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

All right. So this is off to a relic and good start here on Monday morning. Thanks, everyone, for joining us. We have, in case you did not hear my preamble, very happy to have with us Jay Saccaro, Executive Vice President and Chief Financial Officer of Baxter; and Clare Trachtman, Vice President of Investor Relations. I'm -- just in the press room -- thank you. I'm getting lots of cheerful messages here about what just happened. But I wanted to run through an overview of some of the topics we want to cover. But why don't we just get into it.

So first, Jay, if we could, obviously, everyone headed into the Q3 time period by the time we got to August, September with a lot of uncertainty as to maybe how things were going to play out, what results are going to look like and how that might affect full year outlook and everyone's view on the environment going forward. And I'd say in the scheme of things and maybe not that surprisingly, and Baxter came through with pretty solid, stable performance in an environment where there were a lot of ups and downs in some of the end markets that we have medical devices cover. And you had some expectations about Q4, which I have to say we're maybe a little bit more confident than, frankly, some of the other folks that we cover and more exposure to the like of procedures and so on. So if you could talk about just what you expected, ending into Q3, and by mid-Q3, what you saw and what plays into some of the confidence in sort of returning to something resembling pre-pandemic levels by the end of the year, maybe one or some of the other folks in the space who are a little more a little more uncertain.

Great. And maybe before we jump in, just first of all, thank you for inviting us to this virtual conference. We always appreciate that. Prefer in person, but we'll take Zoom with all of the technology challenges that poses. So thanks for the interest and support. And then just a few other comments, broadly speaking, that I think frame the overall context. First of all, we were really pleased with the third quarter. I think it demonstrated, to your point, the durability, the resilience, that has been very much on display over the last couple of years for Baxter amidst the pandemic. In the third quarter, we grew 6% and amidst a highly challenging supply chain environment, we put a margin north of 20% -- operating margin north of 20% on the board, which was really the highest since the spin-off of Baxalta, the highest quarter. And so as we look at the fourth quarter, we expect to see continued momentum, and it's something that will continue the margin performance. Again, amidst a really challenging environment. And so we also recently outlined some long-term guidance, which we shared with investors on our Hillrom Pall. And we also announced the acquisition of Hillrom, which we are incredibly excited about. And I think as I think about it, when we spun off Baxalta, we kind of entered a new phase for Baxter. But at that time, we always felt that business development and smart business development could allow us to enter a new phase, a second chapter for new Baxter. As I sit here today with the Hillrom acquisition, I'm as excited as I was when I was introducing you all to Baxter without Bioscience. And we've got an incredible opportunity with this new combined company for multiple years of exciting growth, exciting new products and performance. So I think that's important context to share. I think we had fairly accurately -- transitioning to your question here. I think we had fairly accurately called our expectations in the third quarter. The revenue was broadly speaking, in line with our expectations. Procedures and admissions were still a little bit challenged relative to pre-pandemic levels. And the interesting thing that's been a factor in the short term is really challenges with respect to new renal patients and the mortality of end-stage renal disease patients which is so unfortunate. So all those things, I think we correctly represented when we put forth the third quarter forecast. And as we look to the fourth quarter, we saw admissions down low single digits, 2%, 3% in the U.S. in October, and that kind of inspired our fourth quarter guidance that we put together. And we do expect to see some recovery in procedures. We are watching this really carefully. There's -- on the margins, a little bit of risk there, but I would say not substantial at this point. And so I think that this has come, broadly speaking, in line with our expectations. But probably the most important factor is just because of the nature of our portfolio, it's simply less volatile than some others that are highly procedure-dependent because frankly, as we look at it, we have some things that are negatively correlated to COVID, and we have some things that are very positively correlated to COVID. And so in combination, it kind of balances out. So we feel good about the fourth quarter. Things have trended in line with the expectations. Of course, a lot of work to do in November and December. But the team -- the entire team is excited to deliver for our customers.

Okay. That's helpful. So there's been a lot of focus on the U.S., obviously, with the Delta surge in August and September. And -- but Baxter is also -- benefits from having a global footprint. So maybe some color as you talk about sort of portfolio diversity and sort of puts and takes in a given environment, how some of the overseas environments have been trending even though the focus here has been when do things get back to sort of full strength back in the U.S.?

