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

All right. Welcome, everyone. I'm Robbie Marcus, the med tech analyst at JPMorgan. And happy to introduce our next session with Baxter. CEO, Joe Almeida, will give a presentation followed by some Q&A. Joe?

Good morning. I'd like to start with our safe harbor statement. Take a moment this presentation will be posted and you'll be able to read in more details. Also how we report our non-GAAP financial results. So I'm here today, and I'm very happy to give you a highlight of our business. We are in the cusp of finishing our transformation. And it's a broad strategy that brought a company to a different portfolio of businesses by the separation of our Renal business as well as the selling of our pharmaceutical services business and the addition of Hillrom that changed our portfolio quite a bit. There was quite a bit of value created by bringing Hillrom into the company in terms of Connected Care. I'm going to get into more details of our new products that are being developed. Also is a diversified portfolio and a portfolio of products that actually are of necessity in every hospital and health care setting. We're completing the sale of kidney, as I said. Vantive should be completed shortly to Carlyle, and we are also presenting and have presented the 2025 preliminary guidance. So all in all, it is a pivotal point for Baxter, where we're moving our portfolio to a Connected Care one, one that create momentum in the company for sales between 4% and 5% and continue the growth in our operating income this year that will reach 16.5%. So with that, I would like to just highlight the areas that in 2023, standing up here, we set to be complete. First was finalization of the model. We changed quite a bit our model. It used to be a regional operating model for Baxter, and today is a segment operating model. We have 3 segments: our MPT segment; we also have our HST segment; and Pharmaceuticals. Those are vertical segments, global segments. We also completed the divestiture of Biopharmaceutical Solutions. We integrated Hillrom, and we are very close to finish what we set to do with Vantive. Vantive, to give you a little update, we are at the very final process of the selling, it's just getting approval for a few more countries, and the transaction should close early first quarter 2025. So to recap, it's a $3.5 billion sale to Baxter after tax between $3.15 billion to $3.25 billion, which will be used exclusively to pay down debt first, reinvest in the business and potentially buy shares back. So what is the new Baxter? New Baxter has a significant increase in its connected care business. Baxter Connect is our cloud connecting system that brings all these businesses together. Our medical products and technologies and health care systems and technologies are quite integrated in terms of how we go to market as well as our pharmaceutical business brings life-saving formulations to hospitals that make easier for them to administer drugs that are life-saving for patients in hospital. We have a very diverse portfolio and have amped up quite a bit of our innovation. So you can see for the slide that is on the screen, just a representation of what is coming out. We have a new pump that launched in 2024, a new platform called Novum. We have a lot of software that we're launching in the near term that will augment that. Also our low force vial adapter, which is a modification of our very successful business in recomposition of drugs called Mini-Bag Plus. And in the future, we have a PCA pump and an ambulatory pump that we'll be launching. The infusion therapies and technologies is a very successful business. It's one that has significant contribution to the company's bottom line, and the launch of Novum has been fundamentally important for the growth of this business in 2025 and beyond, with a great momentum in the next 2 years as we continue to take market share. When you look at Advanced Surgery. Advanced Surgery is a niche business for Baxter, over $1 billion in sales, growing just above mid-single digits, continue to do well, a series of hemostats and sealants. So we augmented that with some tuck-in acquisitions in the last 5, 6 years. They have been doing very well as well. We're excited about new launches. We have some recombination of ingredients that will make our FLOSEAL even faster to reconstitute in operating theaters, and I think will be a great -- continue to be a great margin business for the company. I'm very excited about this business, run by very good component people. This is a vertical business within Baxter on a global basis. Our Care and Connectivity Solutions is our business that has our PSS, our patient support system, our surgical systems and our nursing calling systems. So it's communications, beds and surgical tables. We had a great launch about a couple of years ago, our Progressa+ continued to do well. We continue to be successful in growing the business and taking competitive accounts. The near-term launches will include some new products that we don't currently carry and have low -- very low market share in those spaces. Some to highlight remote communication systems, which will be wireless to nurses to communicate effectively in doing things search army beds or given instructions even with artificial intelligence built in, they'll be able to help them in managing patients. We're very excited about that launch that will hopefully happen at the end of 2025. So it's a good momentum for the company. We also -- we have the new robotic table update, which we work very closely with Intuitive Surgical, just to give you some areas we continue to improve our product offering when it comes to Bed technology. And we're going to continue to shorten the interval of innovation in this area we put about 250 soon to be 500 engineers in Raleigh, software engineers, which work very closely with our India -- Indian