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

Okay. Thanks, everyone, for joining us this morning. I'm Vijay Kumar, the Life Science Device Analyst at Evercore. A pleasure to have with us Baxter this morning. We have CFO, Joel Grade; and Clare Trachtman from Investor Relations. Joel, Clare. Thanks for the time this morning. .

Thanks for having us. It's great to be here. And thanks to everyone who's interested in our company.

Fantastic. So Joel, obviously, a lot of changes at Baxter. With the renal cell there's a lot of moving parts. It's been the last 12 months have not been easy. But when you preview third quarter, what went right, what went wrong? I feel like some ports came in better. There were some moving parts. Maybe if you could just review third quarter.

Yes. Thanks. So, a lot of moving parts. I think the one thing I would say to that, though, maybe, and then I'll get to the quarter in a second, is that I think what you're seeing here now is almost the culmination and sort of getting to the end of the road as some of the really key strategic priorities that we announced back in January of 2023. That really talked about the fact that we're somewhere really reshaping and transforming the company in the sense that we talked about selling our BPS contract manufacturing. We talked about verticalizing the business. We talked about in the separation of our kidney business. And so I -- while yes, a lot of moving parts. There are also just some really key strategic actions, that, I think, took us down to a place where we could really think about sort of, "Hey, how are we moving forward now as if you want to call it a new Baxter." And so again, I know that wasn't your question, but I just wanted to comment on a little bit of that as it sort of, I think really relates to some of the conversation we'll have today. So back to the quarter, on your question specifically, the -- I think what went well. I would say our MPT business, I would say continuing to perform, yes, I'd say slightly above our expectations. I think the Novum pump has just continued. There's really good demand for that. We have expected, we have had and continue to expect strong growth out of that product. So I think that's been a really successful launch for us. From a pricing standpoint, there's obviously been -- as you've heard from us throughout this year, a really positive pricing impact primarily outside the U.S. this year related to MPT. And then again, we've had solid kind of mid-single-digit growth in our Nutrition business to kind of wrap up ITT and then as well our Advanced Surgery businesses. We've had really solid demand globally for our products in that area. So I think all that to say that's continued strong performance in that area. I think from a pharma perspective, I think the -- I'd call it we had a little -- a blip, I'd call it more than anything else in that we had a -- we've had strong growth in that, and we continue to expect that throughout the year. But in the third quarter, we did have some phasing impact of the timing of some of the injectables launches that we had. And again, I expect that to -- we've already seeing some recovery of that in the fourth quarter. And so, again I see that a bit more of a blip, but that was an impact. And the third quarter that was below our expectations. And then from an HST perspective, a couple of puts and takes there. And certainly, that's certainly the one part of the business that continue to have some challenges and again, it was below our expectations. I will start with one positive of that, though, is that our U.S. PSS business, which you recall was a challenge we had in the first quarter. This business actually throughout the year, we've made some operational impacts in a positive way that have continued to drive execution in that business and also our order book has been continuing strong. So our U.S. PSS business is good. We did have some challenges outside the U.S. in Western Europe and in China. And so that's -- and then obviously, in Front Line Care, the Front Line care business, I'd say continues to be challenged by probably some of the primary care markets impacts in that and did come in below expectations. So that's -- that's a little bit of the puts and takes, I'd say from -- in the quarter basis. And the only thing I would say our HST margins were actually good, and I think that was something that came in at a positive for the quarter as well.

Fantastic off the last point on margins. I know the year-on-year comparison, it's tricky given with and without renal and stranded costs, but relative to your internal expectations, it did third quarter operating margins come in line or better? How would you characterize that? .

Yes. I would say that we were -- it was a little off expectations, but primarily driven by mix. I think when you look at the business itself, again, just talking about the fact that HST was softer than expected is actually a mix impact for us overall. We talked about in the pharma business, our compounding grew at a much faster rate than our injectables did. And so that certainly had an overall margin impact, both obviously in the segment, but of course, overall. And then obviously, the continued softness in Front Line Care. Those are really the, I'd say, the primary impacts and as well as some -- I'd say some additional investments we've made for growth that factored into the margin profile of the quarter. But overall, that was really the primary driver.