Sure. We had solid performance around the globe in the third quarter of the year, and we're expecting decent growth again across the board in the fourth quarter. You are -- you have highlighted an interesting phenomenon, which is there are some thoughts of an additional wave that might occur in the fourth quarter or into next year. We're seeing markets like Germany have very substantial increases in COVID patients. I looked at that chart recently, and it was very surprising. And so it's -- that's something that we're watching. I think the big thing from our standpoint is what you see in those instances is challenges in your Advanced Surgery business. And oftentimes benefits perhaps in either your acute business, your BioPharma Solutions business or even your medication delivery, depending on the situation. So what I would say is, for us, it's less of a driver. But I think as we think about next year, one of the things that we are carefully studying is what is the arc of COVID patients that takes place next year and how is that going to look because it does on the margins inform some of our revenue expectations.

Got it. And then sort of lastly, on current environment. You have this sort of -- I think a lot of other companies that we cover are focused on procedure trends or maybe just on businesses that aren't as affected by things like the surge and the postponement of elective procedures, markets that just -- that aren't correlated with those kinds of things, either outpatient procedures or other types of revenue streams. So you've -- obviously, you're focused on that, as you just mentioned, in terms of advanced surgery and some of the other businesses that you cover usage of next delivery devices for inpatient surgeries and so on. But hospital census is something that you talk about a lot, I guess, how do you -- how confident are you in your visibility for the end of the year? And I guess at this point, where do you see that winding up relative to prepandemic levels?

Sure. And we focus on hospital census primarily in the U.S. in large part driven by availability of data. Outside the U.S., in the big 5 in Europe, perhaps you can get decent data in a few countries in Asia, but it does become a little more challenging to gather accurate data on hospital census. Listen, we've seen a recovery in the hospital census. And like I said, down a couple percent in October, 2%, 3%, something along those lines. We're watching it very carefully. This is a function of -- we did see some challenges in July, August as a result of advancement of the pandemic in certain areas. And we did see it regionally in the areas that were most impacted, there were some impacts in terms of COVID patient admissions. And so we are -- we're watching this very carefully as we move through the end of the year. What I will tell you is we have good line of sight for the next couple of months. But beyond that, it really does become a little more challenging to predict, and you do have to take a position on do you think there will be a next wave of COVID or not. On balance, we think the environment related to the pandemic will improve next year. We do, but it's something that we're watching. And interestingly enough, one of the things that folks, our customers have started to talk about is what happens after Thanksgiving and is there a flu season? Is there a COVID spike? And some customers have even called this concept of flu-vid being something that we faced in December and January. I certainly hope that's not the case. But what I would say in that context is if there is a flu spike, that's something that benefits us, generally speaking, as patients typically need a lot of our fluids to support therapy. So these are all things that we're watching. I think nobody has a crystal ball in terms of how this is going to evolve over the next year, let alone a few months. But I think as far as the fourth quarter goes, we understand fairly well what impacts to expect.

Okay. That's helpful. And just to be clear, I mean, there is a -- I think one of the things that's been a challenge, if I could put it that way over the past year for Baxter and really, for everybody in this environment, but in particular, I think for Baxter is that as you just described, there's some things that benefit Baxter in the current environment, benefit in the sense that your therapies -- your fusion therapies and med delivery products are needed. And -- but then there's some of those same things tend to take away in terms of maybe the slowdown in procedures. And so this kind of like benefits, but there's challenges. And so heading into the fourth quarter, for example, if we were to see the combination of a flu-vid type phenomenon, combined with something like a slowdown in procedures as we saw in August, maybe a cautionary pullback or not that I'm predicting that or not that anybody wants to see that, but that would sort of be a plus and a minus for Baxter. Is that a fair way to think about it?

