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

Perfect. My name is Jayson Bedford. I cover med tech here at Raymond James. Thanks for grinding through the first day here. We're really pleased to have with us the CFO of Baxter, Joel Grade; as well as the Vice President, Investor Relations, Clare Trachtman. And so this is going to be 100% kind of Q&A here, so I'm going to start us off. But if the audience has any questions, please chime in, put up your hand, and we can -- I can paraphrase the question for the audience.

So maybe just to start, last couple of years have been a bit challenging for Baxter. It seems like you're on firmer footing today. But maybe for the sake of the audience here, who may not be as familiar with Baxter, can you maybe walk through some of the challenges that you've been through over the last couple of years and level set us on where we are today?

Sure. I can start as kind of a relatively new to the organization. I'd say there's a bit of a combination of a lot of factors, but it really started with our supply chain, some of the challenges that existed back in 2022, in particular, around product availability, around inflation. Just to -- again, there's certain component availability that was really a challenge. And I think when you couple that with the fact that we, at times, had trouble passing some of the inflation costs along that we're experiencing to our customer base. It sort of set us up for some challenging times and particularly when we had acquired Hillrom, at that time, some of the availability of parts was one of the biggest issues within that business. So I would say those are some of the things that were really challenging at that point. And I guess, what I would say, where we are today, we've -- the good news is we've gotten through the majority of that issue. Our supply chain has stabilized. I think, again, from an availability standpoint, I think we're in much better shape. We find ourselves in an industry that I think is stable in terms of the volume growth that we see in the hospital systems. We see a return to, again, what I'll call more stable capital spending levels with our hospital customers. And I think in general, we find ourselves in a place where we have taken steps to enhance some of the pricing that we've taken in with our customer contracts, both from the perspective of some of the elevated cost levels. But I'd say also giving ourselves more flexibility, if you will, to pass along some of the input costs that when they go up along with the customers, the better way than we are -- we have been today. So generally speaking, I think we're certainly in a much more stable place today, and I think it's certainly a good place to build from.

Okay. Joel, you're, what, 5 months in, maybe to the organization.

Yes, about 4. Yes.

There you go. Where are you focusing most of your efforts today?

Yes. I'd say a couple of things. Thing one is really around our free cash flow generation. I think the -- we certainly find ourselves in a place where we've had some elevated debt levels, and I want to really focus on how do we maximize our free cash flow generation. That's really across all types of working capital. It's really -- it's how we accelerate the speed of the collection of our receivables. It's how do we focus on really rigor around managing our inventory levels. We -- back in the times I referred to, we had obviously, understandably so, set parameters in the system to make sure we held more inventory in order to ensure our service levels were at the level they needed to be. But that's an area we're focused on as well and certainly in addition to payables. But I think that's one key area. And then the other one I'd just say, in general, is really making sure that as a business, we're continuing to operationalize things in a way that allows us to really be prepared for some of the -- again, the work we have ahead of us. That includes some of the pricing that we talked about in terms of having additional flexibility there, but really continuing to push on some of the things we're doing in our supply chain area, our purchasing, et cetera, et cetera. So those are some of the areas I've really been focused primarily on since I got here.

Right. Early last year, you talked about reconstructing the portfolio. A big step late last year and then another additional step coming later this year with the spin of the kidney business. And so I guess the question I have here is -- the initial question is you filed an 8-K this morning. So the intention was to separate the business, potentially spin, potentially sell. You've filed an 8-K this morning that indicated you were in recent discussions with private equity around the potential sale of this business. I guess, my first question on that is kind of what triggered the 8-K? And then any other detail you can add?

Sure. I think what -- number one, we've been pretty consistent around our messaging around this idea that our responsibility is to maximize shareholder value. And so whether that was in timing, whether they were in structural areas that impacted the decisions we're going to make, we were really clear on the fact that, that was our overarching objective. As part of that, we talked about the fact that there is -- there could be multiple paths. And so what triggered the 8-K today was really the idea that we had actually received interest from private equity parties that was up until this time was a, hey, we'd like to -- we're going to maximize shareholder value. If something comes along, we're going to consider it. What's different today is we've actually received incoming interest from private equity firms for the possibility of acquiring. But I think the key point though that I just want to emphasize, I mean, this is -- we're taking a very balanced approach to how we're thinking through this. And that again, it's about maximizing shareholder value. And the idea that we've worked very hard to head towards a spin, the work that we've done to get to the potential spin is very relevant to the work that would be necessary in the event that we did decide to go down the path of a sale. And so we're going to continue to ensure that we are very balanced in how we think about these things. But again, in the end, I'll make the decision that will maximize shareholder value.

And just the 8-K requirement, it's strictly based on timing, not probability of an event.

