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

Good. All right. Welcome back. I'm Larry Biegelsen, the medical device analyst at Wells Fargo. And it's my pleasure to host this fireside chat with the management team from Baxter. With us, we have Joel Grade, the CFO; Clare Trachtman, Vice President of Investor Relations. The format is fireside chat. If you have a question, please raise your hand. Joel and Clare, thanks so much for being here.

Thank you for having us.

Thanks for the opportunity.

So yes, let's start with Vantive sale, which was the recent news, Joel, you announced the sale of Vantive to Carlyle for $3.8 billion. What made you decide on a sale versus a spin? Why is that better for shareholder value?

Sure. Yes, thanks for the question. And again, thanks for everyone's interest in our company. I'd say a couple of different things. Number one, we certainly wanted to make sure we were at a place from a valuation perspective where the -- our options were, I guess, say, in the right place. And I feel really good about the process we went through in order to get to this. We certainly -- we started out, obviously, thinking it was a spin. We obviously then had interest from private equity that we announced back in March. And we had a very robust process that got us to place where I felt really comfortable with where we landed from a valuation standpoint. And then why the sale has also really plays in a couple of different things. Number one, we get cash earlier. There's an opportunity to deleverage more quickly to get to a place where we can utilize our balance sheet better more quickly. And then the second piece is really around what I'd call certainty of valuation. Obviously, we -- the spin option would have actually had some part of a retained stake that we would have had. And I think just given some of the volatility in the markets and some of the I'll get questions around, again, from a kidney standpoint and some of the things that have gone through there. I think there's a certainly a valuation, a lot of sale process that certainly we felt better about. And so I think in the end, all those factors contributed to sort of why we ended up where we are, and we feel really good with the end result.

That's great. So can you talk about the time line and upcoming milestones, including updated financials and things like that?

Yes. So a couple of things there. From a closing standpoint, certainly, we'd love to get this done in 2024, but it may end up drifting a little bit into 2025, purely due to regulatory reasons. Certainly, there's nothing else that would be in the way of closing the deals other than just we're in over 30 countries from a regulatory standpoint. And so that may just take some time. But those are some of the key milestones. We will provide -- planning on providing 6 quarters of information that gives a perspective on continued ops to discontinued ops. We'll actually plan on doing that prior to our third quarter earnings release. So that's a little bit of a perspective on kind of, hey, what does this look like? That's a timing perspective there.

So is that non-GAAP P&L as well going back to 6 quarters?

Yes.

It will be that, yes.

That would be helpful. So Joel, in broad strokes talk about the growth strategy and financial profile of the remaining Baxter post-separation?

Yes. So a couple of things there. I think one of the things that we find ourselves in a place with our post-separation is that we are a more simplified organization and an organization that has the ability to really focus, focus our investments on those things that drive innovation, that drive growth. And so I think what you'll see is a key focus on innovation and new product launches. I think this is one of the things that's going to be a key growth driver for us and not only on our overall top line, but also some of the expansion of our margins as well. I think the -- we look at really across our businesses. Obviously, we've had the Novum pump that we anticipate to continue to be a growth driver in MPT. We've had -- in pharma, we continue to have new product launches in our injectables portfolio. HST perspective, we look to that as also an opportunity to really have, again, a set of new product launches over the next number of years that's going to drive that level of growth. And so certainly, a focus overall, again, on growth, on continued expansion of our margins on converting cash, again, free cash flow conversion are really the areas that I think about focusing on in a more nimble, focused, simplified organization.

All right -- and Joel, you've been at Baxter. I want to dig in more to RemainCo, obviously, later in the conversation. But you've been at Baxter now, I think, for about a year?

Yes, 10 months.

So what excites you the most? And what is your focus now?

Yes. I mean, number one, what excites me the most is a little bit back to what I was just talking about is the company has done an amazing job of working through some really transformative significant opportunities. In January 2023, we talked about the idea of selling the BPS of verticalizing the business of separating kidney. And I think where we landed today again, as a place that is a wonderful platform for us to now continue to execute to accelerate growth, again, margin expansion, free cash flow conversion. I really like where we sit as a company today. It's part of what I thought about when I joined this company and those opportunities, again, are really in a good place today. And so I'm really excited about that. I think we can continue to do more things to even be better operationally both from a again, from a supply chain perspective, from a G&A and kind of just back office perspective, I think we can do a continued better job of driving free cash flows. I think -- I recently -- I hired a new shared services leader recently that would -- that's going to really allow us to hone in some of our processes around cash collections from receivables, again, our payable processes and as well as how we manage inventory. So those are some of the things that I'll continue to help us drive as an organization so that we can consistently every quarter, every year, have that type of execution than do the things that we said we're going to do.