Bangalore R&D center. So between this business and our MPT business, we have a significant amount of momentum in research and development. And Baxter became a vertically integrated R&D company. We do have the ability to develop products, 100% internally to the company. We use collaborations with universities and companies and start-ups. But Baxter transformed itself from a pharmaceutical company back in 2016 to a company that can design and launch new products on its own without having the necessity to go outside. We also have, in Front Line Care, a few launches that are very exciting to us. One is our RetinaVue with artificial intelligence that gives the clinicians in a couple of minutes, the feedback into the patient's status of having or not having the retinopathy caused by diabetes. So that product is launching very soon. We have a new monitor coming out this year as well. And I'm excited about the MCT, which will come later this year, beginning of next year, our cardiology monitoring. So good things happening in Front Line Care. As you can see between all these businesses in our Pharmaceutical business, which is doing 10 new products a year, very successfully growing 7% in 2024. We're excited about this business. We've got the right momentum now in our new premixes. As you can see, we now have more the 20 products launched in a year, a company that came a long ways from being sparsely innovative to a company that has 20 new products that are driving our mix and our profitability as well. The transformation that is happening in Baxter has 2 very important areas of -- 2 important pillars, I would say, financially with -- when we target 4% to 5% growth on the top line, if you think about Baxter's business is growing 3% to 4%. 4% to 5% shows 100 to 200 basis points of acceleration in the current weighted average market growth rate as well as the ability to deliver a bottom line that is highly leveraged and continue to grow our research and development groups. So investing in innovation, investing in technology, but delivering a growth into the operating income of the company with allocation of capital that will be done, as I said, first priority debt payment. Second priority, continue to invest in the company. And third is to buy shares where we don't find opportunities for better use of cash. As I said, somebody asked me today about acquisitions. Baxter's focus on tuck-in acquisitions, small adjacencies that will augment our businesses and grow our base to continue to deliver 4% to 5% and hopefully, beyond that in the future years. The capital that we have, more specifically, we are targeting 80% of cash conversion rate as well as we are focusing, as I said, in the leverage in the business. Let me walk you through very specifically, how we're going to go for 13.5% this year to 16.5% in 2025. When I say this year was 2024. What you see is because Vantive went into discontinued operations, there's about 250 basis points that can be absorbed in 2025 cost that otherwise would not be there. So that cost reverses back in 2025, as you can see on the green bar of the first on the left. Then we have also some headwinds in terms of our TSAs, meaning the TSAs are costing the company on its stranded cost. Then we have the hurricane Helene offset that happened in 2024, not happened in 2025. Operational margin improvements and enhancement, which is about 100 points of gain. And then the MSA impact manufacturing agreements that we have with Vantive. When we sell products to them, we sell at a transfer cost plus a small margin. So it's less profitable than if we would sell the product otherwise in the open market, which is part of our agreement in separation. So that's why it shows the 60 basis points. So it's about -- this is the composition of the 16.5%. It's pretty straightforward. I want to make sure you understand that we have plans in place primarily for the operational margin expansion that is going to happen so we can deliver on our commitments. Important to notice that these changes in profitability, we will continue on as Baxter will deliver enhanced operating income and leverage in '26 and '27. I just want to take a moment to recognize our employees who have worked very diligently in taking a plant there is about 1.5 million square feet in North Carolina responsible for the vast majority of IV solutions in the country from a devastating situation where we had Hurricane Helene devastated. You can see the first picture, you barely recognize the plant. And within 3 months, we're able to get all production lines restarted. As you know, we have invested heavily in automation. The plant is almost fully automated. We're able to restart the plant. And by early first quarter, we will have the plant at volumes at or superior than pre-hurricane Helene. Our employees have worked diligently. We had more than a couple million working hours dedicated to the plant and we're able to get product back on the market. Very proud of the company. Baxter is a strong company with the ability to harness its global footprint in IV Solutions. We're able to put that back into the market in the U.S. We brought products from Spain, China, Mexico from different Canada, U.K. to be able to supply the U.S. market. We did the best we could. And now we're almost back to pre-hurricane levels, very proud of the company. And so to close, with the momentum is strong and goes beyond '25. We're building the moment on innovation, capital allocation and the ability to deliver leverage bottom line year-over-year. Our growth to 4% to 5% is what we target for '25. And hopefully, after that, closer to a 5% mark. And hopefully, we can get this innovation in the hands of our patients and clinicians to make a significant difference in people's lives. Baxter, touches close to 300 million lives a year. It's a large company that provides products that is essential to health care. And I think now we're ready for Q&A.

