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

Okay. Great. So ready to start this session. I'm Matt Taylor, the U.S. Medical Supplies and Devices Analyst here at Jefferies, and pleased to be joined by management from Baxter here today for our 25-minute or so fireside chat. So we'll have some time with the variant for some audience questions, but I'll kick things off and introduce our guests here. So we've got Clare Trachtman, who runs the Investor Relations function at Baxter; and Joel Grade, who is the CFO coming into the role about -- 6 months ago? Is that -- all right.

Yes.

So maybe to kick things off, could you just touch on some of the high-level trends that have been impacting Baxter's business? And -- for those who are less initiated, maybe talk about how the business has evolved over the last couple of years through the acquisition of Hillrom and some of the portfolio management that you've been doing?

Sure. I can start with that, Matt. I mean if we think about just the evolution of our strategy, obviously, we bought Hillrom at the end of 2021. We closed the acquisition in December of 2021, and then did weather some challenges throughout 2022 really driven by the macro environment. And then from there, as we announced in early January 2023, we announced a series of strategic initiatives that we were embarking on. The first was that we were going to verticalize our business into 4 operating segments. So each segment kind of operating with a president and having full accountability, full P&L accountability within those 4 vertical segments. We also announced that we were going to be selling our BioPharma Solutions business, and then we completed that sale last year. And then finally, announced that we were looking at spinning out our Kidney Care segment as well. So we -- and really, the decision on both BPS and on Kidney Care was really driven by capital allocation and thinking about just our strategic core and where the business was going to be going and where we would be making our investments going forward. So that's really what led to those 2 decisions. And as we kind of focus on where that RemainCo and where Baxter would be going, going forward. We've made significant progress. We were able to start operating in our 4 vertical segments in the third quarter of last year. As I mentioned, we had the sale of the BPS business and we started utilizing those proceeds to reduce our debt. And then finally, we've made tremendous progress on the separation of our Kidney Care business. As we announced earlier this year, we are looking at a potential sale as well in addition to a spin. And what we've said is that we will -- we expect to complete the separation in the second half of the year. And the outcome of that will really be driven by what we believe maximizes value for the shareholders. So [indiscernible] I don't know if you want to add anything there at, Joel?

No. I think those are -- I would just say a couple of other things. I mean, we've had a -- we have some pretty solid momentum in our business in many of our segments as you saw last quarter, we actually -- while we had some disappointment certainly from an HST perspective, I'm sure we'll go into some of that here in a minute. But some of the other businesses in our MPT in our pharma business in kidney. Again, we've got a lot of positive trends in the overall business, I think we feel good about. And so that's the only thing I would add to everything that was said. Yes, sir.

Just there is a question [indiscernible] 100% of all the changes Hillrom acquisition? And do you go right down at or...

We did take an impairment on the Hillrom in 2022. It was about $3 billion.

But your other question, are we keeping the rest of that business? The answer is yes.

Maybe I'll just double click on the portfolio management question. You touched on [ Kidney Co ] as being kind of the big next step. Could you talk about the pluses and minuses of sale versus spin? What each option would do for shareholders and which you would prefer?

Yes. So let me start with just reinforces what Clare just said for starters is that we're going to do what's best for our shareholders. And that's the -- certainly, the grounding foundational element of this. I would say a couple of things from a sale versus spin, no assuming valuations are obviously in a comparable place. Number one, the sale results in more cash earlier, if you will. So in a scenario where we would have a spin, it would actually be some type of a retained stake. We wouldn't view the spin transaction itself as a full deleveraging event. Our intent would not be to load up the Kidney Co with so much debt that would be essentially an [ automatic ] delivering for us that would happen over time. So the sale would result in theoretically, the more cash earlier that would allow us to delever, obviously, and get into an investment cycle at an earlier time. I think the other piece of it, I always describe as all valuation certainty, meaning -- obviously, there'd be a negotiated price versus, again, where a routine stake would have a holding period and would depend on essentially the valuation ultimately the public market as a portion of that deleverage. So those are the ways I really look at those 2 transactions. Again, certainly, I think, as Clare said, we're heading down a dual path from [indiscernible] I personally feel good about the progress on both. Again, we've had, as we said in our March 8-K, we've been -- we've had discussions with private equity sponsors, think we're in a robust process going in that world. And we have over 90% of our legal entities that have been live for the purposes of the spin. So I think we're in a good place for both, but those are some perspectives on that.

Okay. Maybe we can play that out and think about what you're going to do with the cash if you do sell it or if it takes longer, just review your capital allocation priorities and talk a little bit about where the balance sheet is today.