Perfect. So let's move on to the outlook for RemainCo. What are we going to call it Clare? Just to call it...

Yes, we're not changing the name, were not breaking news here.

So the remaining Baxter, you know what I mean. And I'm going to do this in kind of chronologically starting with kind of second half outlook and then move into some of the color you've provided on 2025. So I think in the second half of this year, you expect Baxter, the remaining Baxter to grow 4% to 5% and which is a little bit above what you did in the first half, about 3%. So talk about the drivers of that growth and the acceleration in the back half of the year, please?

Yes, sure. So it's -- I'll go by business as well. And so from an MPT perspective, again, we're anticipating some benefit from Novum launch. I think we've talked about the fact that the -- we anticipated originally a $25 million incremental growth out of that. And I think we're a little bit ahead of schedule on that. Demand has been really good. The launch itself has gone well. I think we find ourselves in a really good place from a product availability perspective and so we anticipate that contributing to our second half growth. From an HST perspective, I think the -- we've talked about the fact that we've got a really strong order book of things in our CCS business. And so we do anticipate that as a continued incremental growth trajectory, particularly in the third quarter. We've got a little bit of a tough comparison for the fourth quarter because we had an extremely high level of activity in that business last year in the fourth quarter. But again, for the second half of the year, we continue to see that as a positive trajectory. Front Line Care, there's still some challenges in the primary care markets, but we do anticipate that continuing also to have incrementally positive movement throughout the second half of the year. I think even returning to growth probably later in the year as we head into next year. And again, from a pharma perspective, on the put side, continued benefits from some of the incremental product offerings that we've launched this year. We'll probably have by the end of the year, 10 of them in our injectable space. Somewhat offset a bit in the fourth quarter by what I'll call out, probably slower compounding growth. But those are some of the kind of the key drivers as we head into the second half of this year and then into the -- into 2025.

That's helpful. Normally, I wouldn't ask about it, but there's a little bit of a difference between your Q3 expectation and Q4. Did you -- you sound like you touched upon some of those factors like compounding the guidance for that remaining Baxter's like 5% to 6% for Q3 by our math, maybe 3% to 4% in Q4?

Yes. It really is related to -- I guess I'll say a couple of things and if there's anything I missed, Clare, please add it. I mean, I do think the compounding piece is one of those items. We've had a fairly substantial growth, I'll say, in that space in the first half of the year. It does create a bit of a mix issue from a margin standpoint for us. And so this is not necessarily a demand shift, but I think we anticipate that being slightly slower as we head into the fourth quarter. I think the second thing is the comp that I referenced in terms of some of the CCS business. And last year, I think the growth was -- I think it was around 12% in the fourth quarter, and that's a hefty comparison in that particular quarter. And then the third one is really around -- we're having a little bit anticipating a slower growth in our Advanced Surgery, particularly outside of the U.S. with some supply constraints potentially there and again, a bit of a -- some impact from the surgeon strike in Korea.

Got it. And next year, so in the press release when you announced the sale, I think you talked about remaining Baxter -- growing 4% to 5% organically in 2025. What are the -- talk about the growth drivers. It's a touch of an acceleration over what kind of implied for 2024?

Yes. I think it really starts with some of the ideas we've talked about driving innovation and new product launches. I think some of the growth drivers that we've talked about here as we sort of head into the second half of the year, are part of what we see as well, that's almost a continuation into 2025 and sort of our post-separation era. Again, it really does come down to, again, some of the contributions the pump and sort of the continued solid growth we're anticipating in MPT. Again, areas of -- where we had almost a flat year, we're in forecasting and guiding to a flat year in HST. We do anticipate that being something above that as we head into next year. And then obviously, continued growth from a pharma perspective. And so I think a lot of those trends that we've talked about here heading into the second half of this year really continue to apply as well in 2025.

