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

Okay. We're going to get underway. My name is Rick Wise, Stifel medtech analyst. Welcome, everybody, to the first meeting and inevitably the most exciting and thrilling I bet, meeting of our health care conference. I'd like to welcome Baxter International. Presenting today, to my left, Joel Grade, EVP and Chief Financial Officer; and the wonderful special, my longtime friend, Clare Trachtman, why is Joel laughing, Vice President and Chief Investor Relations Officer. Welcome both.

Well, because I've heard it many times before.

I bet. It's -- but you know it's the truth.

Joel, I thought to start ourselves off, when you first started at Baxter and no reason why you remember this, I was lucky enough to ask a question of you on the first public meeting and you gave me a very thoughtful answer, and I want to come back and revisit that. I said about the business, about your goals and dreams and aspirations. And you talked very thoughtfully about learning the business, accelerating growth, driving consistent execution, identifying growth opportunities, et cetera, et cetera. I thought you're now 13 months into the job. Talk to us about your view -- your personal view of your progress against those starting priorities. And what you feel has gone even better than you thought? Were you frustrated? And then I'll ask you separately about looking ahead to the next couple of years.

Yes, sure. Yes, first of all thank you, and we appreciate everybody being here in and your interest in Baxter. Look, it's been a great first 13 months. I think one of the reasons that -- I probably said this before, but what I -- reason I came to Baxter, from obviously 25 years in the food and distribution industry, I just -- the mission of this company, this idea of saving sustaining lives. And as we've thought about what we've seen in North Cove, what we've seen the things -- that mission has been so embodied by the people of this company, and that's just been a really amazing thing to me. And so I think that incredible passion that this company has for that mission is something else. I think the -- you're right, as we talked about the things that I was most interested in doing with Baxter and I saw the opportunity to do so, is to how do we continue to accelerate the growth of this organization? How do we consider -- how do we continue to drive operational execution in a better way? How do we even further rethink about capital allocation? And how we drive cash to continue to make really smart investments in this company? And look, I think to some degree, all of those have happened. But I guess the way I would almost describe it is they continue to be happening. I think -- as I think about the first year from a cash standpoint, obviously, we certainly focused on debt pay down. And obviously, we had a really, I guess, somewhat walking gear in terms of free cash flow because of some of the impacts of the separation. And then as we head into the fourth quarter, some of the impacts of North Cove that are going to impact our cash flows. And so obviously, that's one of the things that we talked about. I don't know if frustration is the word, but you say, hey, how do we think about better ways of our uses of cash? Look, I look forward to even more of that as we go forward. And I think that's one of the things that I would say is as we head into my second year and beyond, the thing I'm most excited about is, as a company, we have had so many key strategic initiatives that started well before I got here, but also while I've been here around deal. We sold our BPS business. We sold -- we've verticalized the company structurally. We are now on the verge, I'll say, of the completion of the sale of our kidney business. All of those things were some really significant transformational work and obviously caused a lot of change and disruption in the organization. But at the same time, it sets us up tremendously well I think as a more agile, nimble company. And so as I head into this next year, this continued focus on how we grow, how we again become continually more consistent with our execution as a company, how we generate cash, how we then reinvest that in our business are really continue to be ongoing themes and things that I'd be spending every waking moment thinking about to do.

Yes. You said that in the comments last week that the company's going to be more focused on, and you're saying it again, innovation, driving growth and improving margins. Is that our take-home sort of message from you?

It really is. I think as we think about Baxter's future growth, this idea of innovation is really going to be an important part of that. And so again -- and again, in a world that has a more focused, nimble company, in a world that again gives us the opportunity to invest our dollars in those projects that are higher return projects. Again, the great thing about the separation of kidney business for both companies, frankly, is that both of us are going to be able to really focus our dollars and those ideas that are the highest priorities for that company. Vantive certainly will. But here at Baxter, again, that was -- that company had probably half of the ROIC of Baxter as a whole. And so the ability to as -- when that is now on its own, we've got the ability to really drive focused investments in ways that I think we'll do both of those things.

Right. No, it makes sense. And everything you're saying are very exciting to me. And as I said to you before we started, I want to sort of dig -- these are points you made last year. Going to dig a little deeper. And just think to the next level, which is innovation, I mean, how can I not believe in it. But do you have the people on board? Do you have the teams? Do you have the leadership? Are you already underway? Is this all funded? I know that the Vantive separation is taking a lot of time. But where are you in terms of really concretely making all this happen?