It was the fact that we -- as we actually received interest from these outside parties as opposed to just, hey, if we -- something comes along, we'll consider it. We've now actually received specific interest from private equity firms.

Okay. And just how does the 8-K impact? Because you've kind of steered investors towards a second half separation. Does that change at all, given the 8-K, in terms of expectations?

Yes. I mean we did say, as part of the 8-K, that we expect to complete the separation regardless of structure in the second half of this year.

Okay. Nothing has changed there.

Yes.

Okay. And just on that business, I realize the focus will be more on RemainCo here. But just on Vantive, expected to be down on the top line in '24. But if we kind of exclude some kind of onetime-ish dynamics, that business is kind of a 3% to 4% top line normalized business with op margins in the mid-to-high single digits, and investors should view it as more of a margin expansion story? Is that the identity of that business?

Yes. I mean I don't want to speak on behalf of the Kidney Care team. I mean I'm sure that Chris Toth, who has been kind of the designated CEO, has a very detailed strategy that will incorporate kind of reinvestment in the business, in particular, to drive top line growth, particularly around the home and accelerating the home and some digital capabilities to really expand that coupled with, I would say, meaningful margin expansion. They do -- obviously, we did provide our segment profitability last year, so you can see what the Kidney Care margins are. And I think Chris and his team have a very detailed plan to accelerate margins both in the near term and over the longer term as well.

And just I feel compelled to ask, the FLOW data in GLPs likely comes out in the next few months, let's call it. Are you prepping a response? Or do you feel your customers understand the dynamic?

So I think that from -- with respect to the FLOW data, obviously, there's been speculation about it. We have taken a more balanced approach. I think that we see that there is potential to actually even add additional patients to the overall ESKD, so end-stage kidney disease population. We don't know the outcomes. There were a number of different endpoints associated with the trial on whether it's just a slowing of the progression from CKD to ESKD or if there was a mortality benefit, those will be there. But I think over time, this will play out. But we think right now, initially, there's a number of different vectors, whether you, in general, have patients that are staying alive longer, that there's less mortality, there -- that could lead to more patients. If you're able to educate patients, they stay in the CKD over a longer duration. Potentially, you have more time to tell them about their options, including the home. And because we're aware that if patients are educated about their treatment options, they're much more likely to choose the home. But unfortunately, today, a lot of patients crash into dialysis, meaning they aren't even aware that they have kidney disease. So the more awareness there is about the disease state, there's the potential for more education about their treatment options, leading to more treatment in the home. So I think there's a number of different things, Jayson, that are out there. But it's too early to say. There has been -- there's products out there today that have been shown to slow the progression of kidney -- chronic kidney disease, the SGLT2s. And we haven't seen a material disruption to the patient population today as a result of those. And if we look at kind of the -- to date, there's been no impact on, I would say, ESKD population because of GLP-1s. And if it were to play out, it's likely over a multiple, multiple year period. But I think it's very premature at this point to comment.

Okay. Fair enough. So Baxter RemainCo, if you will. You've talked about 3% to 4% growth as kind of the end market growth. When you look at the 3 business segments, are all 3 growing or expected to grow in that 3% to 4% range? Or is one expected to grow faster than another?

Yes. So I think what we've talked about this year is that our HST business is the one that is -- that this year projected to grow at a slower rate, more around the 3% range. But certainly, as we head into the future, we see that business as an opportunity to be one that is -- continues to accelerate. Our Pharmaceutical business certainly is also experiencing some very solid growth this year, and we anticipate that to continue. I think we've got a nice set of product offerings that we've launched in the past year. We plan to launch in the current year we're in, and I certainly see a continued element of that going forward. And then as well, the other segment, our Medical Products. Our MPS product is experiencing solid growth, and we do anticipate that being in the -- at or above that range as well.

Okay. Let me just touch on the 2 smaller businesses, pharma first. Potential impact of new products. And then the second one on pharma is just -- you've alluded to in the past some pricing pressure. Is that pricing pressure starting to ease at all?

We still -- I'll start. I mean, we still see some of that certainly in that segment. I think, obviously, one of the things we've -- again, that's continued to be a good -- offsetting some of that is some of the new product launches that we continue to have. But I mean we still are experiencing pricing pressures in that segment.

Yes. To echo what Joel -- so I think the magnitude of the pricing erosion has slowed a little bit from what we had seen previously, when we had seen more significant pricing erosion. There's still pricing erosion, and we would anticipate that, that kind of is an annual thing for this business, that what we are doing is, given the steady cadence of new product launches that we have, which this year is over 10 new product launches, that we are more than offsetting that pricing erosion that we are experiencing.

Okay. On the HST or health care systems business, I think on the last call, Joe alluded to a bit softer pockets of softness in capital. Why is that? And are you seeing that firm up at all?