It is. It's interesting because our portfolio is sold in over 100 countries around the world. And we have -- we report roughly 6 product lines. But if you look at the details of it, there are more products than that, that we sell. And many of them are not correlated at all and many of them behave in opposite directions. And so if you think about it, last year in the midst of pandemic, in the midst of an incredibly volatile environment, we grew sales 2%. And that was, in part, we had a Q2 where there was a catastrophe for admissions to hospitals, which grew sales 2%. This year, we expect to grow sales 4% to 5%. We grew sales 6% in the third quarter. We shared guidance for the next several years. And I want to make an important point, which is remember, we took guidance off the table for probably 18 months, maybe even longer than that. And we did that because we really needed to understand how our business behaved in a pandemic environment more accurately and insightfully. We've never seen a pandemic before, we've never seen the behavior of our product portfolio in that context. So we took guidance off the table because we really wanted to study that. So we reinstituted guidance, and guess what? Guidance is 4% to 5% for the next several years. And it's above our end market growth of roughly 3%, illustrating the durability, resiliency of the portfolio. I mean that's kind of how I would think about it. And some might say, well, that's been a challenge for Baxter, as you point out. I look at it in a little bit of a different way, which is, at the end of the day, I'm really happy to have a diverse non-correlated portfolio of assets that we bring to market. Because what that means is I can feel pretty good about giving the guidance that we've given and the performance of the business. We had the largest impact to health care systems in the history of the world last year, and we were able to grow against that 2%. And then this year, we expect 4% to 5%.

I get that. That's helpful color. So maybe within that portfolio, if we could talk a little bit about growth drivers. One of the questions I get often is what are the drivers? What are the new products? What are the sort of hunting for that thing that's going to sort of become a bigger pole in the tent, which is often in med tech, something that investors are always looking for when they look at an investment opportunity? If you could talk a little bit about what you'd highlight? And I guess NOVUM IQ comes to mind. But other things that you'd sort of point out as you say, in addition to this diversified portfolio, these new drivers are just sliding in that they give us greater confidence in sort of hitting that range or hitting maybe the better part of that range.

Sure. The -- and I'll answer this question, taking to the side, Hillrom, because I think that's the appropriate way to answer it at this point. But I will tell you, as I said in my opening remarks, we are so excited about this combination in a lot of different ways. I think they've got a good portfolio of products today, I think they've got an excellent pipeline. And then I think when you combine Baxter and Hillrom, that's where the most exciting aspects will really happen. But as it relates to Baxter, for example, 2022, I cannot understate the importance of NOVUM, the large volume pump and the syringe pump become a critically important catalyst for us as we look to accelerate in excess of market growth for 2022 and really beyond. I think that we've talked extensively about the product features, the functionality and the fact that we are now finally putting multiple pumps on the same platform. We've talked extensively about the benefits of that. With respect to the large volume pump market, we're a player today. But with respect to syringe, it's totally new ground for us today. We have not sold 1 syringe pump, I think, in like 15 years. And so now all of a sudden, we access this market, which becomes an important unlocker. I'm not sure if that's an appropriate term, but unlocker of additional growth. So getting that to market is a top priority for our organization. We'll also supplement that with a number of pharma launches next year. And so there will be a number of molecules that launch that add to accelerated growth. And I think that's an important aspect in pharma, which is admittedly a very highly competitive market that we're participating in. We'll see continued growth. Although, we'll have to correct for pandemic aspects with our PrisMax 2. It's a great product we have available in the U.S. and other markets. That's going to be a really nice growth driver for us. And then in addition to that, I would say that we'll start to see a recovery in our Renal business, in particular, in PD. While we're still watching this carefully, we're going to see some normalization of new patient starts and mortality, which will be an important growth driver, especially when combined with the Advancing American Kidney Health Initiative, which becomes another long-term driver of growth for us. And all of that sits on top of general pandemic recovery, which I think on the margin is a benefit to our business. So those are a few of the things that we're excited about as we look at 2022.

Okay. That's helpful. And on the syringe pump, which I think NOVUM like you and the pump platform there's something a lot of folks look to. Can you talk a little bit about the confidence -- if you can have confidence, I know it's been a challenging environment for everyone, including the FDA. But if you can have confidence in the time line for that. And also what the syringe pump maybe means to your business geographically? Is that a global product? Is that predominantly impactful in overseas? Maybe talk a little bit more about that.