Well, great. Maybe we could start with just an overall update. You have preliminary 2025 guidance out for 4% to 5% organic sales growth and around 16.5% operating margin. Any qualitative comments you're willing to provide on how you ended up 2024 at this point?

I think, look, you've seen a couple of things that I would just say we have continued solid momentum in the businesses, particularly in our MPT business, even despite the impacts of the hurricane has performed substantially well. We've got -- our Pharmaceutical business continues to show solid growth. And as we've seen much of the year in that business. I'd say from an HST perspective, we do continue to see some improvements there. And as one of the businesses we've talked a lot about is our Front Line Care, we consider -- continue to see recovery of that and anticipate some decent momentum there and our order size, that our order book in our CCS business is strong heading into 2025 as well. So I would say, in general, we feel good about that. We have a positive mix of business that I think we'll see some growth and again, some good momentum heading into next year.

Maybe we could start with HST. You had 2023 coming out of the acquisition, a really good year in HST and then a little bit more mixed in 2024. And you've been very vocal about what happened, what you're doing to fix it and where you want to go into 2025. So maybe just give us an update on where you stand on the HST business.

We -- if we -- if we just think about FLC and CCS. So let me -- You hear me?

I don't think it's...

Is the microphone on? Hello? Okay this one on. Sorry for that. So the Front Line Care business is the one that had a tough in 2024, mainly driven by the dynamics in patient -- in primary care physician practices. We saw a decline in new construction in primary care physicians and a completely shift from retail primary care from companies like Walmart and Walgreens, walking away from primary care physician clinics. We saw that as one of the headwinds. The other one was we had a significant growth in 2023. We caught up with a significant amount of backlog, and that impacted 2024. As we see today, we see this coming back to normality and we predict growth in our Front Line Care business in 2025. When it comes to CCS, the business had experienced operational issues in 2022, early 2023. And I said, we worked very hard to fix those. We show 11% growth in the U.S. capital business in that division. We're very happy. We've been very competitive and taking competitive accounts, which has been good and drove the 11% growth for capital in the U.S. That business in terms of operational performance, it varies significantly between the U.S. and OUS. I think in the U.S., that business has found its cadence. Of course, it's a capital business as known can be choppy, but it found its cadence with good management. We are fixing right now OUS. We had issues in softness in Eastern -- Western Europe and also in China, and these issues are being fixed as we speak now. So if I wrap a comment on HST. We were able now to provide a much better integration with much less disruption in the field, more consistency in this execution and we see positive growth for this business in 2025.

Within HST, there's a couple of different components. One of the soft spots in '24 is the primary care market. What's the latest you're seeing there? And do you think that's a market that could return to growth moving forward?

We see a slight momentum on that. I think 25% is a transition year that will show growth. And because, one, the easy comps from 2024. Second, the volumes are starting to reestablish -- being reestablished. We're starting to see the order normalizing and not continue to decline. So we see that as a positive. Also for that business, remember, that business is about 1/3 primary care driven. The rest of the business, we see opportunities primarily with a couple of product launches and better execution on -- for the business OUS, primarily in Western Europe.