So where I would start with this is we -- what we have said is that we are experiencing -- we are anticipating some cautiousness at certain -- with respect to certain capital spending. It's not widespread. It's not -- but potentially, some pockets were there. Now as I look at last year, we saw sequential improvement for these care and connectivity solutions businesses. Just kind of the more capital-exposed of the HST business, we saw sequential improvement every quarter in our order rates, ending the year in the fourth quarter with actually orders growing on a year-over-year basis. And what we've talked about is we expect kind of a similar dynamic as we get into 2024, so a stable to improving capital environment for this business with continued momentum from 2023 carried into 2024. I think with our cautiousness that -- it was that there are certain systems that maybe continually -- continue to be somewhat delayed with respect to it. But it is improving, and that's reflected in the order rate that we're seeing.

Okay. And you've also alluded to, within HST, some new products launching at the end of '24. Can you just highlight those and the impact they may have on '25?

I do think that the new product launches for this business are going to be kind of that key acceleration to get it beyond the 3% that we are experiencing this year. And as we referenced, we do have a number of new products launching in 2025. Now we have had some recent product launches as well within this business. We launched a new ICU bed, our Progressa+ last year, so we're going to continue to build off that momentum. We've had some launches within our Surgical Solutions business as well. As we get to 2025, within our Front Line Care business, we have some launches within that business, a new Vest that we have in our Respiratory Health business. We have some new monitoring technologies coming out for our diabetic retina. We have some for enhancements on digital capabilities and enhancements within there. Within our care and connectivity solutions, we're looking at some more, I would say, care communications enhancements as well, building off that, building off our Voalte and our nurse call as well.

Okay. Okay. That's helpful. Med products. It's the biggest segment of RemainCo. Kind of, I'd say, the most identical -- identifiable driver here has been your large volume. You're heavily [ de-pumped ]. Your business there, Spectrum IQ, has been growing quite well, both in '23 and the expectation in '24. I guess my first question is, it's growing really well in front of a new product launch. So I'm curious as to why it's growing so well. And then is it more market growth? Is it share capture? Just explain some of the dynamics around the growth not only in '23 but also in '24.

Yes. I think some of the things we're seeing from that perspective. A, I think there has been some level of pent-up demand that's driving some of that level of growth. But I mean, the truth of the matter is that there's also been opportunities we have been able to take share with that product. And so I think while obviously, we wait with anticipation for the Novum pump to come through, we have -- again, the Spectrum pump has been performing really well, and we anticipate continued growth on that heading into this year. Just a quick sound check, make sure you can still hear me with -- okay, thanks.

Okay. Just in terms of -- my sense is there's a lot of aged pumps out there, not only from you but also your competitors out there. I feel like it's a bit more of a level playing field where we've got more devices out there. There's no real constraints. Hospitals are free to make choice here. Do you see industry acceleration here, meaning more pumps being sold in the next couple of quarters than in the -- or the next couple of years versus the last couple?

Yes. I do think -- to circle back on your question, I think part of why we're seeing this acceleration with Spectrum right now is there are some -- and Joel just referenced some pent-up demand because of the age of the fleet out there. So it's more about this replacement cycle that I do think will carry through the next couple of years. So while Spectrum is a great pump, it's got some of the most advanced safety features out there, it's a workforce pump. So we've done really well at protecting kind of our installed base, while gathering -- gaining some share with this. We believe the opportunity set does open up a bit more with Novum, but Spectrum's a great pump, and we're happy to have it. And our customers, obviously, were seeing great success with it.

And Clare, is the -- is it just refreshing -- the replacement cycle that you're talking about, is it just replacing your installed base? Or do you view it truly as an opportunity to capture share?

So that's where -- I mean we are -- I'd say that most of our growth is coming from replacement of our existing -- of our installed base. But we have had -- the way we look at it is kind of our net gains and losses. And we have been a net share gainer, and we expect to be a net share gainer in 2024 with Spectrum. Now my reference is that with Novum, we think that the opportunity to gain share is greater with Novum than it is the Spectrum. But Spectrum is doing a great job, and we are able to gain some share with it and have been in the past.

Okay. And just at one point, when we were anticipating Novum, we thought it was a -- would be a bit of a bolus once approved. How should we -- how should investors think about the Novum dynamic?

Yes. So I think that part of it was -- and this kind of circles back to a little bit of 2022 when we had anticipated that Novum was going to come out. We had provided guidance at that time for Novum. Unfortunately, Novum was delayed from that. And given the supply constraints that we were experiencing, we weren't able to fill that void with Spectrum at the time because we -- it was more challenging to get access to products, product componentry at that time. We've been able to successfully get additional components for Spectrum. So it is incremental, but it's not the bolus that we're thinking of just because we are having such great success with Spectrum right now.

