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

[Audio Gap] Raymond James Institutional Investors Conference. I'm Jayson Bedford. I cover the Medical Device sector. We're very happy to have with us today the senior management team of Baxter. We've got the company's CFO, Joel Grade; as well as Senior VP of Investor Relations, Clare Trachtman. So with that, I'll hand it over to Joel.

Thank you very much. All right. Something with tech support here as well. All right. So good afternoon, everyone. And I appreciate your interest in Baxter. I look forward to the opportunity here to present, and I look forward to taking any questions you all have as well. Certainly, one of the things we always like to start with at Baxter is our mission, and that is the company's place in the health care system and again, our commitment to saving and sustaining lives. Certainly, obviously through so much of what we do, the work we did in North Cove and so many other things, that's obviously evident and that drives everything that we do here at Baxter. I'm going to talk through a few highlights here, and then I'll obviously do some deeper dive into this today. But the first is just a little bit as a reset, so where are we today as Baxter. There's been a lot of change, certainly over the last couple of years. And I certainly am excited about the place we sit in today. And so you'll see here kind of the top level of executing our strategic transformation to accelerate performance back in 2023, we announced some key strategic initiatives, which I'll talk about in a second. But the good news is we are through those things. And so -- the last of which, of course, was the sale of our Kidney business. As a company, part of what we do, and again, the space we occupy in health care is benefits. So a very balanced and diverse portfolio, again, driving those results in support of the mission. Again, another key highlight is the sale of Vantive. Again, we had over $3.4 billion of after-tax proceeds from that deal. We have so far deployed over $3 billion towards debt pay down, which is an important part for us as we think about our commitments that we've made and our target leverage ratio at the end of this year, which was 3x net debt to EBITDA. This obviously was a significant part of our debt paydown story as well as obviously a key strategic milestone. We've also provided guidance in 2025. We talked about a 4% to 5% topline number. We talked about 16.5% adjusted operating margin. Later on, I will take you through a slide that actually helps you bridge between where we are today and that 16.5%. That's a question we get frequently. So I plan to address that. And the final highlight, I guess, again this sort of exact slide is that our North Cove facility, which is our solutions plant in North Carolina, which, of course, was impacted substantially by Hurricane Helene, is actually now producing at pre-hurricane levels. And so a lot of really important kind of tidbits here to summarize where we are at Baxter today. So just to drill down level here on -- we talked about these key actions to deliver shareholder value. Again, back in January '23, there is three things that were announced. One, we're going to verticalize the business. Two, the sale of BPS and then the Kidney Care business. So as a reminder, the verticalization of the business basically took Baxter from what was a country-led model or a geographically-led model, if you will, to where we actually had 3 verticals where leaders of our businesses own the end to end in each of 3, again, Medical Products & Therapies. Again, so the MPT business, HST, which is the former Hillrom business and then Pharmaceuticals. And again, somebody now owns everything from end-to-end commercial manufacturing, et cetera. And each of those are really important piece of how we changed our business model and again, strategically important in terms of our ability to execute consistently. We then also completed the divestiture of Biopharma Solutions or BPS, which was in quarter 3 of 2023. And obviously, we used $3.7 billion to prefer debt payment there as well, which at the time was our -- consistent with our capital allocation priorities in order to pay down debt. And finally, the sale of Kidney, which is again known as Vantive. We sold this business to Carlyle. We closed on January 31, took on $3.4 billion of net after-tax proceeds, which exceeded our original expectations, which actually started out around $3 billion. We elevated that guidance to a little bit higher than that in the $3.15 billion to to $3.25 billion and for a lot, again, good strategic tax reasons, ended up at $3.4 billion, which, again, $3 billion of which has already been used to pay down debt. And so the fact that all those have now been accomplished leaves us worth what we'll call our new chapter of Baxter, which has a couple of items that I think are of note. One, again, an increasingly agile company a company who's better positioned to invest for growth and innovation. And if you think about where we were previously with Kidney, that was a business that had about half the return on invested capital as the rest of the company, and it was actually quite, again, cash heavy from an investment perspective. So what this allows us to do today is to, again, more nimble and agile from an operations perspective, from a capital allocation perspective, really targeted focused in those areas that drive outsized and higher returns and growth for our company. And again, what we think about as strategically, who are we now post-Kidney. And again, for those of you not as familiar with the story, Kidney had a significant