And you also talked about a 16.5% operating margin for RemainCo for Baxter in 2025. Are we from these financials -- I was just curious, are we going to have a clean kind of apples-to-apples comparison for '24 to understand what the base of that 16.5%? No?

So I wouldn't go all the way to Queens it was probably the way I would start there. We purposely guided the 16.5% at the end of the year is what we want to be a really clear view on kind of our new base business heading in there. Now the challenge from a 2024 perspective, you're essentially in a place where you've got a full stranded cost portfolio that doesn't have any impact from TSAs, that doesn't have any impact on essentially any of the cost reduction activity in it. And so having continued ops basis, it's really messy on an apples-to-apples comparison. I hope there's a way to do that, but...

That is exactly right. Yes.

There's no way for us to determine how conservative or aggressive that 16.5% is really.

Yes. And I guess the one thing I'd say is it's -- in some ways, it's actually 17.5%, but we've actually talked about the fact that there's 100 basis points of dilution there as it relates to kind of the net impact of stranded costs of TSAs as well as the margin dilutive impact from the MSAs -- because keep in mind, the -- what we've talked about is a $350 million revenue increase from MSAs is actually not in the 4% to 5%. And so therefore, again, there's a dilutive margin dilutive effect that's part of -- but 17.5%, which actually does turn back into the 16.5%.

Got it. And just I'll throw it out there. I mean, just to see if there's any reaction. But when we added it all up, we got to about EPS of $2.53 for remaining Baxter for 2025. Any reaction to the math? I mean, you've seen numbers, you've seen what people put out there. Are people missing anything?

Look, we haven't guided EPS yet at this point. So I guess I don't -- there's really not probably a lot to say there. I don't know, Clare, if there's anything...

If you saw any major disconnect. I assume you would want to call it out?

Yes. again, we'll get to a place where we'll actually guide the EPS on that. And so at this point, we're not prepared to comment on that.

Fair enough. And then margin expansion, how are you thinking about margin expansion beyond 2025, you're going to have -- you did talk in the press release about the 100 basis points of stranded costs and the TSA and MSA, that going away by 2027. So that should help. How should we think about margin expansion going forward?

Yes, so let me just speak specific and clear on one thing. The -- what we said is we're going to actually eliminate the stranded -- we anticipate stranded cost and the TSAs related to that by being gone by the end of '27.

And that's 100 basis points?

No.

Yes. I mean that part of it is part of that. But the -- and there will be MSAs though, that will still go beyond 2027, potentially.

But the 100 is...

So the 100 basis points is a combination of the impact from the MSAs and the stranded costs net of the TSAs. So it's both of those factors.

And what goes away by -- 100 basis points goes away by '27?

The stranded -- the element from the stranded cost, so that portion of the 100 basis points, that's related to the stranded cost goes away by the end of 2027.

And what portion of the 100 bps is that?

So we have said the MSAs is a little over half of the 100 basis points.

Okay. So you have 40 basis points, call it, that goes away by 2027?

Yes. The MSA impact will be reduced by 2027, but it will still be part of the overall base by 2027, because some of these MSAs extend for multiple years.

But going back to your question in terms of the margin expansion itself. And so yes, the stranded cost is obviously a part of that. But we also -- really a few things. First of all, as you said, the 4% to 5% does represent some level of growth that is over and above what we've had. And so certainly, volume leverage on that is an element that absolutely helps expand our margins as well. Certainly, the new product launches, we anticipate those being margin accretive as part of our growth as well as, obviously, the margin expansion. I think the -- from a -- we -- certainly, in 2025, we've talked about the impact of the GPO renegotiations in MPT, that's going to have a pricing -- positive pricing impact. I think after that, pricing, think about it as kind of flat to slight improvement year-over-year. And then we continue to anticipate a positive mix benefits. Again, we've had some headwind on that as earlier part of this year, but that's something we're continuing, we think we'll be continually improved part as we head forward. And then finally, ISC. We've had, again, substantial progress on margin improvement programs in our ISC business. This is something we actually think we have, again, a nice road ahead for continued improvement in that space as part of margin expansion. So I think you combine all those things, again, it's a good story for the opportunity to build, grow and obviously expand our margins as we go...