Great. And obviously, with the elections, some questions around macro, a lot of changes here. When you look at CMS, HHS, et cetera, some of these heads are changing, does it have any relevance to a Baxter and sort of related to elections on tariffs, how do you foresee the impact from tariffs?

Yes. I think that's a bit of a [indiscernible] in a lot of ways. And maybe I'll just give you a couple of reminders of our business. And we -- from a China perspective, which has certainly been one of the obviously, high-profile commentaries. We have less than -- post separation, we'll have less than 2% of our business that's in China from a revenue perspective. And so -- so obviously, I think that's just a little bit of a frame up from a context perspective in terms of our exposure there. We also -- the way we think about our manufacturing businesses -- we have had -- we try to do as much as possible to manufacture where we sell in the sense that even for example, we have a manufacturing plant in China that is primarily China for China from a solutions perspective. And I think -- and that doesn't solve all our issues, obviously. But I think that's just a general philosophy that does help mitigate some of that. I think as far as Mexico, Canada, there's to be a little bit TBD on that. And so I think -- I guess I'll call it a bit of an early shot on that one.

Do you have manufacturing sites in Mexico, have you quantified what do you manufacture out there?

So our largest manufacturing facility in China is actually going to be with Vantive. So we do -- that's our largest -- we do have some other ones, and I'd probably say they're more HST related. .

But yes, CoronaVac is the one, that's the main one that obviously...

That goes with Vantive.

That [indiscernible] was business. .

Got you. And what products do you manufacture there? Have you disclosed that? And -- sorry, down in Mexico.

So I'd say Front Line Care products are the ones we do down in Mexico, primarily some surgical solutions and then Front Line Care. So it's primarily just HST.

Great. And then -- moving next to, I think Q4 had some moving parts because of the hurricane. You guys did a great job quantifying what the impact was. I think you gave some details from where you are in the progress and where you expect to be end of this year? Maybe some comments on where we are right now from a capacity standpoint? Are we running in line, maybe slightly better than plan.

From a capacity?

Yes.

I mean it varies somewhat across the business. I mean, I think in general, we're in a solid place from a capacity standpoint. I think we -- again, there's different puts and takes in different areas of our business, but in general, capacity is okay.

Yes. So what I would say is we are continuing to make significant progress, and we are probably slightly ahead of where we thought we would be. We continue to update -- obviously, use our website to update our customers as well and where we're at. And so we're making steady progress and on track to be at 100% allocation on select product lines by the end of the year. So I'd say everything -- we obviously have a some lines already up and running in commercial product being given to customers now. So that's actually started. .

I apologize. I misunderstood your question. There's a general capacity with North Cove. Thank you.

Understood. No, thanks for clarifying that. I guess related to that, Joel, when you quantified the headwinds for Q4, right, 150 to 160, the guidance, I think, is low singles on a reported basis. But ex the headwinds, I think it's up low singles. Your prior expectations was 4 to 5 exit rate rates. So maybe just walk us through on what changed.

Yes. So we had talked about that being an exit rate that is primarily impacted though by some of the softness that we've seen in HST and in particular in Front Line Care. So I think the -- where you saw that is the 4 to 5 that's been -- that's primarily been the impact there. And I think that's -- obviously, we're continuing to be positive about our view from 2025, just to reiterate that point, but that's the primary impact in 2024.

Understood. And that sort of segues nicely into that 2025. I think you're one of the few companies who have given us the '25 view. So thank you for that. That's helpful. But when you think about the low singles exit to 4 to 5 for fiscal '25, what do you expect to get better? Maybe help us bridge the mid-singles organic for next year?