So as it relates to the syringe pump, the first port of call will be the U.S. market. But as many folks know, syringe pumps are incredibly popular in Europe and other markets as well, U.K., Australia. So there's lots of markets that will be opened up for the syringe pump over time, and there will be a number of markets for the large volume pump over time. But what I will say is the most exciting opportunity for us with respect to the large volume pump and the syringe pump is in the United States and close markets to that. And as we said on the earnings call, we expect the approval here shortly end of this year, early next year time frame, but we're working carefully with the FDA. And frankly, we appreciate the thoroughness with which the FDA is going through the diligence on this process, and we're excited to bring the pump to market.

Maybe changing gears a little bit...

Matt, we lost you.

Matt, we can't hear you.

Can you hear me now?

Yes.

Yes.

Okay. Not sure what happened. Maybe changing gears a little bit to 2022. And I know nobody is giving guidance at the moment. We're not looking for that, but NOVUM being part of it, and frankly, environmental recoveries being part of it. What are some of the major variables and factors that you're considering when you start to lay out your 2022 expectations in the context of your long-term guidance? And again, I know it's hard to talk a little bit but absent, obviously, the Hillrom deal at the moment.

Sure. One of the underlying assumptions is what is our point of view on further waves of the pandemic. Because if we can take that to the side, then it becomes very straightforward modeling our progress. In some cases, we would see accelerated progress. In some cases, we would see difficult comps. In some -- but generally speaking, I think the end of pandemic is a positive on balance for the company. But that is a critical assumption on the top line that we'll get our hands around. And I think things are -- despite some of the increases ex U.S., I think things are trending in the right direction as it relates to the pandemic and underlying assumptions there. So that's clearly one. And again, there are puts and takes. We will see likelihood less revenue from our BioPharma Solutions business next year than this year. The BioPharma Solutions, it played a crucial role over the last year in terms of helping address the pandemic, and we're so proud of that, but we're not expecting the level of performance that we've seen this year, for example. But offsetting that would be things like advanced surgery and normalization in Renal. So that's really one of the underlying assumptions. I hope to have more data in the short term and certainly in advance of giving guidance on the pumps. And so in that case, that will be another important catalyst for us as we look at our growth for next year. And then finally, one of the critical elements is time line for approval of the Hillrom deal. And again, we'll watch that. But what did we say in terms of the earnings call in terms of expectations of approval?

Early 2022.

So hopefully, we'll have that behind us as we put forth our guidance, but we'll have to watch very carefully because that's obviously a fundamental element to consider when putting forth guidance for the company.

Sure. Okay. So that would be our hope. I think obviously, if it's not, then there'll be some adjustments, I guess, that we'll look forward to if that's not the case in Q4 when you present Q4 numbers. I guess up until now, as you mentioned earlier, folks have been pulling guidance, pulling outlook in middle of last year, early last year just because of the uncertainty. And then I think shifted to sort of presenting guidance with some assumptions, as you have, assuming that volumes get back to X, pre-pandemic levels by this time or that time. At this point, do you think we're able -- we're going to be able to head into 2022 and sort of give just a more unqualified guidance, meaning here's what we expect to deliver, of course, absent any major surges or unforeseen reversals and trends across the globe. Are we going to know enough to do that? Or are we still going to be talking about things like assuming pre-pandemic levels reach X by the middle of the year or something like that?

It's a good question. And at this point, I don't know the exact answer to that question. We're always happy to outline assumptions that underlie our guidance that are helpful for investors. And our expectation is we really try to give reasonable conservative guidance. So at this point, I don't know the shape of the pandemic. If it rages on, we'll probably give you line of sight to guidance being related to patient admissions and procedures, we'll probably do something like that. And if it significantly abates, then maybe we can give a straightforward unqualified guidance. We'll have to watch this.

