Baxter International Inc. (BAX) Earnings Call Transcript & Summary

We'll now come to order for the 2021 Annual Meeting of Stockholders for Baxter International. My name is Joe Almeida, and I'm Chief Executive Officer and Chairman of the Board of Baxter International. I'm pleased to welcome you to our 2021 annual meeting. For the second time, we are conducting today's meeting via webcast. If you are experiencing any technical issues, please contact Broadridge representative at (800) 586-1548 For those in the United States or +1 (303) 562-9288 for those outside the United States. Each of you should have received an agenda for the meeting, which indicates the matters to be considered today. At the conclusion of the meeting and time permitting, we will address duly submitted general questions. I now would like to introduce Jay Saccaro, Baxter's Chief Financial Officer; and Ellen Bradford, Corporate Secretary. At this time, I would like to introduce the members of our Board, all of whom are participating on the webcast. Our Lead Director was recently appointed to this role in February. Al is a -- Albert P. L. Stroucken is a critical piece of our strong corporate governance practices we have at Baxter, which Thomas Stallkamp, our former Lead Director, helped to augment and oversee. Then we have Thomas Chen; John Forsyth; Peter Hellman; Mike Mahoney; Patty Morrison; Dr. Steve Oesterle; Cathy Smith; Thomas Stallkamp; Amy Wendell; and Dr. David Wilkes, our newly appointed Director. We are extremely fortunate to have a Board with distinguished backgrounds and extensive leadership experience. I encourage you to read their biographies in our 2020 proxy statement. I would like also to thank Dr. James Gavin, who recently retired from the Board for his 18 years of service to Baxter. Over the course of his tenure, he helped to oversee the transformation of the company and the implementation of best-in-class corporate governance practices, including improved Board refreshment practices and the expansion of our corporate governance outreach programs. Baxter's talented senior leadership team is also on the call with us today. Before we move on to today's business, I'll ask Ellen to provide our safe harbor statement.

Thank you, Joe. Our comments today will include forward-looking statements that involve risks and uncertainties. Actual results may differ materially from the forward-looking statements. Please refer to our annual report on 2020 Form 10-K and our other filings with the Securities and Exchange Commission, all of which are available on our website. In addition, today's presentation contains certain non-GAAP financial measures. A reconciliation of these measures to the most directly comparable GAAP financial measures is posted on the Investor Relations section of our website.

Thank you, Ellen. Copies of our proxy statement were sent to stockholders of record on or about March 22, 2021. The record date for the voting of shares was March 11, 2021. Ellen, please report the number of shares of common stock that are entitled to vote and are present at this meeting.

More than 87% of the approximately 506 million shares entitled to vote at this meeting are represented here today. There are no other securities entitled to vote. Therefore, a quorum is present.

Thank you. Since the quorum is present, we'll proceed with today's business. Peter Sablich with Broadridge Financial Solutions will act as inspector of elections today. His oath of office has been filed with the Corporate Secretary. [John Sichak] and Johnnie Lewis of PricewaterhouseCoopers LLP, Baxter's independent registered public accounting firm, are with us today. Ms. Sichak assumed the role of our new lead partner beginning with the 2021 calendar year. He has advised me that they have no formal statement to make. However, they will be available during the Q&A session to respond to related questions from stockholders. Before we begin with the formal business of the meeting, I'd like to review the procedures that will follow during the meeting today. We have 7 items of business to be voted on today. After the presentation of each agenda item, I'll ask Ellen to raise any questions related to what -- to that item that have been duly submitted through the Broadridge portal. To submit a question, please click on the Ask a Question button on the meeting website. You will then need to submit your question. In order to ensure that the business of the meeting proceeds in an orderly fashion, questions at this point should be limited to the 7 agenda items being considered today. We'll be posting answers to a representative set of questions relating to the meeting matters that remain unanswered after the completion of today's meeting as soon as reasonably practical. Answers will be posted at www.investor.baxter.com, and will remain available until 1 week after posting. Following the voting on matters to be act upon the meeting -- rather be act upon at the meeting, I will share certain highlights of Baxter's 2020 performance and direction for the future. Time permitting, we will then turn to general Q&A. We're now proceeding with the formal business of the meeting. There are 7 proposals on today's agenda: first, the election of 12 directors; second, approval of named executive officer compensation for 2020; third, the ratification of PwC as Baxter's independent registered public accounting firm for 2021; fourth, the vote to approve Baxter's 2021 incentive plan also referred to as Omnibus plan; fifth, the vote to approve the amendment of and restatement of Baxter's employee stock purchase plan, also referred to as the ESPP amendment; and sixth and seventh, 2 stockholder proposals. Most of our stockholders have already voted on all of these proposals. If you have previously voted, you do not need to take any action unless you wish to change your vote. To submit or change your vote during the meeting, you must be logged on as a Baxter stockholder. If you are, Click on Vote Here on the meeting website. Submission of a new vote will revoke any prior proxy you may have previously submitted. I will now proceed through the proposals in order in which they were discussed in the proxy statement. Time permitting, I'll ask Ellen to present any duly submitted questions relating to a particular proposal after the proposal has been presented. The first proposal to be considered is the election of 12 directors. May I have the nominations for directors?

