time, our 2023 guidance does not contemplate any US revenues for the Novum IQ large-volume infusion pump. We anticipate submission of our final responses to FDA within the quarter. We continue to be very excited about the prospect of this launch and the benefits it offers our customers. Our objective remains to launch this pump in 2023. Throughout 2022, demand for our products and therapies remains solid, but supply chain challenges, impacted our ability to fully supply this demand. We experienced record levels of back orders and backlog, particularly for the legacy Hillrom business, and while we observed positive development and supply availability in the fourth quarter of 2022, we currently anticipate component availability will remain challenging and will continue to hamper topline sales in 2023. We are working relentlessly to secure components and address order backlog and our expectation is that supply for electromechanical components will improve in the second half of the year. As Joe outlined, we are implementing a series of changes across our organization that are designed to meaningfully simplify the operating model, and manufacturing footprint, drive strategic clarity, improve operational efficiencies and accelerate future growth. In addition to consolidating our operations into four vertically-integrated global business units, we're also evaluating additional strategic actions, including potential product line in country exits to better position the company for more profitable growth over the mid to long term, these exits are expected to reduce sales by more than $100 million as compared to full-year 2002. Lastly, as it relates to the top-line, 2022 results, included approximately $140 million of sales that are not expected to repeat in 2023 as well as the benefit of approximately $50 million due to lower customer rebate cost. This includes lower COVID vaccine revenue of approximately $100 million and two contractual payments which benefited Renal Care sales by approximately $40 million in the second-half of 2022. Moving on dynamics impacting the rest of the P&L, first, I want to point out a couple of factors that are impacting our 2023 performance as compared to 2022, such as higher annual incentive compensation payments for employees, increased interest expense and a higher tax rate assumption. In addition, while we see some improvement in the external macro-environment with Select Indices coming down from the peaks seen last year, our cost base is still elevated relative to historic norms. As such, cost-of-goods-sold is expected to be a headwind compared to 2022. This is due to the rollout in the first-half of 2023 of manufacturing-related costs capitalized into inventory in the second-half of 2022, as well as the challenging comparison to the first-half of 2022, prior to the start. Significant increases in inflation. We expect the impact from these inflationary pressures to begin to ease in the second half of the year. Also, as mentioned earlier in response to the significant macro challenges, the company has experienced over the last two years, we will be implementing a cost reduction program in parallel with our operating model redesign that is expected to be finalized later this quarter. This initiatives and additional actions the company Has undertaken to enhance performance are expected to deliver more than $300 million in total savings during 2023. These savings are expected to increase over the course of the year, with the majority of the savings being realized in the second half of the year. The lower cost of goods, coupled with the increased savings, are expected to drive meaningful margin expansion and earnings growth in the second half of the year as compared to the first half. We also expect the impact from foreign exchange to lessen in the second half of the year. Finally, as Joe mentioned, with respect to our outlook for 2023, we biased our guidance towards capturing additional potential downside risks. We recognized that our performance last year disappointed investors and us alike. While we are confident the actions we are undertaking will set us on force for improved performance longer term, we have recognized that 2023 will be a transition year on our path to achieving this objective. Incorporating all of these factors, I'll now walk through our guidance and expectations. For full year 2023, we expect global sales growth of 1% to 2% on a reported basis and flat to 1% growth on a constant currency basis. We expect full year adjusted operating margin to be between 15% and 16%. Interest expense is expected to total approximately $530 million which reflects pass and potential future rate increases and adjusted tax rate of approximately 22% and a diluted average share count of 508 million shares. Based on these dynamics, we expect 2023 adjusted earnings, excluding special items of $2.75 to $2.95 per diluted share. Specific to the first quarter of 2023, we expect global sales to decline by approximately 3% on a reported basis and approximately 1% on a constant currency basis. And we expect adjusted earnings, excluding special items of $0.46 to $0.50 per diluted share. With that, we can now open the call up for Q&A.