So when you sum it up and you're at 16.5% next year, what -- where do you see margins going over time? Or what do you think the cadence is? Is it 50 plus? Is it 50 to 100? If you can't quantify it now, I understand.

Well, we have kind of -- we expect annual margin expansion. I think Joel referenced several levers that we have to drive that margin expansion going forward.

Yes, we haven't actually quantified that at this point. Something as we would have eventually have an Investor Day sometime in first half of 2025 that actually allow us to actually talk further about some of that.

So Clare, do you have a goal of like 50...

Previously, we've had that. I mean, the reality is just given the levers and given some of the reduction in the TSAs, Larry, it's probably fair to say it's above that.

It's -- you said it's fair to say it's above.

The 50 basis points. Yes, that was the prior LRP that we had. Yes.

Fair enough. And then pricing, Joel, when you said flat to slightly up, I can't remember exactly what you said, was that inclusive of the renegotiations? Or that the renegotiation of the GPO contract would be on top of it. So it could be better?

Yes. I would look at what I -- that's sort of flat to slightly up is kind of like a normal year ongoing view of pricing, I think, in the year. For example, in 2025, we have renegotiated our GPO agreements we are anticipating -- we've talked about the fact that this year, we had 100 basis points of improvement outside of the U.S. in that space. We're talking about 100 basis points within the U.S. for our MPT business as it relates to the GPO negotiations. And keep in mind, we had 2 out of the 3 of those contracts that we negotiated this year. There'll be another one that will be in 2027, that will be also renegotiated, but that 100 basis points that we're talking about for...

And to be clear, the flat to slightly up, does it get even better? Or is that a bit....

I think it's beyond 2025 -- that's more like a 2026.

Okay. Understood. Okay. And then the margins, Joel, for the second half of the year, I know I'm going jumping around kind of chronologically here. But you do have a 200 basis point margin improvement in the second half of the year, I believe, versus the first half. What are the drivers there and just confidence in that?

Yes. I think some of the drivers in that, again, we had, I guess the undershot margin in the first quarter, particularly as it relates to HST and so I think some of that is actually what I'll call continually expanding margins in our HST business over the course of the year. And so that's one of the main drivers of that impact. And so -- and I also think, again, as we -- the prior year, we had some pretty large cost impacts that we've had that we're actually going to be yield in the second half of this year moving away from -- so I think we'll -- that continued trajectory of our margin improvement is I wouldn't call it seasonal, but it's actually going over the course of the year that we had some impacts in the first half, we won't have again in the second half.

So feeling good about those margin in the second half?

Yes.

That's good. And then moving to MPT, Medical Products & Therapies, Novum IQ, it sounds like it's going well. Yes. I guess maybe just talk about just the receptivity that you're seeing in the market for that product. It's new pumps, sometimes like it takes time for hospitals to get comfortable with a completely new pump. Why -- it sounds like you guys are having some early success, what's resonating with customers?

Yes. I mean, I actually think we're off to a really good start in that. I think the demand has been at a level probably even above what we expected. We've had kind of a mix of wins between our existing customers as well as some competitive wins. We originally talked about the impact of that starting in the third quarter. We had -- got a little bit of early start on that and had some impact the second quarter as well from Novum. And so I think for all those reasons, I think the demand side is really good. I think the product availability is in a really good place. We reworked a number of the -- our inventory that we had on hand and also manufacture new products, so I think in order to supply that demand, we've actually got ourselves in a good place from that perspective. I'd say the other thing, too, that I think is kind of something we haven't talked about that much, but I think it is an important part of this is that, that product was actually launched in Canada for a couple of years. And so we actually have the ability to -- if there's some bugs or some tweaks that we had to do within that product. We got a lot of that taken care of by the time we actually launched it in the U.S. So I think the reception of that has been really strong. Again, the launch itself has gone well, and the demand for the product has been outstanding.

And what's resonating with customers?

Yes. I mean I think that the features of Novum, it has over-the-air firmware updates that we can obviously apply those remotely. So it allows for many of the pumps to be remote serviceability. So 95% of our pumps will be able to be serviced that way. It's also, we have the standard platform between the LVP and syringe, which we didn't offer. We have the most advanced safety features in the largest drug library out there, which, again, any changes to the drug library can be applied wirelessly as well. That those are a lot of the features that resonate. Again, we also talk about we look at it just overall, just the value and quality proposition that we provide to the hospitals as well across the portfolio.