Yes. I would say a few things there. Number one, we have continued strong expectations of our growth in MPT despite some of the softness that obviously is resulting from the North Cove. Now to be clear, we do expect some of that from an MPT standpoint to continue into Q1. But overall, again, back to the pump sales. The pump sales remain really strong and we expect that continue the end of the year. We also, from a solutions perspective in MPT expect that business to continue to recover. And I'd say by the fourth quarter actually have a favorable comparison on a year-over-year basis. So I think, number one, we've talked about the fact that our MPT business had a strong year -- the underlying demand is good, and we expect that to continue. From a pharma perspective, one of the things we continue to expect to do is actually continue new product launches that we've -- we've historically had a handful of those a year. This year, we've had several of them already, and we're expecting 10 or so next year. And I think that is something that will continue to contribute to the growth expectation. -- pharmas had about a 7% growth this year. And so again, we expect strong continued growth there. And then I think from an HST perspective, the big thing there is, again, some level of recovery from what were some really tough comparisons and some challenges that we experienced in 2024 that I'd say we're not expected to experience in that same way as we head in 2025. I think the -- in 2024, we had some tough comparisons in 2023 due to some of the backlog that was absorbed in the prior year. We had very -- government orders were off, new construction starts were off. There was, I think, a lot of -- I would say, some forward spending when there is government money that was coming in that really ended in the middle part of the year that, again, we're up against that comparison as well. And so I think as much as anything, some of the headwinds we had this year, we don't expect some of those same headwinds to impact us in the same way as we head into next year. So that improvement itself, I think, is also part of what you see as the driver of the improved results.

Got you. And sorry, just to clarify, the IV fluid impact in Q4. Is that -- do you expect some impact in Q1 or should Q1 be normalized? .

We do. We -- I think that, again, as we've talked about, we expect to have all of our lines producing, but that doesn't mean they're all back to 100% production. And so I think there's still going to be some level of anticipated MPT softness in Q1. And so -- but again, we do anticipate that to recover those. And I think that will lead at some point to some that restocking that happens during the course of the year. And as I mentioned earlier, by the end of -- by the fourth quarter, we do expect a favorable comparison with the prior year.

And Joel, have you guys quantified on what the impact in early next year could be because of the IV fluid sort of capacity coming back -- is that half the impact of what we saw in Q4? Or should that be less than half or any qualitative comments.

We have said that.

No. We haven't said specific to Q1, what the impact would be there. I mean, it's obviously going to be less than what it is in Q4, significantly less. We'll be, like I mentioned earlier, back to the 100% allocation, but -- the key thing is to achieve that 100% just in context, is that we are leveraging our other facilities around the world. So that's kind of where you get to it. There will be some impact in the first quarter. It will be significantly less than what was in the fourth quarter, but we just have not quantified it yet.

Understood. Because of these impact here, has Baxter lost any accounts.

Yes. I think our view on that is not permanently. I think that there has certainly been some obviously impact in terms of needing to fill in orders, and that we do expect will continue for a part of the year. But I would say, in general, we don't expect that to be a long-term impact. And I'd say even one of the things I'm actually really proud of as a company in terms of the way we've responded to this and the speed at which we've gotten back up to speed really focused on patients and on our customers. There's been a lot of favorable reaction from our customer base around that impact. And so for those reasons and others, certainly, we don't -- we're not anticipating a longer-term impact there. .

Fantastic. And maybe last one on this topic. The 4% to 5%, does it assume any restocking from these customers.

It does. Again, I would say just again, as I think about the -- how that year just conceptually would play out again with some first quarter softness, some level of restocking that would happen. And then again, getting back to a more normalized rate by the fourth quarter. Maybe just one other side to say, on a bit of a different, but related topic. From a cash perspective, I guess the other thing I would actually just say to you, I know we're going to probably talk about cash later, but since on this topic. I do think we're going to actually have some level of cash impact continue in the first quarter as it relates to this really for two reasons primarily. One is, I'm going to call payables related to expenses that were incurred in Q4 that will end up actually being paid in Q1? And then secondly, just a bit of a, I'll call it, a rebuild on our inventory levels that will likely have some cash impact in Q1.

Got you. More sounds like a temporary timing element. It shouldn't change your free cash conversion that longer term?

Correct. I agree with that. It's just that there is going to be potentially an impact in the first quarter.

Great. And then one of the positives for you guys is, like you said, infusion therapy, it's done really well. Third quarter was outstanding at 7%. When you look at those numbers, right, what came in better? Was all of this [indiscernible] SIGMA SPECTRUM has also done really what maybe characterize what drove that 7% MPT growth? .

