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

Welcome, everyone. I'm Robbie Marcus, the med tech analyst at JPMorgan. Really happy to have our next session with Baxter International. I'm going to bring up Joe Almeida, the CEO, for a presentation, and then we'll do some Q&A after. Joe?

Good morning. Thanks for attending the Baxter JPMorgan conference presentation. Please read our safe harbor statement. This is also on our website. This presentation is going to be posted there as well. We are -- about a year ago, we set forth a transformation mission for Baxter, and we've been very active in pursuing that. I'm going to give an update where we are today and tell you how much progress we've made and how excited we are about the future in 2024. Baxter touches about 350 million patients a year across the globe, it's one of the largest health care companies in terms of interaction with patients, not only in the home, but also in acute sites, hospitals, every ward in hospitals. We are 4 segments: our Medical Products and Therapies, our Healthcare Systems and Technology, Pharmaceuticals and our Kidney Care. We're present in more than 100 countries. At Baxter, everything we do is centered around the patient. Our mission is to save and sustain lives. We are engaged -- 61,000 people engaged every day in making patients better once they contact with products that we make. We have a very strong ESG agenda. And I just want to highlight to you that by 2040, we will be carbon neutral. We're working very hard at the moment, implementing strategic water programs. As you know, Baxter is a very large consumer of water. It's the largest IV infusion company in the world. Also integration of our energy systems into a sustainable way of continuing to operate. We have several of our plants today with cogeneration. Our plants in the Caribbean are self-sufficient for the most part, with cogeneration on-site, implemented one in Aibonito, Jayuya and the next one is down in Guayama. We also are very focused in our patients, as I said. We've got to continue to improve our process and capabilities to ensure patient safety and quality in everything we do. We have invested over $275 million in underserved communities across the globe during the period that we're speaking about. And diverse representation is very important to us. More important actually is the inclusion factor. Baxter has made significant progress in ESG, has been a tradition of the company. We're going to continue to charge forward. If you think about where our mission meets our commitments, we are in markets that grow 3% to 4% a year. The 3%, what I will call, the Baxter business is ex-kidney, 3% to 4% a year, the expected growth between '23 and '26. We are from anywhere, hemodynamic monitoring, IV therapies, infusion pumps, compounding systems in hospitals. Also in our Healthcare Systems and Technology is our patient support systems, our general surgery systems that we have, surgical lighting, surgical equipment as well as the only integrated surgical table to robotic systems in the [ OR ] in the world. As we continue to progress in our injectables, we had a real period where Baxter had headwinds in price erosion. We have diminished due to our innovation. Our innovation has been significantly bringing new molecules to market using Galaxy technology, which is very strong for Baxter. Baxter has grown 5%, 6%, 7% this year. We've seen the growth in our Pharmaceutical business, and I'm very excited about the management of the group today because we've made significant strides in offsetting what has been the most remarkable price erosion that we've seen before 2023. All these products have a significant amount of diversity. There's no one product that has more than 2% or 3% of sales in the company. We have diverse geography, diversity of products and a lower risk due to the variety and mix of our products. We continue to enhance our supply chain, which has been an issue for us. And I was here last year speaking about the challenges. We're able to turn that around. We have a much more resilient supply chain at the moment. And we've been able to make significant progress towards our objectives of reducing our cost. We have significant amount of innovation. I heard today from an investor, asking questions about what is innovation at Baxter. Baxter has increased its spending in R&D in some of our categories. We have more than 22 new products launching in 2024. Some of them are on the screen. These are pipelines of products that will be launched in '24, '25 and '26. You can see from every single product line we have, we have technology. As you know, Baxter had to restart its research and development function for medical devices when I came to the company, was inexistent. And we were able to build now centers in India, we have centers in Northern Illinois, and we're putting the center in Boston to be able to continue to enhance our ability to create software-driven alternatives for improvement in [ flowing ] hospitals. Software drives everything we have. Integration of software is very important to Baxter. So having different sites and different locations that can bring together the software integration for Baxter is extremely important. We continue to invest in our reformulation of generic drugs that we make them 2-year shelf life, ready for use in hospitals using technology proprietary to Baxter, and Pharmaceuticals continue to launch a significant amount of new [ products ]. As a matter of fact, in the next 2 years, we're going to have 15 new products launched. When we go into our Kidney Care, we're dividing 2 different businesses, the Chronic Therapies and Acute Therapies. The Chronic Therapies, we have a very large footprint in our peritoneal dialysis business as well as our HD, or hemodialysis business. The growth of this business is expected to be about 3% to 4% between '23 and '26. We have -- I just want to point out that our product offering is very comprehensive and truly global. The United States is about 25% to 30% of sales of this business. So it's one of the most global businesses that Baxter has today. In terms of near-term opportunities and new products, we are very focused in telecare. Telecare is where we think the enhancement of outcomes of PD is going to come from. We have noticed after our launch of our telecare business with our Sharesource application, that we can get up to 50% retention of patients on therapy once we start using this technology. So this allows us to keep the patients on therapy, which is beneficial for them instead of shifting from PD to HD. We have made significant progress in Acute Therapies. This is a business that's been growing significantly during COVID, has been a business that has significant amount of margin opportunities, continue to increase, and is a very global business. We have the leading technology in continuous renal replacement