Yes, I would say we're actually well down that path, and what do I mean by that? So if I look across our businesses, starting with MPT, clearly, our Novum pump has become one of the key focus areas of that business and one of our key growth drivers. I think, it's interesting, obviously, that to some -- took longer than many of us would necessarily liked it to in order to go to market. But the timing was somewhat fortuitous as it turns out in the sense that we're in the middle of a replacement cycle on a lot of the pumps in the marketplace. There is a -- we had an opportunity, as you know, to renegotiate 2 of our 3 GPOs and actually now go to the IDN negotiations with these pumps. Demand in general for our pumps has been really strong. We've had last -- in 2023, we had double-digit growth in pumps. This year, our pump growth has been close to 50%, both from a Novum perspective, obviously, as well as our Spectrum pumps. And the pumps themselves, both from the LVP pump, the syringe pumping, in all cases, we're having some very strong growth. So that's a strong innovation in that business. From a Pharmaceuticals perspective, we talked about the level of growth and introduction of new products in our injectables segment has actually significantly ramped. So from our historical levels to this year and as we head into the future, as you know, that -- those new product launches are critical in terms of maintaining margins and expanding in the pharmaceutical space. And that's something that we have a robust pipeline of products that I think our leader in that space is very focused on, driving these type of outcomes. And so again, that's not something we have to ramp up. There's a significant amount of work done there. And then in HST, again, this is an area that I actually look at as one of the key drivers of innovation in our company in the future. And this is part of the sort of the thesis of Hillrom when it was acquired. You talked about connectivity. You talked about some of these other areas of new product introductions. And again, the -- our R&D spend has continued to be very consistent and again had slightly elevated. And in HST, this is an area where I see our -- really, again, interesting and exciting opportunities as we go forward in 2025, then obviously certainly beyond that. So -- and again, these are not -- we should think about getting started all of this. This is work that's being done. And again, I think we're -- I'm really excited about the possibilities going forward.

That's really encouraging to hear it. And we're going to come -- I'll come back to some of these points. Post the kidney separation, the Vantive spin, talk to us about RemainCo -- I mean, ongoing Baxter from 2 vantage points. One is the portfolio that will remain your go-forward portfolio, are you good to go? And how big a priority is M&A going to be? And how realistic is it going to be for you to pursue that M&A?

Yes. So number one, the portfolio that you see from the RemainCo or post separation, I really -- I do think is the foundational building block for our company going forward. And so that doesn't mean that there's not going to be, I'll call it, tweaks. Markets to be in, or be out of things along that line. But I -- but as far as what I would call transformational or significant alterations to our portfolio, I don't see that. And I think this is -- in either direction, so to speak, I think we're in a place right now where we have a good foundational base for our company. To your second question on the M&A side, one of the things that I've said is we -- as we continue to get our balance sheet into the -- towards our -- at our target leverage point, the 3x, M&A will play a role. But what I would not expect is some large transformational deal in this company. But what you should expect is, over time, things that are folding tuck-in deals that allow us to accelerate certain product lines or allow us to accelerate, places where we can grow the WAMGR's of the markets that we're in, in areas that really focus things that again are, I'd say, a better buy versus a build, but those are -- but that's how I see that, portfoliowise.

Good. And again, a lot of these, we're going to try to -- if we have time to get into a little more. I don't want to say too little about the hurricane and the job -- the brilliant job you've done there because you've talked about it publicly repeatedly. It has been an awesome effort, and it's amazing that your -- you've gotten -- I know Western -- North Carolina very well. And I can't imagine that you've done -- what you've done there, given the geography and placement of the region. But looking ahead now, you've said that there is going to be an impact into the fourth quarter, possibly into early next year. Are you being conservative when you talk about that lingering into the -- you're just trying to make sure you don't promise too much too soon? Or is it really no, no, there's no way it can't -- it won't be impact, won't linger into the first quarter?