Yes. So number one, at this point in time, our primary capital allocation priority is delevering. And so I think the -- we would certainly look to utilize the proceeds of the sale, we'll just say, particular case would be -- or either for that matter, an opportunity to pay down debt. We have a debt maturity in November of this year that we would be first looking, obviously, to pay down. And then likely, there's a term loan in 2026 that would be a target of to actually pay down as well. So I think for this point in time, the proceeds we would get, we would look to get our balance sheet to a place. We've said 2.75x debt to EBITDA as a target. I've said I think that's somewhere between that and 3x is a reasonable number for us to run this company at. And so I would look at that as our primary capital allocation objective now, and we're using the proceeds of any type of a separation. Going forward, certainly, we would then have a refocus of those capital allocation priorities that really truly starts with investing in our company. And investment for innovation, investment for growth organically, certainly. And then again, in the right way with smaller tuck-in bolt-on opportunities from an inorganic side. But again, really focused on driving growth. Of course, we remain committed to our dividend. We've talked about that. And obviously, would reevaluate sizing that, depending on how the outcome of the separation goes. And then at some point, we would also reinstate a buyback program, certainly for starters to offset option dilution and then from there. But again, focus primarily is investing for our company...

And maybe we could pivot and talk -- you mentioned before that there are a number of places that you feel like the business has good momentum. So let's start there. And why don't you talk about what you feel like is going right in pharma and some of the other recent approvals like the pump. Where are those areas that you feel like you have positive momentum? And maybe talk about what that means for your growth algorithm?

Sure. Yes, I'd say there's a number of areas we have positive momentum. First of all, I'll start -- in general, with our MPT business. There's a lot of good things going in that business. Certainly, the announcement of the Novum pump that is a key element of what we're looking to do going forward there. I think we've talked about the fact that we have some incremental growth from that in the latter part of this year. But certainly, as we head into next year, again, the momentum we feel is some of the new product introductions, particularly Novum and MPT is a great start. I think in our pharma business has had a lot of good momentum. And one of the themes you're going to hear from me from both of us consistently is, we have a good pipeline of innovation and new product introductions. And so that's a theme here. And so pharma falls into that category as well. I think this year, we talked about the fact that there'll be 13 new product introductions. We've already announced 5 of them. And so I think the -- that has generated some momentum in our business, both from a growth standpoint. And obviously, again, some positivity from a margin standpoint. And so I think -- and then I guess I would say the same, obviously, HST, while there's been certainly a challenging first quarter, we certainly do see some momentum in that business. And as we look to go forward as that part of our company as well, from a new product introduction standpoint, we have some really interesting and exciting things going forward in that part of the company as well. So I would say that. And certainly, Kidney has performed well. I mean they had a strong first quarter. Their acute business has been both from a growth and a margin standpoint really positive. And so a lot of positives there. Anything you'd add to...

No, I think that's perfect.

Maybe I'll take through each of those with a little follow-up question. So first on pharma launches. Could you talk about how big those new products are in aggregate? What's the market that you're targeting? And what could we expect that in terms of the growth contribution?

So I'll take that. I think again, collectively, these are going to add in 2024, over $100 million in sales for 2024, and we'll continue to grow. And one of the other things as we look at the portfolio, what we're seeing is that it also brings some of our other premix because, again, most of these launches are in kind of a ready-to-use format, looking at some of these differentiated technologies that we have. So I think that's what we're really focused on and will bring a lot of those products coming forward. It's a little hard to talk about market sizing for these because, obviously, they are all generics. And so what we are competing with is the [ violent AMP ]. But basically, what we're looking at is charging a slight premium for the ready-to-use because we believe it does result in workflow efficiencies for the hospital setting. So we'll have several this year. I think we'll have a similar cadence of 10-plus new product launches next year. And so it's about carrying -- as we continue to broaden the overall premix portfolio, it should carry through to as well as hassles order more than as we increase the breadth of our overall offering within the space.

And you touched on the pump approval as well and talked about some incremental growth that we could get from that. Your pumps have already been doing well even without the new products. So maybe talk about what Novum adds in that incremental growth? And looking at more about the pump market in general because there is a lot of competitive launches going on at the same time, and there's been pent-up demand in that market.