Yes. I mean pump sales in general have been really robust. I think we find ourselves in a replacement cycle as well, but I think is -- we always say it's certainly would love to have gotten our pump out earlier, but the fact that it timed it really in the middle of what was the replacement cycle has actually been beneficial. And so I think we've had strong demand certainly from Novum both on the LVP pump as well as our syringe pump. We've had continued strong demand for spectrum. And I think -- so in general, the market, we're certainly anticipating continued positive momentum in that over the next number -- next few quarters for sure. And I think that's certainly something we're excited about. I think just from a -- and from a share perspective, I guess the other thing I would call out, we've had both wins and existing customers for a replacement perspective, we've also had -- we've had wins in new customers. And I think from a spectrum perspective, I think we've talked about the fact that we're taking about a percentage share per year on spectrum. And I think we see that as probably 2 points of share a year on Novum. And so I think that's been -- in particular, on the LVP, syringe pump probably higher than that, although obviously, that's a new product so that's on a very -- on a small base. But long and short of it is, again, good strong demand in the pump market in general, and we've had really nice wins both on the existing and competitive side.

And off those comments, interesting, you mentioned visibility on the next few quarters. Do you have orders that gives you that visibility?

Yes. From a pump perspective, yes. I mean we have a funnel out there. To Joel's point of both new and existing customers that we are targeting. And so we have a very healthy funnel that we will be going out and executing against this quarter and into 2025 as well. And the one comment I would also add to Joel's comments about just overall MPT growth is we've been seeing really nice growth outside the U.S. based on volume and demand that we're seeing for our solutions outside the U.S. that has contributed along with some momentum within our nutrition, our clinical nutrition business as well.

Got you. And sorry, just on share gain comment here. Was it -- you were gaining 100 basis points worth segment now that's accelerated 200 basis points with Novum? .

Exactly. Yes.

And the other related -- when you do place these pumps, there is a certain attach rate for associated consumables. How should we think about the consumable contribution.

Yes. From a consumables, what we've said is for each pump, it's going to vary, obviously, by the hospital setting, but we would expect probably somewhere between $500 to $750 in set sales and annual set sales for each channel with the pump.

That's fantastic. And then when you look at the comps, your MPT comps of low singles, why is mid-singles, the right growth rate for the segment rate. Obviously, you have order momentum, you're gaining shares, shouldn't this be doing much better than mid-singles?

Well, so I would say a couple of things on that. Obviously, our third quarter was elevated from that perspective. And so I -- and I -- look, I do think as, again, back to a little bit of my commentary on the softness in Q1 that we're anticipating. But from an underlying perspective, we certainly are anticipating strong results out of that. And I think -- and again, I do think we -- as we head into the latter parts of the year and we really do hit that comparison that I think will be favorable in Q4. Certainly, I think between -- as Clare just talked about, all aspects of that business are performing well. And I just -- there's -- again, still a little bit of uncertainty. I'll call it around North Cove.

Got you. And there was some news recently that one of your competitors making investments in IV fluid capacity. I'm just curious from a competitive standpoint, do you see any changes at all?

So we -- I mean, one of the other manufacturers did announce that they were entering into a joint venture. I don't know if that's what you're referencing. The -- what I would say about that is it does, I think, highlight just -- this is a highly regulatory environment. It's very costly to manufacture IV solutions with quality and regulatory requirements. So I think that one shows, and I think that even what's happened with North Cove, I think has really sensitized customers to, well, there's been a view that this is a commodity -- this is actually a drug. This is something that goes into a patient's bloodstream. So I think that there's more -- it's created more of an awareness just about the criticality of these solutions. But I do think that this was something, from a peer perspective, that's something that they've decided to do. We have -- we know with North Cove -- we have a great manufacturing facility. We've invested in the facility from a quality standpoint, but also automation so that we can be able to produce reliable -- reliably produce IV solutions at a fast manner to address the needs that are out there. And I think -- and do it in a cost-effective manner. We've gotten the question, would you diversify your supply? I mean, I think the reality is this highlights, it's not really profitable to do that. The economics don't warrant that. So I think that we will continue to focus on that. We've prioritized our customers and we're continuing to drive that going forward. So I don't really want to get into the dynamics except to say I think it highlights that this is -- it is to be able to produce IV solutions in a reliable manner and does take investment.

Sorry, I'll just add one thing to that, if I could. And I think the other thing though, it's demonstrated is our actual global redundancy in this organization in the sense that we actually have 9 plants around the world that manufacture these products. Part of the focus we've had, I'll get on patients and our customers has been the production of these products in China and in Spain. And we've air freighted these products over. And then so again, when we sort of say we haven't necessarily -- we haven't spared costs in well to ensure that we're taking care of our patients and our customers. That's the other part of it that I, again, really proud as a company, and I think it does demonstrate some of our global redundancy that exists.