No. I think there will be some lingering impact in the sense -- and that's not just being overly conservative. I think -- again, I want to just start by saying, again, we have made just monumental progress moving forward with this. And I think we've said externally, we actually expect all of our lines to be up and running by the end of the year. Now that does not mean we'll be operating at full capacity by the end of the year. But again, just if you saw before and after pictures of this thing and the time period this has happened, it's really actually inspiring to be totally honest with you. But back to your question, I do think, again, there's going to be some lingering affect back to my comment on, we're not going to be operating at full capacity. Now one of the things that I've been really amazed that we've done as a company, we actually have 9 facilities globally that manufacture these products. And so we've utilized a couple of them quite heavily from a redundancy perspective, particularly in China and Spain. And so we've really managed to do a lot of work on utilizing our capacity globally in order to do the things that we have up until this point. But I do think, like I said, between getting the facility completely up to capacity, I think there's going to be a little bit of a, say, a shortage in the network. And we -- I do anticipate some continued softness in the Q1. The thing I would add to that, though, is -- and I know you didn't ask, but I'll say it anyway, we don't see that as a permanent loss of business. I think there has been an outpouring of your customer just support for the work that we've done to actually get us where we are today. And while I do think there is, again, some of this temporary softness as a result of it, I actually feel quite good about our ability to actually recover or if you want to call it, maintain that business from a customer perspective. And again, maybe there's a point where by the end of the year in the fourth quarter, you do have an overlap of some of that business or we'll actually have a chance to pick some up.

And not to overdwell on this, just -- but briefly, as people we go through a difficult experience, sometimes you emerge stronger, the common wisdom says, I mean -- and clearly, you have a renewed appreciation for the quality of our team and everything. But is there any longer-term upside here that you're going to want to -- once you emerge, you're going to be leaner or stronger or the customers appreciate what you did and so there's going to be more opportunity for share? Is there any upside from this painful experience?

I actually think there could be. And we said this at -- within Baxter. This -- we have the opportunity for this to be our finest hour. That was a common theme that we had set as an organization that, obviously, when it first happened, you take a punch in the gut. And then you realize there is -- every challenge creates an opportunity. As we said, this could be our finest hour. And I actually believe that. And I think there is -- I do think the -- I think there is customer upside to this over time. I think the -- our resiliency and our redundancy as a network I actually think is one of those things that made us better in a sense that, again, we had other places around the world that we had the ability to do this, and we actually utilize them in a way that probably was again now something that is a permanent redundant solution. And thank -- God forbid, we have another situation like that.

Got you. Let's turn to the 2025 outlook, which I know you're anxious to revisit. But I got to say, the #1 question I've had relative to Baxter, and I'm sure it's the same for you, has been some skepticism interestingly surrounding the company's ability to grow 4% to 5%. Now -- but I said to myself, ex the hurricane, half of RemainCo Medical Products grew 5% this year. I don't know why it wouldn't be repeated in '25 without -- even without the hurricane recapture, that's 250 bps of growth, I say. Another quarter of the business, pharma has been growing 7% for the last 2 years. And you're basically saying you got another mid-single-digit plus. That's 150 bps of growth. So even if HST, the Healthcare Systems and Technology segment is flat, those 2 segments alone gets you to 400 bps of top line growth. Am I thinking about this in my -- is my calculator broken? Is this too rosy a viewpoint? Are you nervous about your 4% to 5%?

I think you're thinking about that in a very appropriate way. I mean I think the -- actually, we feel -- we actually feel very confident in the 4% to 5% we've talked about. And yes, as you said, there's a bit of a, again, a comp from a hurricane perspective. Again, although there is, just as a reminder, I know I said it before, but there is going to be a bit of softness out of that yet in the first quarter. But generally speaking, again, the -- this last quarter, our MPT business has some real momentum in it prior to the impact of the hurricane. Again, we already talked about it from a pump demand standpoint. But we're certainly anticipating that part of our business continue to grow. And again, our Advanced Surgery business is performing well as well. And so I think there's -- again, hurricane aside, there is a -- there was some real momentum in that business that we expect to continue. From a pharma perspective, again, we -- as you've said, we've had really solid growth in that. And as I referenced earlier, our continued anticipation is our new product rollouts as we head into the next year again, will continue to elevate from where we've been. And I think, again, a lot of confidence in that. And yes, look, from an HST perspective, I would say a couple of things. Number one, we had a -- obviously, we've had a choppy year to say the least in that business. Certainly, that presents an opportunity from a comparative standpoint to have actually some improvements we had in the next year just from easier comps. But the reality of it is if you think about some of the things in Front Line Care and what impacted us this year, our 2023 -- the comparisons versus 2023, and this year were difficult because 2023 had a lot of backlog that had been taking in from what had been a backlog in 2022, some of the government spending has been down this year. And we're really the primary -- or the sole provider, if you will, in the VA hospitals and the government orders have been way down. Some of the things in the primary care space in terms of new construction development, in terms of some of the big box retailers that have been in and then kind of backed out of that space a little bit, the primary care space itself is in a fine place. Like people are going to primary care. And so I think there's going to just be a natural rebound in some of that business as we head into next year. And then from a CCS standpoint, one of the positives that actually happened to us this last quarter, and we've been talking about this much of the year, our U.S. PSS business orders have been really strong, and our results actually in this quarter were really strong. And that was some issues we had earlier in the year that have been -- again, we are -- we have resolved and really have begun a continued strong order book as we head into next year. And so I actually think -- while -- and while we've got some challenges, OUS in that business and particularly on the CCS side, we'll need to continue to work through, I think there's really a lot of reasons to feel good about that as we head into next year. And like I said, I personally feel confident.