Yes. So I'll start, and then, Joel, if you want to add in anything. We are very excited about Novum. Obviously, this was a platform that we've been waiting for. We had the syringe approved. Now we are adding the LVP. The LVP is the largest market size out there. But what this really allows us to do is really build around the Novum platform within the hospital, within the Enterprise IQ, which is the gateway with it. So we'll continue to build out our overall portfolio between MPT and HST. So it's really about how do we continue to innovate and Novum allows us to do that. And again, Novum is the latest pump out in the market. It has some of the most advanced safety features that are available and has our Dose IQ safety software as well. So we've talked about the fact that with Spectrum, we were doing really well. Now we expect to do even better with Novum. Now you've made a point, I do think that there is a period of pent-up demand that is out there in the market right now. And so we're very pleased to have Novum and be able to offer that along with Spectrum to our customers. So we are in those processes right now. We'll continue to kind of build on that momentum. I believe this year, we'll end the year strong with Novum, and we'll take that into 2025 and continue to build off that.

I think if I just could add 2 things. I think one of the things that also -- I think we find [ Fortis ], if you will, from a timing perspective. Certainly, it took time for us to get to this place where the pump has been approved, obviously, longer than probably any of us would have liked. But at the same time, as we go through the negotiations with the IDMs as part of the GPO negotiation, the timing actually works pretty well in the sense that we now have this pump available to actually be able to have as part of those discussions. And as there's certainly some replacement cycle timing coming up here over the next couple of years, people make decisions on that. Again, we certainly do feel actually feel really positive about the fact that the pumps available. As Clare said, it certainly sets us up on a platform of some, again, opportunities for connectedness and the timing of the negotiations of some lower -- the IDNs actually, I think works well for us.

I mean, maybe that's a good transition then because it has been a big focus for investors. You talked about a lot of these contracts that you've had coming up for renewal and going through negotiations to try to get either price uplifts or more volume. And I guess, a, maybe talk about how the pump plays into that, but also if you could give us any update or color on how those negotiations are going? And then what kind of financial impact they could have?

Yes. So from a GPO standpoint, keep in mind just for the audience's context, 2 of the 3 largest GPOs were actually up for negotiation this year. The impact of this will start in 2025. But we've had successful negotiations with 2 of the 3 largest GPOs. The third is not actually coming up for renewal until the impact will be likely in 2027. So that's why only 2 of the 3. But the negotiations with the GPOs went well. You did -- we've had some successful opportunities to take some pricing out of this. And so the -- what now happens is the GPO negotiation essentially is a hunting license for them going and actually negotiating with the individual IDNs, and we're in the process of doing that. I think the -- we certainly feel encouraged both from the perspective of where we had some opportunities to take price. And where we have, again, that will ultimately translate into both pricing and volume. Now the -- I guess the other thing I would point out is we -- some of those negotiations happens, the other success I think we had out of this was the ability to add what I'll call escalators in the contracts that allowed for in the event that there was some type of supply chain shocks or something that would drive and ultimately, a cost of goods up. The ability to actually have indexes that allow us to take some of that pricing in a way that we have a lot more flexibility than we've had in the past. So that's a positive. Now that doesn't mean there's a floor, so it doesn't go down. But where we do have things that are the cost to the supply chain or whatever other perspective go up, we have the ability to do that. So overall, a successful negotiation. The negotiation of the IDNs will likely be -- we are targeting that to be completed by the end of this year. And again, some of the impacts we've talked about would start in 2025.

And can you help size that at all in '25 and through 2017? How do we think about the potential impact of the negotiations playing through?

Yes. I mean, we've -- so this year, we are -- we have -- pricing is positive for us this year, and we expect pricing to be positive next year. What we've said is we're going to -- we're not going to be specific with these contracts. We'll talk about how pricing contributes to the total entity, which, again, for this year, it's north of 50 basis points positive for us. We'll give guidance on 2025. But I think we do expect as we go into 2025, pricing will be positive as well.

Great. And Joel, you mentioned before some of the challenges with HST, as we're calling it out. And so maybe you could just, a, unpack what the challenges were in Q1? And talk about kind of the road to recovery there and also some of the underlying momentum that you see in that business?