component that was home delivery business. And so today, we do not have that as a component of our business. And so we think of ourselves now as an essential health care partner. We give an unmatched portfolio of market-leading devices, medicines and technologies. That's who our company is. That's how our portfolio of products fits together. Again, we're focusing on customer-inspired innovation. I'm going to give you some examples of that in a little bit. But I think the key here is the words customer inspired. These are innovations that are not only innovative just for the sake of being innovative, but innovative for the sake of what customers are looking for in the marketplace. And certainly, again, in the care settings where we are best positioned for success. And then again, we have an exceptional team of people focused on mission and consistent execution and our objective is to be much more consistent, more predictable in a way that actually again is -- some of the the challenges and some of the ups and downs we've had over the last couple of years, something that we are certainly striving for and again, feel good about how we're positioned to move forward. Now I'm not going to drain all this, obviously, but what I wanted to just give you a perspective on across our segments when we talk about customer-centric innovation, what's some of the things that are on the docket and what are some of the things you should be thinking about? And just some, I guess, some perspective on some of the scale of the portfolio of products that we have that we're positioning for the future. And obviously, with MPT right now, it starts with Novum. Again, the work that we're doing, the Novum Pump, the launch actually happened just before the midpoint of last year. The demand has been outstanding. The performance of the product itself has been outstanding. We've talked about the fact that we have, again, a very competitive product that has certainly lots of areas that are differentiated in that space. And again, we've continued to increase our share by competitive wins as well as replacements. But you'll see here that some of the examples of the things that are both in the ITT and the advanced surgery of things that we have launched as part of our current portfolio and some of the exciting work that we're doing for the future as well. For HST, Healthcare Systems Technologies, again, this is primarily the old Hillrom business, but things that -- and today, you'll see the 2 businesses there in the CCS or Care and Connectivity Solutions and obviously, Frontline Care. In both cases, we have a number of things within our current portfolio that obviously have a breadth and depth, both in capital and some of the replacement products that are used in the hospital space. But you'll see some of the near-term launches that we have as well. And again, as we think about what is the purpose of each of our businesses in here, here at HST, this is a big part of driving innovation in this company. And you'll see there's also some things in the future and things that actually we don't have here that I look forward to talking to you about as those play out here for competitive reasons we haven't listed. But this is obviously a perspective on the fact that we have a really significant and robust innovation pipeline coming. And then from Pharmaceuticals perspective, Obviously, the 2 businesses that you see on the screen, the injectables and anesthesia and drug compounding. Clearly, one of the things we've talked about over the last year or so is the amount of products that we're rolling out in our injectables portfolio. This is something that our leader of pharma has continued to stress, and we've, in 2024, had double-digit product launches. We anticipate that same thing in 2025. And so this is, again, consistent innovation in this space and something you should expect from us. And to be perfectly clear, we're not all the way to bright on our innovation journey at Baxter. But the point of this is we do have -- we're definitely -- we're certainly not starting from ground zero. And the reality of it is this is a key focus of our investments and our capital allocation as we move forward as a company. And so as I talked about before, some other kind of components of this strategic transformation, again, that talked about a more streamlined, agile company. From a financial perspective, we've talked about the fact that we're targeting 4% to 5% sales growth on an annual basis. That's, I'd say the base way to think about our company. And I often get the question, is that an organic, an inorganic growth. And the way I would say to that is that over time, again, we'd like to earn the right to be able to do things also inorganically. But on a smaller scale, meaning fold-in tuck-in deals, not large material acquisitions. But there's areas that when we make investments in our organic portfolio and there might be areas we have the opportunity to buy again, in order to supplement that. But from a 4% to 5% operational growth annually is something -- and you should think about this as -- from a base company. We talked about driving sales faster than our markets, expanding our [ waivers ] through innovation, through market expansion. And then adjusted operating margins, We're not going to just focus on topline. We're actually going to do that profitably. One of the things you'll hear me talk about often is leverage. We want to be able to be in a place where we generate growth and that our margins are higher than our sales growth. Our expenses are growing lower than our sales growth. Our OI grows at a faster rate than our sales growth