Okay. Helpful. Part of the weight on margins has been kind of this rigid structure with the industry's kind of GPO and contracting. You have a sizable chunk of your business that's coming up for renewal here at the end of the year. So I guess, what's the goal and your expectation from this, I'm going to say, repricing but renewal with GPOs?

Sure. So a couple of comments on that. Number one is that we have had a successful renegotiation of 2 of the main 3 GPOs that we have. The third is not really impactful for 2027. But the impact of the renewals of the GPOs for us will actually happen in 2025 just to be perfectly clear. Our anticipation is that we've had, again, the successful renegotiation that we will see some positive from pricing in 2025 from renewal of those contracts. And in addition to the positive from the pricing, again, it's not just pricing, it's also -- again, there's some volume opportunity there as well because I think the -- if you think about that, it's really around setting the tiers within the contracts, the GPO contracts, and negotiating with the individual IDNs, which we're anticipating doing this year, so that we actually have that negotiation done by the time next year rolls around. And that, again, we have a -- both the successful opportunity to both add price and to continue to add to our volume as well. I think the other part I would just add is that one of the things that the team has done a good job of is ensuring that we have a better ability to have some, what I'll call, flexibility within our pricing structure on impacting things from externally that impact us, whether it's some type of additional cost or fuel or freight or some of these types of external factors, that we'd actually be able to have a better ability to pass along in the event those are [ passed ].

On those -- I'll use the word escalators. Are those negotiated at the GPO level or at the IDN level?

It's at the GPO level.

Yes.

Okay. And by the time of your investor event midyear, will you have a pretty good idea as to kind of how those contracts will be finally -- in final pricing on those contracts?

Yes. In terms of the Capital Markets Day, just to be clear on that, obviously, the timing is somewhat dependent around the outcome of the Kidney Care separation process. So -- but we will -- we should have some -- we will provide guidance. What we have said before is we will look at providing what we anticipate pricing will contribute to both kind of top line and margin over our long-range plan horizon. So not specific to the GPO contracts, but just in totality, what we'd expect pricing to be.

Sorry to pin you on that investor event.

No, that's okay. No, actually, we're having a Capital Markets Day out there too, so that's good.

Yes. Yes. Just on margins. I think the '24 guide is at least 50 basis points in the face of, what, 40 basis points of FX pressure, I believe.

Yes, 40 basis of FX pressure. Also, we did enter into a contract manufacturing agreement within our -- following the sale of our BPS business. So our pharmaceuticals business entered into a manufacturing service agreement, and there's a 40 basis point headwind as well as a result of that.

Okay. It seems like gross margin is the primary driver of the leverage you're seeing. Is that the case going forward? Or do you think you can leverage R&D and SG&A over time?

Yes. I actually do see that as the key driver going forward, both from a -- and again, I consider this an encouraging sign, both from a pricing standpoint as well as really focused on the areas of opportunity within our independent supply chain. That include things like, again, the optimization of our facilities, that include automation, include procurement, both direct and indirect procurement. That includes things like logistics and supply chain opportunities. All of those things are what I'd see as part of our gross margin expansion opportunities. I've said this before, I'll say it again. We're not going to SG&A ourselves to prosperity. These are things that we will, in some cases, actually need to continue to make certain investments. In particular, in sales and marketing in the company. But obviously, we will continue to be smart on those areas as well. But I think this is a -- those are the areas I really see as an opportunity to expand our gross margins and a key driver going forward. And R&D, just -- yes, you mentioned R&D as well. I mean I think R&D is something that actually, on a percent of sales, did increase in the past year. And we do see -- expect to see that modestly continue to increase as we continue to focus on innovation and new product launches.

The level of R&D required to generate 3%, 4% top line, is it much higher than where you're at today?

No, I wouldn't say much higher. I just -- I think I certainly wouldn't see that going above a 5% at any point in time.

Yes.

But I do see some -- again, some modest progression though.

At one point, back in the day, Baxter generated 45% gross margin. And it's skewed a little bit because there's been a lot of portfolio activity. But can core RemainCo Baxter get back to 45%?

Yes. I mean I think that our goal going forward is to continue to expand margins. I don't know that we're going to comment on specific, but naturally, margins will lift as we separate out Kidney Care. Naturally, margins, both gross and operating margins, will lift. So I think that from that base, yes, I think that we see a pathway for continued expansion on both gross and operating margin, really driven by the gross margin.

Yes. We just -- we haven't guided that yet, obviously. But I mean, certainly, when we do get to the Capital Markets Day, there's, I think, perspective on that. But certainly, we feel bullish about the opportunities ahead of us.

I probably would have been satisfied with a yes, but we won't tell you the time line. I think that's -- we're bumping up against our 4:30 clock here. So I certainly appreciate the time, Clare and Joel. We're -- Amarante 2, I think, is the breakout session downstairs. So thank you.

Thank you very much. Thank you.

Thank you all.