Mr. Chairman, my name is Eric Zion, and I'm a Baxter stockholder. I nominate Joe Almeida, Thomas Chen, John Forsyth, Peter Hellman, Mike Mahoney, Patty Morrison, Steve Oesterle, Cathy Smith, Al Stroucken, Tom Stallkamp, Amy Wendell and David Wilkes for election as directors.

Thank you. Is there a second?

My name is Ramón Rivera, and I'm also a Baxter stockholder. I second.

Thank you. For this annual meeting, Baxter's bylaws require that the corporate secretary be notified in writing of any nominations for director on a timely basis in advance of today's meeting. We have not received notice of any other nominations for directors. Accordingly, the nominations for directors are closed. The Board of Directors has recommended a vote in favor of each of these directors. Ellen, have there been any duly submitted questions on this proposal?

There are no relevant questions that we won't be addressing on our website.

The second proposal to be considered by stockholders is an advisory vote on the compensation of the company's named executive officers for 2020. Is there a motion?

My name is Eric Zion, and I'm a Baxter stockholder. I so move.

Thank you. Is there a second?

My name is Ramón Rivera. I am a Baxter stockholder. I second.

Thank you. The Board of Directors has recommended a vote in favor of this proposal. Ellen, are there any duly submitted questions on this proposal?

There are no relevant questions that we won't be addressing on our website.

The third proposal to be considered is the ratification of PricewaterhouseCoopers as Baxter's independent registered public accounting firm for 2021. Is there a motion?

My name is Eric Zion. I'm a Baxter stockholder. I so move.

Thank you. Is there a second?

My name is Ramón Rivera. I am a Baxter stockholder. I second.

Ellen, have there been any duly submitted questions on this proposal?

There are no relevant questions that we won't be addressing on our website.

The fourth proposal to be considered is the approval of Baxter's 2021 incentive plan. Is there a motion?

My name is Eric Zion. I'm a Baxter stockholder. I so move.

Thank you. Is there a second?

My name is Ramon Rivera. I am a Baxter stockholder, and I second.

Ellen, have there been any duly submitted questions on this proposal?

There are no relevant questions.

The fifth proposal to be considered is the approval of Baxter's employee stock purchase plan amendment. Is there a motion?

My name is Eric Zion. I'm a Baxter stockholder. I so move.

Thank you. Is there a second?

My name is Ramón Rivera. I'm a Baxter stockholder, and I second.

Ellen, have there been any duly submitted questions on this proposal?

There are no relevant questions.

The sixth proposal to be considered was submitted by Mr. Chevedden. This proposal relates to giving stockholders the ability to act by written consent and appears as Proposal 6 in the proxy statement. Mr. Chevedden, would you like to make a motion with respect to Proposal 6? I'd ask that in consideration for the others present in our agenda, please keep your comments to a reasonable period of time. The operator is now unmuting your line.