Yes. So I'll say a couple of things on this. So I'm going to bring HST down into the 2 components. It's obviously frontline care and then the CCS business. And so from a frontline care perspective, there's a few things to kind of keep in mind here. One, from a macro standpoint, there have been some softness in the primary care space. We've talked about the fact that there's been a slowing of new construction start-ups. There's been some -- I'd say some timing elements of what reimbursements were stopped in June of last year from some of the COVID reimbursement. And so there's been some timing elements that I call it, just on a macro basis, that have contributed to some of the slowing on that. We also talked about the fact that we had some operational issues as it relates to this. And then -- and one of this is primarily focused in Western Europe. So I want to be clear on the specificity of this. We had some quality supply chain challenges that we self-identified in Western Europe that -- we didn't lose the orders, but we weren't able to ship some of the orders that has been resolved. And so we anticipate some of that resolving itself from an order perspective. But between those macro issues and some of the things that can operate that specific operational issue that was really some of the primary drivers from FLC's perspective. Again, we do anticipate some continued recovery in the primary care space, but that is going to take a bit of time. From a CCS perspective, again, I look at that as well as there's really both a kind of macro, and then again, I'll call out just a couple of specific things from an operational perspective. From a macro perspective, it's really more of a, I'll call timing and phasing of orders. This business is a little more lumpy from a demand perspective. Here's the good news. We have a strong order book. And in this business, our orders translate into shipments very consistently. Timing is sometimes an element to that. But I think the orders we received in the first quarter came later than we anticipated them to come in. They did come in, but they came in later, which has obviously prevented us from shipping them though in the first quarter, which is some of the timing element that you see there. So there is a piece of that. And so I think the -- there's -- some of that was kind of phasing. There's also just a phasing and installations of some of the equipment that we saw. From an operational perspective, the primary impact in the quarter was related to the fact that we actually are in our work to consolidate plants. We actually consolidated 2 plants in that area. One was in Massachusetts, one in Mexico. Consolidated that into Mexico, the execution didn't go as well as we'd like it to. Again, which caused additional distribution costs as well as part of the margin impact. That has also been worked through. We're continuing to resolve that. And so again, there's -- it's a very kind of a specific operational issue that we worked to resolve. And so bottom line is, in this case, we certainly -- we do see continued momentum building in that business. It's a kind of -- I'll call it a ramping impact over the course of the year. And so those are some things that we're working on specifically in that business. One final thing I'd call out, [ affected ]. One of the things that say culturally that's been existed in that business from a sales force perspective is they typically been incentivized on an annual basis, meaning a lot of what they're paid on was focused on what happened during the year, not necessarily what happened during any given quarter. And so a salesperson, maybe I didn't care if it shifted in February or August. Obviously, in our world, that stuff doesn't matter. And so some of the work we're doing actually is working through and changing some of the incentive programs that actually has more of a quarterly focus than it is this large in annual lump. You've seeing that business historically ramp until the end of the year. You're still going to see some of that this year, but we're continuing to work through that. So anything else you would add there?

No, that's perfect.

Just being cognizant of time, I did want to ask the audience if there's any questions before we wrap up here in a couple of minutes. I have a couple more questions myself. But just to give anyone a chance here. Going twice. Okay? No. So I just want to go back to the HST conversation. With all that said, all the challenges that you've worked through, you talked about some recovery in Front Line Care. What should investors expect for the growth rate of HST this year? And what do you think the more sustainable growth rate is for that business going forward now?

Yes. So for this year, we guided to approximately flat for this business with growth really accelerating in the second half of the year. So the first half of the year will be depressed given some of the factors that Joel mentioned, really accelerating as we get into the second half of the year. And the goal is to build off that momentum from the second half of the year. We have several new products launching in 2025, both within Front Line Care and CCS. As Joel mentioned, we have a great order funnel. And so I think that as -- obviously, we will anniversary some easier comps in the first half of next year as well. So that's the momentum that we think we'll take into 2025.

And you updated this a couple of times. Maybe you could just talk about what this all means for your weighted average market growth now? What do you think that the core business grows ex Kidney Co, I guess?

I'll start. So what we've said is that our current weighted average market growth is around 3% to 4%. Our goal is to continue to increase that and through really innovation, new product launches. And again, from an inorganic standpoint, when we do -- when our balance sheet and we've addressed the debt load, we are looking at some smaller tuck-ins and things like that to continue to build on that. But it's going to be a combination of inorganic or inorganic innovation. Really focused on those higher growth opportunities within our business and building around them, particularly as we think about just the overall digital landscape and our position within the hospital, having that corner store there and really building around that. So that's the goal. It is to move it higher. We have successfully demonstrated an ability to grow in excess of our weighted average market growth. So we will look to continue doing that. So both one, growing excess of that, but also increasing our weighted average market growth over time as well.

Yes, that's certainly our objective. And I guess the other thing I'd add to that, Clare kind of said this earlier, with a focus on those areas that are also not only focused on accelerating growth, but also expanding margins. I think the ability to actually focus on those areas that do both is it's not just one or the other. It's something that in case all cases, we're focusing on driving both.

Well, I think we should probably end there. Keep everybody on time. But thanks so much for your time, Clare and Joel, and thanks for your interest in Baxter.

Thank you, everyone.

Thank you, all.