Got you. And Clare, on your comments about this is not a commodity. It's an interesting comment. Certainly, you're injecting these things into the bloodstream. Why shouldn't pricing be better? I think that comes up a lot. And I know you've been through negotiations. Maybe talk about pricing.

Yes. I mean -- well, number one, I guess I want to reiterate, I think we are we are continuing to take pricing. And again, we have in our broad -- our MPT business, both OUS and as we've talked about with our GPO renegotiations, as we head into 2025. There's -- again, we expect a substantial pricing impact. We set about 100 basis points as an enterprise 2024. We expected that same impact in 2025. And so that's, that, I guess, a little bit back to the point. There is some recognition some impact of that. But the other thing I would say though is I think obviously, being in that business and the market share that we have in solutions is there's -- it's a foot in the door in a lot of different customer basis that allows us to then sell both the sets as we've talked about. But as we sort of sell as one Baxter, other parts are very broad portfolio. And so I think there is an element of that, that I think is balanced between appropriately taking pricing, but also putting ourselves in a position where we have the ability to actually sell that broad portfolio of products that we offer. .

Got it. And maybe switching gears next to Advanced Surgery. That segment has done really well last few years, done about corporate. Maybe talk about sustainability. I think you guys do really well in sealants and hemostat.

Yes. So certainly, it has been a really good business and continues to be. And I think, again, our demand both for our hemostats and our sealant products globally has been really good. I think we -- we continue to look for opportunities for new market expansion and other areas there and anticipate continued progress in that space. The other thing we've done as well is that we have -- obviously, we've primarily been in the [ call the ] active space, but we've started into the passive space as well with some relatively recent product launches. And so we continue to see opportunities in that area, both inside, outside the U.S. And so certainly encourage -- continually encouraged by that. .

Would you say you're gaining share in that part of the market, Joel?

We have, and I think certainly in a market that we're continuing to outpace the growth of the market in that business.

Got you. And then switching next to [ HSNP ]. I think Front Line Care is one where it's hard for us to get any comps. I know you've spoken about challenge physician spending environment. Maybe you just talk about what's happening in that space. Have you seen any change in sentiment or when could things change?

Yes. I guess maybe where I would start with on a macro level is that the primary care space itself is certainly continues to be robust, if you call that. The volumes are strong. People are continuing on populations aging, people continue to need primary care. So I think just on a 30,000-foot macro maybe that -- starting with that commentary. I think what we're -- again, as I mentioned earlier, we're coming off of a cycle where there's a lot of government funding for spending. Again, we've had slowness in government orders. We're -- and so I think the -- we find ourselves in a place where we're -- I wouldn't say we're yet saying, hey, there's a recovery and a growth -- but really and truly, some of the impacts that we had in the past year, we don't anticipate repeating in that same manner this year. I think we continue to -- one of the areas that we're continuing to focus on is new product launches in this area, so that it's not a, hey, we're just subject to market conditions. There's things that we're continuing to do that are actually expanding our product offering. But it's a relatively slower recovery. We certainly do anticipate though, as interest rates continue to go the right direction. Some of these new construction starts will continue to increase. The one thing that will also be interesting is some of the big box retailers that originally had plans to enter into that space, because there is some bit of a primary care physician shortage that exists. And so it will be interesting to see how that continues to recover. But all in all, obviously, over the longer term, we certainly anticipate this return to a more normalized level. Is there anything you would add to that? .

Got you. And so Front Line Care for fiscal '25, should that be below the corporate given your gradual recovery comments?

I would say the answer is yes to that.

Got you. Then the other part of [indiscernible] is critical care. I think that's one of the bright spots. You call it order trends. Maybe talk about orders, right? What's driven that order trend? I think you said 18% growth in what parts of the business are you seeing these orders trend?