This is John Chevedden. Can you hear me okay?

Yes, we can.

Now Proposal 6, shareholder right to act by written consent. Shareholders request our Board of Directors take the necessary steps to prevent written consent by the shareholders entitled to cast the minimum number of votes that would be necessary to authorize an action at a meeting, at which all shareholders entitled to vote thereon were present and voting. Written consent is a super-democratic process for shareholders to take action between annual meetings. Written consent is super democratic because if a shareholder does not support written consent topic, the shareholder does not have to do anything and it accounts against the vote. This is in contrast to a shareholder meeting where shareholders support or shareholder opposition counts for nothing unless the shareholder makes the effort to vote. A shareholder right to act by written consent affords Baxter management strong production. Due to the low shareholder participation in annual meeting elections, any action taken by written consent would still need more than 63% approval from the shares that normally cast ballots at the annual meeting. This 63% bill requirement gives substantial protection to management that will remain unchanged. This proposal topic won more than 38% support at our 2020 shareholder meeting. This 38% support may have represented a near majority votes from the shares that have access to objective proxy voting advice. As a sign of management desperation in 2020, management countered haphazard versions of written consent, not envisioned by the 2020 shareholder proposal, and then attacked its own made up haphazard version of written consent. Management failed to provide even one example of its fictionalized haphazard version of written consent that was ever adopted during the last several decades. Management promotes a fallacy that shareholders should be distracted from improving corporate governance because there are some good existing governance practices. Management promotes the fallacy that shareholders should be restricted to only one formal means, the calling for a special shareholder meeting to raise an issue between annual meetings, plus it takes almost 1/3 of the shares that voted at annual meetings in order to call for a special shareholder meeting. Management bragged about the constructive deliberation at a special shareholder meeting. This has been completely blown out of the water by the [indiscernible] tightly controlled online shareholder meetings. Management promotes a fallacy that shareholders should be comatose about improving their corporate governance since management has an informal shareholder engagement process that has no rules, no independent oversight and can be abruptly shut down. It is amazing, the number of companies that brag about how their so-called shareholder engagement process gives results that are in lockstep with the management sales pitches. Please vote, yes, shareholder right to act by written consent, Proposal 6.

Thanks. Is there a second?

[indiscernible] I second.

Ellen, have there been any duly submitted questions on this proposal?

There have been no relevant questions submitted.

The seventh proposal to be considered was submitted by Mr. Kenneth Steiner. Mr. Steiner has designated Mr. Chevedden as his proxy on this proposal. This proposal relates to separating the roles of Chairman and CEO, and appears as Proposal 7 in the proxy statement.

This is John Chevedden. Can you hear me okay?

Thank you, Mr. Chevedden, for acting as a proxy for Mr. Steiner today. Would you like to make a motion with respect to Proposal 7? I ask that in consideration for the others present and our agenda, please keep your comments to a reasonable period of time. The operator is now unmuting your line.

This is John Chevedden. Can you hear me okay?

Yes, we can, Mr. Chevedden.

Proposal 7, independent Board Chair, sponsored by Kenneth Steiner. Shareholders request the Board of Directors adopt a policy to require the Chair of the Board of Directors, whenever possible, to be an independent member of the Board. If you voted against this proposal, please consider changing your vote before the polls close in a few minutes. It is shameful that this proposal has to be out of the ballot today because it received 54% approval at our 2020 Annual Meeting. Proposals that receive a majority shareholder support are expected to be adopted. The lame responsive management with a [indiscernible] feed link policy that is meaningless. Management tried and failed to convince the Securities and Exchange Commission that it had adopted a meaningful policy in response to the 2020 shareholder proposal that won our 54% support. An internal Lead Director policy is no substitute for the independent Board Chairman that we voted for in 2020. A Lead Director is an empty suit compared to the independent Board Chairman we voted for Dr. James Gavin, Chair of the Governance Committee, which is responsible for the Baxter [indiscernible] policy, that would allow easy avoidance of an independent Board Chairman for a decade or longer. Dr. Gavin is now leaving the Board, and he's going out with [indiscernible] trying to sell Baxter shareholders on an argument that ran out of gas at the Securities and Exchange Commission. The Securities and Exchange Commission is an expert on corporate governance. The SEC studied the Baxter Lead Director policy and found it lacking compared to our 2020 shareholder approval of an independent Board Chairman. The SEC issued a formal decision. The [indiscernible] policy championed by Dr. Gavin could be called the internal Lead Director policy for Baxter. This [indiscernible] policy gives the Baxter Board an excuse that is good for 100% of the time to easily avoid Baxter of having an independent Board Chairman that we voted for in 2020. Please vote, yes, independent Board Chair, Proposal 7.