That's great. That's great color. And back to the pricing comment about the GPOs and the IDNs and everything. I heard your comments last week, I left a little confused. So I thought the -- from GPOs, there was 100 basis points potentially. And you said maybe you've gotten 50. So I'm a little confused. My question really, and I'll stop talking, when I look ahead to 2025, what kind of contribution will price make? How much will you have used up? And is there more to be had in '26 and beyond from these -- the GPO, IDN process?

So first of all, maybe if I can start just reminding the group that we -- there's 3 primary GPOs. We renegotiated 2 of those this year. The third one will actually be renegotiated in 2026 to impact 2027, so just again to set a little bit of context from that standpoint. So no, what we talked about, and hopefully pretty consistently on my part, but if I didn't, that's -- it's -- we were anticipating 100 basis points of pricing improvement as a company based on the work we've done through...

And we'll see that fully 100 basis points next year or no because it won't...

No, we're anticipating seeing that next year.

Starting January 1.

Starting January 1, yes. And yes. And we've had actually 100 basis points of that this year, which is mostly outside of the U.S. pricing. Next year, we're anticipating that from the GPO agreements inside the U.S. You asked about '26 and '27 and that. From those 2 in particular, it's -- I would say the 2 years are a little more of a kind of cost of living type increases more than they are sort of the more sizable price increase that we're getting this year. The other comment I would just make that I think is interesting about the GPO contracts this year. The other impactful thing from my seat in the stands is the prior contracts were negotiated at a time when our inflation was at a much more, I'll call, narrow band. And so those agreements reflected not as much ability to pass cost along that had sort of spikes or cost increases. In this particular round of our negotiations, we've actually included clauses that allow us to actually in the event there's what I'll call shocks in the system, we have a much better ability to actually pass cost along.

That's great and really important, obviously. 2025 margins, again, a topic of a great deal of interest. Help us bridge from the 13.7% operating margin you're projecting to end this year to the 16.5% you're expecting in '25. Is it volume? Is it mix? Is the absence of negatives? What are the big chunks that are going to get you there?

Yes. Maybe I'll start with the math and then I'll actually get to the answer to your question in terms of those specifics. And so if you -- one of the things that's complex this year as you look at us on a continuing operations basis is that all the stranded costs related to, obviously, the separation is sitting today in an unallocated cost center at our corporate. And so -- and in 2024, just candidly, there's not a TSA impact yet and some of the impacts from our cost containment measures have not yet been realized. So you essentially have a fully loaded stranded cost, which obviously takes our margins to around this 13.7-ish mark. If you then add back what we provided from a stranded cost perspective, 250 basis points, let's call it, that then gets us into -- I'm going to use round numbers right around the 16-ish mark. And then if you add back again 50 basis points related to our North Cove impact, that gets your margins on a sort of comparable basis, if you will, to 16.5% at the end of -- for 2024. Now as we head into 2025, the impacts that we're now talking about that we are anticipating positive pricing impacts. We're anticipating positive impacts from ISC, positive impacts from, again, some leverage on volume, et cetera, et cetera, et cetera, that actually take the 2025 margins up to around the 17.5% mark. But then there's actually a headwind, if you will, as it relates to both our MSAs and TSAs that we're running into about 60 basis points from an MSA perspective. Think about this as sales at a kind of low double-digit margin perspective, which on an operating margin impact is dilutive. And then about 40 basis points from a TSA standpoint, which basically says, look, we're going to be -- think about our stranded costs of about $265 million, maybe a little under half of that is actually TSA impacted. And so -- but that doesn't all happen in year 1. We're not going to fully absorb all of the stranded costs in the first year. So there's, again, about a 40 basis points dilutive effect as it relates to TSAs too. So that takes the 17.5% down to the 16.5% that we've talked about. And so again, that hopefully gives some color on how we sort of end up in that place.