therapy, and that is supplemented by other therapies, such as liver as well as sepsis and CO2 removal in our portfolio. It's a very exciting technology, was, as I said, key during COVID, and it is even more important going forward as the portfolio of our Kidney Care business. If you think about what we came down last year to present, 3 things. We said we're going to finalize our operating model into transforming the company into segments and decentralize what was originally long-term Baxter way of operating. We also said we're going to complete the sale of our BioPharma Solutions business, and we were going to spinoff or separate our kidney business. And we're -- I have to say that we made tremendous progress and complete both the reorganization of the company as well as the sale of our BioPharma Solutions. We sold for a significant amount of premium and has been a great opportunity for Baxter to pay down debt and put money in the balance sheet to be able to deploy against debt repayment in the future. The progress has been significant in the separation of our renal business. We are in process today with already going live in many different regions of the world. So we are progressing towards the spin at the end of July 2024. So how do we think about value creation for Baxter and for our shareholders? You think about 3 different very important pillars and levers we have. Commercially, we are a large company. We have the ability to negotiate contracts in a large -- at a large institution. Baxter shows significant advantage when is -- when is in contract negotiations with specific institutions to be able to provide value to them. Commercially, we have the footprint, we have the products, we also have the innovation. You look at our ExactaMix Pro launched and is doing very well in the U.S. We have our new Novum platform, large volume parenteral launched in Canada. It's currently with the FDA in the U.S. We're in active discussions with them, hopefully to have that approved in 2024 and launch. We already have in the U.S. our new pump, that -- for a syringe pump, the first in the history of the company, is launched in the U.S. and doing well. Innovation in Front Line Care has been significant. We've been growing our cardiology business in the upwards of 37%, is doing extremely well, is a business within our HST portfolio. We also did significant launches this year in the PSS, or Patient Support Systems, with the new Progressa+ badge and the Centrella, a workhorse, a great product for [ MedSearch ] that we just added lateral rotation to it this year. So several different launches. Also the ability to avoid significant price erosion in our Pharmaceuticals business was due to innovation, significant innovation and launch of molecules like Zosyn and other things. Operations. We streamline our operations in Baxter. This was a long-term coming history of great manufacturing and operations. But at the moment that we were faced with supply chain challenges, became a significant hindrance into the company. We transformed that. We have a new team in operations led by Jim Borzi, who joined us about 3 years ago. And we were starting to see the cost reductions, which are in between $300 million and $400 million a year. It's starting to offset inflation headwinds and is starting to drop to the bottom line. I feel much more comfortable with our supply chain today and the changes that we've been making to make sure that we have resilience in supply chain. It's not only the ability to produce product capacity, it's patient safety and quality and resilience. We see that day in, day out in the U.S. with our competitors not being able to produce products, we come in and we supply those products. For instance, in products as basic as [ pour ] bottles, which are sterile water that is used in hospitals for [ several ] procedures. We're #1 competitor, and we're increasing capacity and putting more products in the market because our competitors cannot keep up with the demand. So there's great things happening in Baxter, expanding the commercial footprint, accelerating innovation and making sure that our supply chain is resilient and repeatable in everything we do. If you think about very same themes for Kidney Care, and Kidney Care has done a great job in terms of managing the portfolio of the company. As you know, we shut down one of our factories in the U.S., making dialyzers. We did this to be able to enhance our ability to produce the product effectively and profitably. That was done in a way that did not impact the market at all and also positively impacted Baxter. So it's a win-win because the market did not need that capacity, and Baxter was able to take that out without any consequences. Innovation. We are accelerating the R&D. And if you talk to Chris -- Chris Toth, our CEO appointed for Kidney Care; and his CFO, Matt Harbaugh, will be with us during the one-on-one. So you'll be able to ask more questions -- answer more questions about the portfolio work that they are doing. So for me, it's the commercial expansion of that business continues to show progress, innovation with new PD telecare as well as in operations, making sure there's resilience across the board to be able to produce the products needed every day in people's homes. So if you wrap this, there is good momentum in Baxter. We've been executing every single quarter. The company has -- is optimistic about our growth rates in 2024. We are executing on everything that we promised to do. And we are hosting an Investor Day later this year. There will be 2 different segments. One is going to be Kidney Care in separate, it's going to have its Investor Day, and then Baxter is going to have its own. We are convinced the separation of Kidney Care from the rest of Baxter will generate value. Those are 2 very, very different businesses. They operate with different end customers and different profitabilities and ROIC. They are not similar to the rest of Baxter. Despite the fact for many years, they've been part of the same company, they are completely different, including the go-to-market and how we distribute the products, they are extremely different. And I think there is value in separating them and creating opportunities for both companies to invest well in the key levers and drivers of value for the shareholders that together, we will not be able to do it because just the use of resources. I want to make sure that you know our first priority for capital allocation is to pay debt. We're going to pay debt until we get to the ratio that we want to have. And then we will deploy capital in share buybacks and the small tuck-in acquisitions, but only, only once we get to the debt level that we want. This is our priority #1. So with that, I will ask for Joel Grade and Clare Trachtman to join me on the stage. And I think, Robbie, you're going to be asking us questions and the audience.