Thank you. Is there a second?

My name is [Helen Bond], and I'm a Baxter stockholder. I second.

Ellen, have there been any duly questions submitted on this proposal?

No relevant questions have been submitted.

We now proceed to vote on the agenda items. The time is now 9:18, and I declare the polls open. Once again, if you have not already voted or if you wish to change your vote on any proposal, please click on the Vote Here button on the meeting website. [Voting]

Thank you. The time is now 9:19, and I declare the polls closed. At the end of the meeting, we will present the results based on the votes submitted as of this morning. The inspector of elections will tabulate the votes, and we will disclose the final results on the Form 8-K to be filed within 4 business days after completion of this meeting. Dear stockholders of Baxter, I want to spend a few minutes with you today speaking about our journey in 2020 and 2021 and forward plans for the company. What is at the center of everything we do is our patience. Our mission is save and sustain lives. That is demonstrated by 50,000 employees that serve more than 75 million patients in more than 100 countries. Baxter registered sales in 2020 of $11.7 billion, split in 3 different regions of the world, with Americas at 54%; Europe, Middle East and Africa, 25%; and Asia Pacific, 21%. We have a large scope of products within Baxter. They range from Renal Care with $3.8 billion in sales; from medication delivery with $2.7 billion in sales; pharmaceuticals, $2.1 billion in sales; and many other products, including our Biopharma Solution business around $0.5 billion in sales, and this is the business that helped fill and finish vaccines against COVID-19. 2020 was a very difficult year for the world and was not different for Baxter. But Baxter employees stepped up to the plate. They showed what the mission is about. They showed what they are about. We maximized the production of medically necessary products across all of our facilities, which never shut down for a minute during the pandemic, mainly facilities that were located in hotspots across the globe, such as U.S. and Italy and parts of Central America. We delivered products to hotspots. We prioritized products for places in the world that needed the most. We partnered to manufacture products and vaccines, primarily, with 3 different companies, and we're currently making them. We always said the patient safety and quality is number one priority for the company as well as our [Audio Gap] took several precautions to make sure their facilities were safe, even being located some of them in hotspots. We also donated $2.5 million to Global Relief Partners for the pandemic. Our performance, despite the fact that we had significant impact of COVID-19 in 2020 results, we still registered 2% of operational growth. We had costs of COVID that were headwinds for the company, including cost of PPE, COVID pay, inventory build, logistic costs and many other things that came to bear and reduced our profitability by 70 basis points to 18%, and that also was reflected in our earnings per share -- adjusted earnings per share that went down 7% to $3.09 and affect our cash flow as all these items are cash driven. We had a $253 million reduction in cash flow to $1.2 billion. But nevertheless, there's no one thing we did than me, as a CEO, would ever regret. The commitment of our employees made possible that we served millions of patients across several different hotspots, making sure that our mission was always first. It's worthwhile for you to walk with me, what we call, Baxter Force Multiplier. At the center of everything is our mission. But how do we get there? We have 3 aspirations. First is -- number one, patient safety and quality and employee safety. Second is growth through innovation, the best place to work. We do those things right. We do with ethics and compliance and honesty, transparency and everything we do. We act with sense of urgency. We collaborate with courage and simplicity. We do those things right. We get to the mission of the company, which is save and sustain lives. By doing that, consequently, we're going to hit 2 vectors of performance. One is financial performance to satisfy our stockholders. Second is our Net Promoter Score, which measures our engagement with our patients and customers. Do those things right, we're right back at our mission. Let's take a double click, I think, as a top priority for the company. We had significant improvements from 2015 to today. You can read on the screen some of the improvements, but I want to highlight the reduction in medical device reports, which we call MDRs, of 76%; field alert reports of 82%; and field actions of 48%. We had 6 warning letters that were resolved since 2014, and we have one so warning letter outstanding in our plant in Ahmedabad, India that came with the acquisition of Claris. We're working very hard to satisfy that, and we hope to get to that resolution in the future. Patient safety and quality drives what we do every day. It's also important to us to be recognized for best place to work. We want every day, in every part of the world, we do business. Our employees wake up in the morning and feel proud that they come to work for a company that makes a difference in people's lives. We have 4 tenets of our best place to work, serving our communities worldwide, reduce our environmental footprint, expanding access to care, and focusing on inclusion and diversity. And to that, we have