Well, so I would start with our U.S. PSS business. This is an area where -- in the beginning of the year, we had some challenges with orders coming through, you'll recall in the first quarter. And we talked about some things that we're continuing to work on operationally. I'd say a couple of things have happened since then. And number one, focusing on underlying compensation in different ways with the focus on growth and new customer wins. The utilization of our sales tools that as part of Baxter, we've continued to get better and better at that really gives us better visibility and focus on the size of the order book. And so I think -- and just in general, good solid demand for our products as we find ourselves in a place today where the order book in that -- in our U.S. PSS business has been really -- has been strong. Our revenue, that's been translating into revenues. Keep in mind, there's a bit of a -- one of the questions I asked when I first got to this company is, hey, okay, we have good orders. How does that translate into our actual revenues. And the answer to that is it's extremely high, if you want to call it, [ batting ] average, meaning if it's -- there's an order, it translates almost with certainty into an actual shipment. The timing is a bit variable. And so one of the things you've heard us talk about from time to time, particularly in our capital businesses in general, has been a bit of -- at times of a lag from installations perspective. But we continue to see a strong order book in that business. We anticipate continued momentum there. And I think that definitely has been a bright spot of us that's feeling much, much more strongly about.

Any change in customer behavior post elections? Are they taking a pause on capital side?

Yes. I would say, in general, I mean, the capital environment is -- remains pretty strong. And again, as we certainly -- capital orders, again, both as we talked about from the pump perspective, from the obviously in the small capital. And then in this area, the sort of larger capital orders remains in a strong place. And so we certainly anticipate that being a continued positive area of our HST business .

Got you. And when you roll all of these pieces together, right, orders are strong, but perhaps the timing, there's been some push up, how should we think about fiscal '25? Should that be in line with the corporate for this segment in CCS or below or above corporate?

So I'd say, in general, HST next year will be slightly below it, okay? So we've kind of said like a low to mid-single. Obviously, we'll finalize our guidance when we provide it in February next year when we give our 2025 full outlook, but given a lot of the things that we've talked about, in general, I'd say HST in total, we're not -- we don't give specific guidance between the divisions there. So in general, though, low to mid-single digit is kind of what we're preliminary looking for, for HST.

And one of the questions we get is on share shifts in the market. Baxter has been very clear, look, we haven't lost here. Maybe share some thoughts on what drives that statement.

Yes. We have -- our installed base continues to be strong. And so we -- again, there's puts and takes from time to time. But overall, again, we do -- we certainly do not believe we've been in a position where we've lost share. And in fact, again, we have had some really nice competitive wins in that area as well. And so I would say, just generally speaking, again, that we like the place we're in there. Some of our new products in terms of -- with our Progressa+. We've had good success in some of -- in that new product rollouts. And then again, that's been a positive impact. So we certainly don't see a share loss overall. And again, we look at that on an annual basis, too, just to be clear, I mean, there's fluctuations that happen from time to time on a month-to-month or quarter-to-quarter basis. But in general, we feel good about that. And again, feel favorable. We feel good about some of the competitive wins we've had as well.

Then maybe switching to pharma. It's been really strong this year, but 3Q, you noted some timing element, what are the new products that when you look at fiscal '25 that you're expecting to launch? Is there any timing, regulatory sort of risk from an approval standpoint? How should we think of pharma.

Yes. Again, we haven't gone out into specifics on the products themselves. But I guess what I'd start by saying is I'm very confident in our ability to actually roll out our products. We've got a very nice -- the leadership in that segment of our business has been very proactive in terms of kind of a robust pipeline, both organically and some inorganically in terms of providing a pipeline of products to roll out. And I think -- our mechanism for doing so has been very consistent, and I don't -- I actually -- I don't see a lot of risk in that as we head into next year. And that will be a continued focus of ours on in terms of some of the -- again, particularly in the injectable part of our business.

Got you. And I know pricing in that market has been challenged for a few years. When you adjust for mix, right, as you launch new products, is that on a net-net basis for pharma? Is pricing stable? Or how do you characterize mix-adjusted pricing in pharma.

I'll start and Clare can chime in here. I think the thing that I would say there is that, obviously, the fact -- the way pricing behaves in that space is doubly important in terms of why we continue to have a robust pipeline of rollouts. And so I think it's certainly the case that over time, the pricing element of that space is negatively impacted. But our ability to actually continue to roll new products out is really a key part of that. Anything you'd add to that?