Well, great. Joe, 2023, I feel like was a bit of a transition year for Baxter. You announced the spin, you sold BPS, you executed some good quarters, you were able to beat and raise consistently. Coming into '24, we don't yet have full 2023 numbers, but how are you feeling about the health of the business and the direction that Baxter could go in over the coming year?

Our businesses are executing well. As you could see, for execution first, second and third quarter. I have no doubt that we'll be able to execute on our promises on the fourth quarter as well. We have, with the change in the organization, made a significant improvement in how we operate our markets, how we go to market. As a matter of fact, separating segments made us stronger going to market than we had before being by regions of the world. The allocation of resources and capital are going well. The execution of our divestiture of our BioPharma Solutions was excellently done. And if you are aware of the price that we sold the business for, it was very important for Baxter to be able to recapitalize and be able to pay the short-term debt. You saw the -- you're going to see the benefits in the fourth quarter with reduction of interest expenses. So there's quite a bit going on in Baxter. But more remarkably, I don't -- I want to underscore the transformation, the supply chain and the ability that we put together a team that now has integrated systems to manage a very complex supply chain. We are a medical technology company that has pharmaceutical business and medical devices with significant worldwide footprint and that management now today, the centralization and the ability to obtain our cost reduction is at a $300 million to $400 million a year, has been great for us. So our team is executing well. So good execution '23, expecting even better in '24.