received several recognitions across the globe as global system ship and top employee inclusion and diversity, as you can see. We're very proud of it, but we're not finished. We have much to do. We also restarted last year our activating change today, advancing ratio justice within the company. We're not satisfied with where we are today, and we aspire the society part of the communities where we live. We have 4 areas and 4 pillars of focus. We're going to add in the workforce, workplace and culture, communities that we participate and serve in marketplace. These objectives are highlighted to our senior leadership team at Baxter, and we are very focused in advancing racial justice. As important as everything we do is the innovation that we bring to our patients, to our customers, to the clinicians that use our products. We use 4 different vectors to that objective. We innovate in our portfolio. We develop the markets. We enter adjacencies, either organically or through acquisitions. And most importantly, now we are impacting some of our business with digital transformation. We have multiple avenues to increase patient impact. We're hitting all 4 of them. As an example, I can tell you, in 2021, we're launching 22 products in 2020. Some of the recent highlight products that were launched included several EUAs in the U.S. and outside the U.S. for products that were needed during COVID. One of them is Oxiris, which was approved for use in the U.S. to filter cytokines for patients, who are the most affected by COVID-19. We also launched HOMECHOICE CLARIA APD, very important, cost-effective product into the U.S. For the first time, after 20 years, we launched a new in-center hemodialysis monitor, AK98. We also have created a new pump platform, which currently is with the FDA for approval, but we already got approval in Canada as well as in the EU with CE Mark. And lastly, we had multiple strategic acquisitions to advance our portfolio and grow our business. We're committed to innovation. Innovation fuels our mission. When we do that, we also need to look at our structure -- our cost structure across the company. Operational efficiency is everything to us. We have done a significant job in reducing our cost structure, but we still need to be very focused in reallocating resources into innovation, optimizing our integrated supply chain across the globe by continued financial discipline, while financing digital transformation. So we have a lot of things going on as the company continues to advance its modernization and this of culture transformation. To do that, we allocate our capital as we think are the most appropriate way to benefit our shareholders. We reinvest in the business with capital investment in all of our facilities across the globe. We meaningfully invest also in research and development. We just increased our dividends by 14% and just repurchased $300 million of our shares. But we are also very committed to M&A, not only tuck-in, but understanding where is the puck going? Where is all the transformation that we experienced during the pandemic, COVID-19? The digital transformation in the world is bringing new horizons to Baxter. So when we look at M&A, we look at tuck-in acquisitions, but also we always keep looking at where the puck is going, not where it is today. To that end, since 2015, we have delivered higher returns than the S&P 500 and S&P Health Care. We did have a year last year that affected our performance because of COVID-19. But when we look at the performance of the company, I can assure you, we did everything we could to take the best result while serving our patients across the globe. But you can see the performance of the company has exceeded its benchmarks. So what is in store for 2020 on and beyond? 7 priorities, always patient safety and quality, number one in our heads; grow through innovation to 2 vectors, innovative ecosystem because it takes more than one group and a company to make this happen. It takes a whole company as well as the outside-in mentality; digital transformation in digital health to bring our new products to market, such as our new share source platform revamped with mobile app that is coming out later this year; best place to work with 2 very solid pillars, culture and talent and next -- and our activating change today for social justice; and industry-leading performance because we still need to do a lot of work in our margins, so we'll continue to drive margin improvement and transformation of the portfolio, meaning overinvesting in areas that have higher potential for growth. So when we look at the momentum that we have today, we're ensuring that we are agile enough to compete in the new world. We're seeing where the puck is going. We're seeing where the trends are going and trying to get ahead of them. Advancing the digital transformation in the company makes this company outstanding and makes this company stand above and beyond our competitors. We are maintaining strong cadence of new product launches, as I just said, 22 new products in 2021. And we are strategically deploying capital to the right places. On behalf of Baxter, I'm here thanking the 50,000 employees that made this company so successful in serving our patients and customers in 2020. It's a lot in-store in the future. We're not done yet. We have a lot of work ahead of us, and appreciate our shareholder support of Baxter now and in the future. Moving on to the next order of business. Ellen, do you have the results of the voting?