Sure. Okay. Fair enough. I don't think anybody knows, it's a hard question, but that's something I think we're all trying to figure out heading into next year. Maybe if we could talk a little bit about margins and leverage. You did provide some outlook long term as to, on average, what you expect to be able to achieve in terms of driving operating margin expansion. There was some back and forth, I think, around the time that you reported Q3 numbers as to what that could be, you're not -- a difficult situation for you because you haven't guided yet for next year. But this sort of bouncing back and forth between the thinking that it should be higher because we're somehow bouncing back from the pandemic in '22 or it should be something more average, closer to 50 basis points. If you could talk maybe a little bit about sort of the puts and takes to your thinking on, again, not where the number lands, but -- or if you're willing to share where you think the number will land. But just what those puts and takes are, costs coming off, pandemic-related costs coming off, maybe input costs going up, other elements to consider in the P&L that would get you to whether it's 50 or whether it's 70 or whether it's 90 basis points next year.

Sure. We outlined -- for those unfamiliar, we outlined 100 basis points per year, but in some years, more than 50 basis points. That was what we shared when we put forth our guidance. And again, for us, the spirit behind guidance is we want achievable, conservative guidance. And when we put it on the table, we take that commitment very seriously. And so now the question is, what are the variables that take you to different levels within that range. And what I would say is we -- in the third and fourth quarter, certainly in the third quarter, and then we expect in the fourth quarter, I was really pleased with our ability to offset inflationary impacts this year with a reduction in COVID-related costs and spending discipline, which led to a record margin for Baxter -- or new Baxter, I should say. And so I was really happy with that result, and I want to thank our team here for a tremendous discipline on the OpEx side in terms of manufacturing improvements and the things that we're doing in our facilities to offset in terms of thinking creatively about the supply chain. We were able to navigate a highly complex inflationary environment and supply chain environment incredibly well in the third quarter with line of sight to similar performance in the fourth quarter. So really, really a notable achievement. As we look to next year, the things that I'm watching are, what are the inflationary impacts and inflation has been more challenging than we foresaw at the beginning of the year. That's clear. But thus far, we've been able to manage and offset that. In addition to that, we're looking at the supply chain situation. We've paid very significant premium freight costs this quarter, last quarter. And a lot of that is about getting our products to the patients when they need it because shipping across water is very complicated and challenging today. And so a lot of times, we're opting for premium freight, and that's had an impact. And then there will -- another factor is some normalization of OpEx costs, again -- against a reduction in COVID-related costs. So we'll see some continued reduction in COVID-related costs through to next year. But the reality is there will be some residual costs that were made. So those are all factors that we have in play. And we're watching each of them very carefully. I think I feel good about what we've put forth both in terms of the fourth quarter and then minimum expectations for next year and kind of the plan that we've laid out over the next several years. I feel good about that. But as we fine-tune guidance, looking at some of these drivers becomes a very important input. And like I said, I think we've got them -- I think we've got good assumptions around them that we'll fine-tune. But to be clear, the world, not Baxter, the world is going to have a very challenging fourth quarter as it relates to dealing with logistics and the supply chain. That's going to happen. And I think our company is well positioned. And I think we've well forecasted that, but we're -- it's something that features in the numbers that we've shared.

No, that's totally appropriate. It's something everyone is facing. Can you hear me now? I just...

We can, we can.

So yes. And I guess on that point, just to be -- just so we understand the comments that you made and just -- then and just now sort of reinforce at a minimum, 50 basis points potential margin improvement that we should think about for next year. And I guess what goes into that in terms of assumptions for things like easing expedited shipping costs or improving logistics and supply chain environment? Or is that -- at this point, you're just looking at those as those are big variables, we're not even going to tackle them, but if things stay the same, we think we're comfortable with the bottom end of our long-term range, say, 50 basis points?

Look, I'm going to -- I'll stop short of getting into too much details on next year because we really do have a comprehensive process that we undertake which includes things like plant-by-plant performance, how we're going to optimize and reduce cost, things like how do we minimize things like expedited premium freight, how do we think about mitigating the impact of inflationary costs. So all of that is a process that we're undertaking as we speak. And so I'll stop short of getting into too much detail on next year other than to say, look, guidance, we take the long-term guidance very seriously. Our guidance is on the table, make no mistake about that, and stay tuned. We're watching a lot of things. But on balance, we feel good.

Fair enough. And I understand that we have to have something to talk about when you report Q4 numbers.

That's right. That's right. And hopefully, a lot. Hopefully, a lot.

Yes. Absolutely. And I'd love to -- I know we only have about -- well, we have about 15 minutes left. So hopefully, we have time to sort of get...