Great. Joel, maybe I'll toss one over to you. And I realize we're going to probably be getting updated long-range targets for RemainCo and SpinCo, which I'm restricted on, so I'm going to stay away from SpinCo for this presentation, later this year in the spring at an analyst event. But how do you feel about RemainCo's ability to reach or get close to the previous targets for Baxter, which just a reminder for everyone, was 4% to 5% constant currency revenue growth, 350 to 400 basis points of operating margin expansion through 2025 and greater than 80% free cash flow conversion by 2025?

Yes. So I feel good about that. As you said, certainly, as a reminder to the group, there will be an updated outlook at our Investor Day later. So in terms of that type of detail, you'll get that then. But our goal is to have growth that's over and above our end market growth, and I feel good about our opportunity to do that. And in addition to that, there will be a growth, but profitable growth. And so growth that's going to not only continue to accelerate growth beyond that of our end markets, but also do so in a way that expands our margins. And so I feel good about those things. Things you heard Joe talk about, the things we're executing on across the enterprise, certainly give me that confidence as I've come into this company. The other thing I would just say, in terms of the -- just as a reminder, once the spin does happen, you will see margins at our company that are actually higher than the Holdco that you see today. And so that's an advantage for us, obviously, both from the perspective of having a bottom line that has expanded, but as well as the opportunity to then continue to put some of that money in for reinvestment, which certainly is obviously part of the -- what we see as part of the key strategy to spin and the opportunity that we see to create value. So generally speaking, I feel good about where we're at. And I think, again, this company is in a place, we just continue to execute better and better.

And you touched on weighted average end market growth around 3% to 4% for the RemainCo component. I think everyone would probably like to see that move up over time as it's easier to grow higher revenues if you're in faster growing end markets. So maybe speak to how Baxter can do that organically? And is there an inorganic component that you're looking at as well?

The innovation in sites of care are how we're going to be able to surpass WAMGR. And add to the WAMGR, if you think about sites of care, things like ACS are new opportunities for Baxter. We always served ASCs, always did through IDNs in the U.S., but there is a very large group of ASCs, which are not connected to hospitals, which are independently owned and operated by physicians. And that is an area that Baxter had very little penetration in the past. And with our HST business, with the beds, if you think about what we offer, we offer from this furniture coming into the ASC, to the beds, to the pumps, to the sets, to the anesthetic gases, medicines, monitors. So we have a very complete offering. So for us, it's important, and we put together a brand-new group that we'll be calling on the ASC with a different portfolio. So important to us is that to get to a higher WAMGR, it has to build some of that organically. And once we pay the debt to the level that we want, we then, with tuck-in acquisitions, primarily in Front Line Care, in our care communications and parts of MPT, we'll be able to expand the WAMGR. And it's important to us. We'll be focused on that, and it's something we're going to do once we get into 2025.

Great. Just maybe staying on the longer-term outlook here. Costs have been something that's been an issue at Baxter, particularly with the inflation over the past few years here. You've put into affected number of projects to help overcome that and improve your margins. And I think we're set for 2024 to see pretty substantial operating margin expansion, which we could get into a few questions here. But for this question specifically, just maybe talk to the projects you're doing on the operating margin expansion continuum and where in the life cycle of those you are?

Sure. I'll start with that. And I think it starts around our integrated supply chain work with work that we're doing to really, I'll call it, optimize our network, optimize our distribution, optimize our logistics. There's a lot of automation work that's being done that is, again, further enhancing that opportunity. The -- from a purchase and a procurement standpoint, one of the things that we're looking to do is to continue to figure out how to leverage our -- again, as Joe talked about scale and the ability that we have to leverage that in terms of how we procure products, both on the direct and the indirect side. I think those are some of the areas that are truly focused on the -- in the COGS area. And one of the things I'll say, and I've said this before, we're not going to SG&A ourselves a way to prosperity. But nonetheless, there are still opportunities on that end as well, in areas like shared services, other areas that we continue to enhance our overall operating margins of the company. Joe, anything to add?