Got it. That's helpful. Joel, maybe getting to move on to HST -- what is it, the Front Line Care, FLC. Talk about the issues there. You touched upon it earlier, but when do you see turning the corner?

I mean I think the issues we've had in FLC have been really around the primary care markets. And it's, I'll call it, back roll things. I'll just touch on a few of them. And I think there's been some slowness in government orders. I think there was a fair bit of COVID funding that fell off in the second half of 2023. There's been a slowdown in construction starts. Some of the big-box retailers that actually had put some of those types of businesses within their box, have actually been exiting some of that due to a shortage of primary care physicians. And so there's kind of a conglomeration of macro factors that have had some impact on that. I think the positive, though, from our perspective, again, we have not lost share in that space. I think there is a certainly in anticipation that the business itself will start to turn. We've had incremental improvements as the quarters have gone by. And I think by the end of this year, anticipating being back to a place where we're actually in slow level of growth and then beyond that as we head into 2025. And so I think that's really been a bit of a softness, almost, I'll call it a rebalancing that's happened in that business in 2024, that allows us to continue now back to growth in that space in 2025.

That's helpful. And pharma was a standout in the first half, 11% growth but you only expect implied low single digits, call it, 3% in the second half. Is that all because of compounding?

That is primarily because of compounding. The other part of it that we've had some slowness in our businesses and our inhaled anesthetics. That's been something that's been slowing. And I'd say has probably accelerated a little faster than we thought from a slowness perspective. But really, the puts are the positives of the new product launches we've had in the injectable space. And again, the compounding is something we're anticipating to slow down. And again, that's really more on us than it is on the market. I think the -- to some extent, that business for us is all outside the U.S. in select countries outside the U.S. And there's a very high level of demand for that service from our perspective. But again, it's a margin dilutive, if you will. So I guess, growing at a really accelerated rates, not necessarily what we're trying to do there.

I was going to ask a follow-up on that. Compounding, I know it, compounding is a low-margin business. Why did you just met touched upon it? What's the strategic rationale for Baxter to stay in a business like that?

Well, number one, it's still -- it's not a small business in our portfolio. And so I mean, I think the I think there's -- by exiting that would certainly be -- would leave a stranded cost element of that. It's one thing to say it's low margin, but it's also, again, a piece of -- a decent piece of business. That's number one. I think the second part is -- just strategically, I think in certain -- the parts of the world that we're in, having that business is actually an inroad, if you will, to some of those hospital systems and medical systems to have access to other things that we then sell. And so I think it's I'm not sure it's quite as easy to look at it just purely in isolation and say, "Hey, we should or shouldn't do that." I think it's a lead in for other things that are part of our portfolio.

And so when you're talking about...

No, I completely agree.

When you were talking about the pharma launches, I was saying to myself, we don't have great visibility on these pharma launches. So it's pretty difficult to model. It's -- have you guys thought about how you could kind of enhance the visibility to some of these new injectable launches so people can have an appreciation of kind of what the growth trajectory might look like? Because it just we see it go -- it's not easy for us to have visibility, right, on what's going to -- what's happening?

Again, a lot of these, Larry, are already generic injectables. So it's not -- these aren't pharmacies or branded pharmaceuticals where there's a market. I'd say a lot of what the team is focused on right now is existing molecules that are already generic that are in a vial or amp presentation and putting them into a differentiated format like a premixed injectable. So a lot of it is filing those types of molecules. We had a lot of success with norepinephrine. We put norepinephrine in a premix and that's been one of our growth drivers. And so those are the types of products we'll launch -- so it's a little bit about the steady cadence of new product launches, driving hopefully close to mid-single-digit growth for this business, which is volume gains more than offsetting any sort of annual price erosion that is anticipated for these types of products.

And so if I could just add one thing to that. I think the other part of it though, too, is that, again, this year, we've launched 7 new molecules. And I think, again, by the end of the year, likely to get to 10. I think next year in 2025, we're also forecasting to get to 10 launches. And I'd say that's an uptick in the number of those type of product launches relative to where we've been in the past. So I understand and appreciate the comment. I just want to clarify, though, there is an element of this that actually has resources moving towards that, that actually has accelerated the growth in that space.