Based on the results submitted as of this morning, the advisory vote requesting that stockholders approve the compensation of the company's named executive officers, as disclosed in the proxy statement, received votes in favor, representing approximately 91% of the shares present and entitled to vote. Assuming any new or changed votes duly submitted during this meeting did not change the results, the disclosed compensation for 2020 has been approved, and the company thanks you for your support. Based on the results submitted as of this morning, the proposal to ratify PwC as the company's independent registered public accounting firm in 2021 received votes in favor of approval, representing approximately 92% of the shares present and entitled to vote. Assuming any new or changed votes duly submitted during the meeting do not change the results, the appointment of PwC for 2021 has been ratified. Based on the results submitted as of this morning, the vote requesting that stockholders approve the company's new 2021 incentive plan, as disclosed in the proxy statement, received votes in favor, representing approximately 94% of the shares present and entitled to vote. Assuming any new or changed votes duly submitted during the meeting do not change the results, the 2021 incentive plan has been approved, and the company thanks you for your support. Based on the results submitted as of this morning, the vote requesting that stockholders approve the company's amended and restated employee stock purchase plan as disclosed in the proxy statement, received votes in favor, representing approximately 99% of the shares present and entitled to vote. Assuming any new or change votes duly submitted during the meeting do not change the results, the amended and restated ESPP plan has been approved, and the company thanks you for your support. Based on the results submitted as of this morning, the proposal relating to granting stockholders the ability to have by written consent received votes in favor of approval, representing approximately 53% of the shares present and entitled to vote. Assuming any new or change votes duly submitted during this meeting do not change the results, the proposal has passed. Now on behalf of Al Stroucken, our new Lead Independent Director; Thomas Chen, the new Chair of our Nominating Corporate Governance and Public Policy Committee; and the rest of the Baxter Board, I want to thank shareholders for expressing their views on this matter and to many shareholders for engaging with us on this important topic over the prior weeks and months. The Board is committed to addressing this matter in the off season, and we will revert in the coming months with our plans on how to address this shareholder proposal, which has clearly received majority support. Now based on the results as of this morning, the proposal relating to separating the roles of Chairman and CEO received votes in favor of approval, representing approximately 27% of the shares present entitled to vote. Assuming any new or changed votes duly submitted during this meeting do not change the results, this proposal has not passed.

Thank you, Ellen. This completes the business of the meeting. Time permitting, I would ask that Ellen present any general questions, not otherwise relating to one of the meeting agenda items. As a reminder, we will be posting answers to a representative set of unanswered questions relating to the meeting matters as soon as reasonably practical after completion of the meeting. Answers will be posted at www.investor.baxter.com and will remain available until 1 week after posting.

And the meeting matters that we won't be addressing on our website, Joe.

Thank you, Ellen. I now declare this meeting formally adjourned. Thank you for participating in this year's annual meeting. We appreciate your continuing support.