Just adding that the new product launches will enhance that profitability. So if you think about when we're able to launch our new pump platform, that has opportunity for improvement of margins when we look at our Progressa+ new monitors. So all the products that we launch have opportunities to provide better margins than our current products. So the growth comes not only from optimizing our cost structure, our -- what we call our OpEx, but it's also the mix of new products that will bring the margin up.

And Robbie, if I could just go back to one of the things you asked about, even on the free cash flow side, all these things are also going to contribute to our ability to generate, with target of 80% conversion ratio for our cash. And so when you combine that with some of these things that also impact how we manage inventory, how we manage working capital, the combination of those things, ultimately, contribute both from a P&L perspective and from a free cash flow perspective.

Okay. Great. If I look at '24 and realizing you haven't fully reported out fourth quarter and full year 2023 here. I think everybody is looking forward and trying to get their model set for the coming year. Maybe I could run a few numbers by you. The way I look at 2024, I have your RemainCo component around your weighted average end market growth of 3% to 4% or so in 2024. Renal, you have China VBP, and you also have the exit as you talked about the dialyzer plant as headwinds in the year. We're at around minus 1% in our model, puts you at around 2% to 3% constant currency growth for '24. Is that a fair way to think about the business?

So I'll take that one. So Robbie, what I would say is that, I mean, we haven't provided our guidance for 2024. Our expectations, we'll provide that on our fourth quarter earnings conference call, which is scheduled for February. I think directionally, what you're saying, and this is aligned with some of the commentary that we had on our third quarter call, that I think we've had some momentum, as Joe referenced earlier, for this year that we see continuing into next year. I think with Kidney Care, there are some headwinds that they're facing, but the underlying momentum within that business, particularly with our PD patient growth in markets outside of China is doing really well. So I think that we're seeing -- we're starting to see some traction across all of our businesses that we believe will carry us into -- carry into 2024.

Maybe same sort of question down the P&L for '24. I know there's currency to think about. There is debt pay down and interest expense. There's global tax regulations, which are pushing up tax rates around the world. How should we think about some of the puts and takes down the P&L?

Yes. Again, we're not going to give specific guidance, but I do think that we are anticipating a level of margin expansion next year, driven by a lot of the programs that both Joel and Joe referenced, within our integrated supply chain that will help contribute to driving that margin expansion next year. Our interest expense will go down given we were able to utilize the sale of BPS to reduce our debt load. So we do expect that to come down next year. From a tax rate perspective, we do expect our tax rate to increase next year, probably by about 100 basis points, driven by -- primarily by the pillar 2, the implementation of pillar 2. So I'd say all of those factors that you referenced are there. This will lead our expectations to some level of earnings growth, but we'll provide the specific guidance in the next month.

And specifically on interest, some of the debt you're paying down, May time frame, I believe, is probably a little lower rate than the interest you're earning on the cash. So is it fair to assume, first half, lower interest expense, second half, higher, but total year lower than '23?

That's exactly a fair assessment. So we're holding cash right now. So by the end of '23, what we'll have done is paid out some low coupon debt, but also pay down our 2024 term loan. With the remainder of the cash, we'll hold that until a European bond that's due in May. We'll pay that off. We will pay a portion of our 2026 term loan. But in the meantime, we are earning cash or earning interest income on that cash, that will lessen as we pay down the low coupon debt. So we'll -- interest expense will pop up a little bit in the second half of the year. But to your point, we'll be down pretty meaningfully year-over-year.

Yes. And I guess, the only other add to that is on the 2026 term loan, that's also some floating rate debt. So in the event that interest rates do mitigate to some degree, there may be some marginal benefit from that as well.

Just scan the room, any questions? All right. I'll keep going. As you think about some of the different business lines and product launches, any updates you could give us on Novum IQ, where it stands? Is 2024 the year for approval?