I think we have about 5 minutes left. Yes?

Yes, 5 minutes. 5 minutes.

5 minutes, yes.

So then let's get to some questions maybe around the acquisition. I know you're not going to talk a ton about that either because you've got -- it hasn't closed, and I'm sure you've got a lot of ideas on how to present all of the opportunities there. But maybe if you could talk just a little bit about how your strategy to expand further into connected care and digital health sort of led you to this deal? And what Hillrom -- what do you think Hillrom brings to the table in that regard?

So we're really excited about the acquisition, as I said in my opening remarks. And it's interesting because Hillrom has a very diverse portfolio and with a lot of different features that contribute to their growth. And furthermore, as we look at the transaction, I think it's exciting on 2 levels. One is, from a financial standpoint, we have very attractive accretion that we've put forth, very solid end-market growth, solid growth coming from Hillrom. And so as we look at the next several years, I believe that it's a very attractive economic deal for Baxter with a solid return on investment. And for me as the CFO, it's something that I've always focused on, and we've been very disciplined over the last 6 years on what kind of deals we would undertake. As we move forward, though, I think what becomes more exciting is the fact that Baxter has been a company that's been really focused on using digital and technology to enhance outcomes for our patients through the products that we have on the market. And so over the long term, my strong view is that we will be able to combine what we do with their expertise in terms of connected care and monitoring and measuring to create something that is far greater than the individual companies today, and it's something that should be exciting for all of our patients and customers. So we're really excited to innovate in new ways. And one simple example, like we talked years ago about integrating with the hospital EMR system are for 2-way wireless. We finally got our first demonstration of that with our version 9 of the Spectrum pump and that was a couple of years ago. We're up to 45 instances where we have integrated with the hospital EMR system. So we're -- it's a 2-way push and pull from the pump. It's a notable achievement. It's something we're very proud of, something that illustrates where the future of health care is going. Well, Hillrom, with their beds and other devices, has hundreds of instances where they have integrated with hospital EMRs. And so now for us, it's how do we think about integrating, providing data, analyzing data to enhance outcomes. I want to -- I'll stop short of describing specific products. But suffice it to say, I think when we do have our Investor Day, which we expect to have several months after the close, it's going to be a real opportunity to showcase some of their products that perhaps are less well understood. Some of our products are of the same nature, but then also what can we do with this portfolio of products in a way that allows us to really help solve problems for hospitals in new and unique ways. So really, really exciting.

And I'll ask a question here while I just go through my e-mail to make sure I'm not missing anyone. But how much of -- it seems like both Hillrom and Baxter were sort of pursuing sort of a digital strategy independently, obviously, and both coming from the businesses that were not -- although software has been a big part of Baxter's technology platforms for a long time, I think it's fair to say both companies were not known as sort of digital health leaders. You might take issue with that. But in the same way that some of the sort of West Coast startups were considered to be kind of breaking the ground or something like that. So how much of joining together is -- I guess how much of the benefit here is products on the one hand, but also sort of resources, people, expertise, capacity for leading in digital health where maybe it was something that you were both sort of trying to get to, say, 3, 4, 5 years ago?

I would say Hillrom, through a number of acquisitions that they've done, really has established a solid competency in this area. And so I've been impressed with a number of the products, but more than that, the technology and capability that they have in place. And then what I would say about Baxter is, yes, look, I understand your point, but remember, we have had a telemedicine platform in Sharesource for years. And it's a tremendous opportunity for us to help clinicians enhance outcomes for end-stage renal disease patients. We have now a platform that sits on top of our Novum IQ and our Spectrum Pump, have a technology that sits on top of our PrisMax all designed to enhance outcomes. And some of that's been enabled through acquisitions that we've done. So I think it's -- look, we're not a West Coast startup right? That's clear. But I think both companies have illustrated some abilities and competencies in this area, and we've got a lot more that we want to show you all.

Fair enough. Well, it's a little past the bottom of the hour here. So we'll call it there. And thank you both for taking the time. Always a pleasure to catch up and really do appreciate you joining us today as well as everyone else. So thanks so much.

Thank you.

Thanks, Matt.