That's great. I was stressed about the amount of time to fill those questions. But as we get toward the end, I think, oh my God, I haven't asked about -- sort of a personal question almost. Look, I followed Hillrom for 7 years or something before you acquired it. I thought it was a great story. There was a pipeline. I was excited when you bought it. I believed the CareCom story from the beginning. And I know there are a lot of reasons why it hasn't lived up to what Joe and now you would have hoped. But when does Hillrom, when does HST become the jewel of the gem that you think? Is it going to take another 3 years of work and turnaround and investment? Is it that far away still? Where are we in resolving it? And maybe just dial it in because of time. Talk about the drivers of better margins there and what's going to make that happen?

Yes. So for starters, I'm going to go back to something we talked about earlier, that's about innovation. I think the -- I think some of what's happened there historically is there's been -- they've been not as timely going to market with some product launches. And I actually think this is an area operationally that has made some significant improvement. And so I think as we -- again, as we head into 2025, '26, '27, there's -- again, the product launches themselves, there will be some really interesting things coming out in 2025 that I'd say the impact of that is more in '26 and '27, but there's some impact in '25 as well. And so I think part of what really takes that company into here is the vision of it, into here's the reality of it, is really truly becoming again, strong and consistent around our innovation and new product launches. And I think there's -- again, there's been substantial progress made in that area. I think one of the things, again, that we also talked about even in some of the things that were challenged in CCS and PSS early in the year is just the utilization of some of the tools that our company brings to the table in terms of how we go to market and how we sell. And I think some of the alignment of sales incentives, I think some of the alignment of -- again, the utilization of really having a view on our order book in a way that's more, again, detailed and consistent than we may have had in the past. And I feel good about that moving forward. There's continued opportunities for some cost leverage as well. I mean I think the -- our integration efforts as it relates to Hillrom still have some opportunities ahead of us, particularly from a technology standpoint. And so I think there's areas that we can continue to leverage, again, our cost structure in a better way that also drives that -- ultimately, that margin profile. But I think, look, when that company was acquired, I think it was viewed as an opportunity to have that as one of our premium margin businesses in our portfolio. I think we absolutely still believe that. And I think some of -- all these steps, both from a top line and bottom line, as we talked about, are driving that company in that direction.

Great. And I'm really intrigued because I think it's so critical. Have the corporate incentives been changed in such a way that you're going to drive this vision that you have? Are the people in place at HST specifically that you trust and believe in to make this agenda unfold?

Look, we certainly -- we have strong leadership in that area, and we have had -- we had some transition in our frontline care leadership and that, again, I'm confident we'll put somebody really strong in that business to continue to drive that going forward. Again, we always, as a company and everyone could use continued enhancements of talent. But I actually do feel good about the leadership we have in place there. And again, we'll continue to grow that as we go along.

Great. We've got like 50 seconds left. And just something you said last week that I hadn't thought about relative to Baxter much was the ASC opportunity. And maybe just expand a little bit more on what percentage of sales is it today? Are you going to, in fact, focus more now? And is this maybe a little hidden opportunity for growth?

I'll let Clare take this one.

Yes. So what I would say is it's a small percentage of our overall sales today and primarily within the NPT space. And we've talked about kind of in our nutrition business, but it is an area that we believe is one of the faster growing, and we're putting the investments behind it to be able to participate in this. I think we've seen care really move out of this acute care setting into these alternate sites. And whether it be the home, whether it be the ASCs, other alternate infusion clinics, we believe we have the right to play there. So it's about getting the right portfolio to be able to capitalize on that opportunity.

In the spirit of growing with the growers, again, that's always certainly where the market is headed in a lot of ways.

Makes sense to me. I think we're out of time. Joel, it's a pleasure to see you finally in person. I appreciate your comments and your thoughtful comments. And Clare said the only budget item that's going to double next year is the IR budget, but I think I'm just...

Exactly, yes, for the investor conferences.

Fantastic.

Thank you very much. I appreciate it. Thanks, everybody.