Okay. 5.5 minutes left. I wanted to ask about capital allocation. Before that though, just one other question on -- so back to Novum IQ and so the U.S. infusion therapies and technologies was a little soft in the first half. That -- I assume that's the line where we're going to see an acceleration from Novum IQ?

It will accelerate in the back half in the U.S., yes.

And big picture, historically, U.S. infusion system sales have been about a $600 million business for you. Should we -- when we look back, when you launch a new pump, that business grows at a double-digit rate for a number of quarters, Clare, if you think back with Spectrum IQ and -- is that how we should think about -- if people are trying to think, well, what is Novum IQ contribute to Baxter? How do we think about it? We know the $25 million, but it's probably some of it cannibalized.

Yes, Novum sales are higher than $25 million this year -- that's incremental.

So is there any way -- if people are trying to say, what does Novum IQ mean to Baxter on a go-forward basis? Did I -- the way I described it, is that the best way?

I think Novum -- the launch of Novum gives us confidence in achieving above-market growth for the next couple of years.

Within?

Within the total segment, within MPT,, in total.

MPT, in total. And the market growth is?

Well, market -- the -- we're -- I'd say we're in an accelerated upgrade cycle right now. I think there is pent-up demand within the market. I mean, because overall infusion systems market, Larry, does not grow. I mean it's a replacement cycle. So I think that there is pent-up demand, which will lead to, I think, several quarters and potentially several years of grow faster than what you would normally have on an annual basis.

Okay. Fair enough. Yes, you understand that?

No, I understand. Yes.

Okay. Cool. Joel, capital allocation, the dividend. You talked about reevaluating the dividend, at least in the slide. What -- maybe could you shed some light on what you've meant by that in the slide?

Sure. So number one, to reiterate, we are committed to a dividend post separation. So let's just start with that. What we talked about is essentially resizing the dividend. I'd say, more properly reflect the size of our business. And so we plan to actually announce that in December for our January dividend. And so we haven't yet come out with and said, "Hey, what does what are the specifics of what that looks like from an actual size perspective," but certainly something we're giving a lot of thought to and more to come on that.

I mean the way it's been played back to me from investors as well, it's about 20% dilutive Vantive ballpark, that's our math. I mean, investor math, if you will. And so that's like the back of the envelope, while the dividend, that's what people are assuming the cut will be. Is there anything you would add to that in terms of that line of thinking?

Yes. Again, Larry, I'll look forward to giving you that information. We just haven't gotten -- we haven't gotten a place we're ready to share that yet.

Okay. anything else on capital allocation when you'll be capacity for M&A and things like that?

Yes. I mean I think the key point there is, number one, we talked about the idea that we're going to get back to a 3x leverage or below 3x leverage by the end of 2025.

And you are now at?

We're in the low to mid-3s at this point. And so -- and what we plan to do there that once we achieve that is get to a place where we have a very balanced capital allocation. It's -- that really starts with innovation, investing in innovation, investing for growth. We've already talked about the dividend. We also -- at that point would certainly reinstitute a buyback program that would certainly start by offsetting dilution and then obviously opportunistic from there. And so -- and then from an M&A perspective, I think the -- I would not be looking for us to be doing any type of large transformational deals. Over time, we would -- hopefully we're on the right to do some more folded tuck-in type deals, I think that would enhance our portfolio. But those -- but that's the way I think about it. I would also say this. I think running the company around that 3x leverage is actually an appropriate way to do so. I think when we -- I think it allows for a balanced capital allocation and actually good. It will get balanced between investing in our company, returning value to shareholders. I think that would be well supported by our generation of cash flows.

Clare, I know you talked to a lot of investors, what didn't we talk about? You've gotten a lot of questions since the Vantive sale what else do you want to follow to that?

I think we hit on the main questions that we've been receiving. And we've just done 2 days of meetings, and I would say -- your list of 34 questions fairly addressed most of the questions that we're receiving.

I'm glad we got through almost all of my 34 questions, all of it. Perfect. Thank you for being here and good luck...

Thank you very much.

Thank you.