So the only thing I would add is that we do expect continued erosion to Joel's point, in this business. The magnitude, though, from what we had seen previously has lessened. So we aren't seeing the type of pricing declines that we saw kind of in the 2020, 2021 time frame. So that has lessened, but we still continue to expect annual erosion for this business.

And then one last one on pharma. Compounding is really strong fiscal '24. What drove the strength or talk about sustainability of compounding?

Yes. So number one, there's a really strong market demand for that product in general for that -- those compounding services, I'll call it. And so that is -- obviously, it's primarily focused in a few countries. That's primarily in Australia, New Zealand and U.K., Ireland and Canada is the primary market for that. But it's -- I would tell you the -- our anticipation next year is actually some level of slowing in that, but I'd call it almost purposefully in the sense that it's -- we've had a -- again, from a mix perspective, we talked about it earlier, our compounding growth, in some cases, exceeded our injectables which is actually a margin challenge for us. And while we certainly continue to drive margin expansion in the compounding business, and we expect it to continue to grow probably in line with the remainder of our pharma business. We do anticipate some slowing of growth in that area as we head into next year.

Got you. Then maybe switching to margins here. I mean it was really helpful. You laid out the 16.5% op margins for next year. And obviously, with some of these changes here, FX comes to my mind. Obviously, Q1, you have some impact here from IV fluid. Talk about your confidence in achieving 16.5%?

Yes. So the way I would think about that is we -- as we kind of talked about a normalizing, if you will, our 2024 margins that basically took us -- when you add back the impact of the stranded costs, you add back the impact on our remain cohort continuing operations. And then you add back the say, 50 basis points of North Cove. That kind of gets you to a 16.5% by the end of 2024 margin. So as we head into 2025, we've talked about the positive impacts of both from a volume growth perspective, from a pricing perspective and MPT, we continue to have benefits from our ISC and margin improvement programs there as well. And so I think those are all translating into about 100 basis points of growth over -- that takes a 16.5% to, call it, 17.5% next year. What we have called out then is a couple impacts going in the other direction, meaning that the -- from a TSA, the sort of the net impact of TSAs and stranded costs that are not yet absorbed. Obviously, we have a lot of cost containment programs at work, but we're not going to get all of it next year. So that's about a 40 basis point impact -- and then there's about a 60 basis point impact of what I'm going to call the dilutive margin impact of our MSAs. There's a sizable amount of MSA revenue, I think, around $350 million we talked about and which is really a low double-digit margin. That dilution from an operating income percentage perspective is about 60 basis points. And so all that kind of backs you to 16.5%. And confidence level, again, I feel good about what we've talked about there. I think so the impacts that I started with, I do feel good about in terms of the from a volume perspective, from a pricing perspective, from a continued margin enhancement perspective .

In the $350 million of MSAs, is that going to sustain or should that drop off over time?

Yes. It will phase, although it's -- again, the timing of that is somewhat variable in the sense that again, there will be some phasing out in '26 and '27, but there'll be others that actually go on for longer than that. But overall, you should expect that to continue to phase down as the years go way.

Got you. And since you brought a phasing, any phasing for fiscal '25 first half versus second half that we need to be aware of? from margins, revenues, I think you've done a good job laying out the IV fluid or anything from a margin standpoint, first half versus second half?

I mean I think it plays into the same thing as we ramp production given Q4 this year having the impact of the hurricane and there are not in Q4. Your second half is going to accelerate versus your first half, and our sales, exactly.

Really typical in our business is anyway.

We get more leverage over the course of the year.

Yes. Got you. And maybe in the last minute here, one on FX, it's been volatile. What's the latest on FX? I know it changes day by day, but what's the latest on FX?

Yes. I'll start. I mean, again, I think it's something that we'll continue to watch as we go similar to kind of your comment on tariffs. Those are two things. The one thing that I will say is as we exit and separate from Vantive our geographic presence does change a little bit, and we're less exposed to some of the more volatile currencies and so we are able to -- in the currencies that we're at, we do have local manufacturing still. And we're also able to execute hedging programs as well within those currencies.

And in some cases, actually in some of really volatile markets like Turkey. Our post-separation business, actually we transact primarily in USD. And so there's actually some element of that, that to Clare's point, our FX exposure actually lessens post separation.

That's fantastic. With that, we're out of time. Joel, Clare, thank you for the time this morning

Thanks Vijay.

Appreciate you having us.