When I think of capital, I try and segment it into revenue-generating non-revenue generating high ASP, which, let's say, is over $100,000 and low ASP. And A lot of Baxter's falls into low ASP and much of it into revenue-generating which, I would say, is in the good buckets. So how do you feel about capital equipment as we're moving into 2025, we see rates maybe not going down as much as we had been hoping for as we sit here today. So what are you seeing in the market and the outlook for Baxter Capital?

I think if you look at what do we have as capital, we have infusion pumps. We have beds, we have monitors. And like you said, all of them do not exceed $100,000 in ASP, right? So -- but they're quite different even in -- within the classification of sub-$100,000 per unit, they are quite different. So I would say that right now, we don't see any issues with infusion pumps. As a matter of fact, we see us with great plans in 2025 to continue to take market share. And we see the order books -- the order book going into 2025 for HST in the U.S. is much better than was going into 2024, last year from 2023. So I see positive in both sides of it. I'm not claiming that we have a crystal ball that will look into capital performance the rest of the year. But so far, we haven't seen any impact that has any correlation with rates at the moment, which would be probably less than what was expected 6 months ago in terms of rate decrease. And neither we see any issues with hospitals ordering things that we sell. So I will say cautiously optimistic at the moment.

Yes. Robbie, if I could just add one thing to that. I think to Joe's point, on the small capital side with pumps in particular, we find ourselves in the middle of a replacement cycle, that we also anticipate carrying on here over the next 2 years or so as well. So I think from that standpoint, there's actually some good momentum that part of our capital business.

Maybe we could touch on pumps. You have Novum IQ approved now in large volume, you also have a syringe pump on the platform. This is your first new pump in, I don't know the exact number.

30 years.

It's been a long time. So maybe I know you had strong double-digit in 2024. Maybe you could touch on what you're seeing so far in the launch and how to think about that business moving into 2025 in the context of the guide?

So to your point, this is the first product that Baxter has launched in the pump space made and designed by itself in probably 30 years. So we feel very proud of that, and we designed a world-class product that has tremendous acceptance. We saw growth of the pumps in 2024 of 50%, and we see the replacement cycle that Joel just mentioned as an accelerator for the next 2 years. So we see us continue to take share here, at least 100 basis points, a minimum a year. And we feel confident that the technology that we have plus the software that actually powers the communication between the pumps and the electronic medical record systems very powerful. So we're excited about that and our teams in Northern Illinois and India did a phenomenal job in bringing the product to the market.

Within the fluids side. And I know you worked really hard over the past few months to keep your customers, keep your volumes flowing from around the world into the U.S. you said we'll be back to normal volumes or at least pre-hurricane volumes in first quarter. How should we think about that business moving forward? Were there any share loss to competitors? Or has Baxter been able to retain most of its customers?

We retain most of our customers, first of all. Second, we are in the middle of signing IDNs for 2 GPOs. And for one of them, we're fully signed. And the second one, we hope to be fully signed by the end of January. So we have acted as fast as we could in the best interest of our patients. We did medically necessary allocations, and we thought that we did a fair process in getting products to everyone who need it. And I think Baxter's recovery is evidence of our capabilities and our ability to mobilize on a global basis within 2 weeks of this and shift products from overseas where we flew over 200 flights, 747s into the U.S. and brought products from all over the world. Despite the fact it was not sufficient to offset what the plant was making was beneficial to put products into allocation levels of 60% that migrate all the way to 100%. So I would say that we have still a backlog, and we feel the Baxter has the right cost position and the right flexibility in the supply chain to attend the U.S. demand, and I think most of our customers see that.

Joel, maybe I could jump to some of the P&L. And up on the slide, it's about 13.5% on the bridge for 2024 operating margin. You're guiding to 16.5%. It was really helpful bridge to walk through. Maybe if you did a pro forma year-to-year, how should we be thinking about the underlying operating margin expansion and the sources of that?