as it does, of course, our EPS. And you'll see here for 2025, we're accomplishing just that, again, with a 4% to 5% topline and growth. Again, an operating margin of 16.5% bottom line, which again is good operating leverage. From a capital perspective, we've talked about that we're targeting to have 80% free cash flow conversion, which is driven by, again, anticipated improvement in operating results, but also enhancements from our working capital. Now in 2025, one of the things that we've talked about is the fact that in Q1, we're still going to have some impact from what I'm going to call, Hurricane Helene payables, meaning we took the expenses in Q4, but we're going to actually pay the payables in Q1. And there's some level of inventory restock as well. So from a cash flow perspective, you should expect that some of that impact in Q1. But beyond that and as we go forward, I certainly anticipate this being a company that generates free cash flow in a way that we've outlined here. And that focus on our free cash flow as well as the debt paydown that we already talked about is a key element of targeting our 3x net debt to EBITDA that we've targeted by the end of 2025. This is obviously an important element for us from a target perspective. What it allows us to do once we've reached that point is to really essentially reset and reestablish the way we allocate capital. We've talked about our first priority at this point is to pay down debt. But going forward, those investments in our business, the opportunity to restart a buyback program, we're obviously committed to a dividend that we've rightsized based on the sale of our Kidney business. And overall, from those investments we're making within our company, deploying capital towards higher growth, higher return opportunities as we talked about. And so I think, again, from that perspective, there's a lot of good stuff there and again, set up well by the fact that we've now completed some of these transformational initiatives as we look forward to the future here at Baxter. Now I did promise you a walk on the operating income bridge because there's been a lot of questions and some level of confusion I would say to this. And the way I would think about this is really the following, which is even slightly different than on this slide, but I'll say it in my own words. We're starting with a 13.9% operating margin in 2024. If you then add back, what's 40 basis points of the Hurricane Helene impact is we're obviously not anticipating that in 2025. You then add about 220 to 225 basis points of stranded costs. So now if I'm sitting here in 2024, I'm adding the 220 to the 13.9. Why? Because as a continuing operations business, all those costs that were previously allocated to Kidney now sit with the continuing operations of the company. And so if you add those 2 things back and then you add 100 basis points of operational margin expansion for 2025, that 100 basis points comes from growth in sales. It comes from a positive mix contribution, which was a headwind in 2024, but expected tailwind in 2025. It comes from pricing. We renegotiated 2 of the 3 large GPO agreements and we're anticipating 100 basis points on an enterprise level impact from a pricing perspective in 2025. We talked about ISC improvements that we continue to anticipate. And so those operational expansions will be another contribution of 100 basis points. That basically takes you to, what would be 17.5% margin, if you keep doing my math. And then there's 2 things that are going to go in the opposite direction from an operating margin perspective. One is a 60 basis point impact from MSAs to our manufacturing services agreements, which are a result of the sale of Kidney. Those are not reported sales, but not operational. But the gross margin is a low double digit, and so that's margin dilutive, and that takes out about 60 basis points. And then there's a 40 basis point impact of remaining stranded cost. So in 2025, we're expecting about $125 million of TSA income to offset our stranded costs and the remaining being taken out with cost containment activities outside of about 40 basis points. And so those numbers would ultimately gets you to the 16.5%. And people ask, where is the degree of confidence in those numbers? I would say the degree of confidence in those numbers for me, is actually quite high. Obviously, Hurricane Helene impact, it certainly, knock on wood, not something we'll be repeating again this year. Certainly, the impact that we're taking from both the TSA income and the cost containment activities on the stranded cost as well as the operational expansion ideas that I talked about earlier, I feel confident in those both from pricing, mix, ISC and so again, and the leverage we take off our sales growth. All those things, I think, contribute significantly to this. And we feel good about those numbers. And so as we move forward, I think what I'd like you to take away from me today from our company is that we have some continuing momentum we're building. We had a strong fourth quarter. And again, the business has continued momentum here as we head into 2025. We certainly get asked the question all the time as well, how is your -- how do you feel about the portfolio and where does all that sit today? I would tell you what we're certainly on a material basis, we're in a good place from a company perspective. We will always be continuing to assess whether it's select products, whether it's select geographies that we want to either get into or move out of. The example would be we've talked about the fact that we're looking to exit our solutions business in China, which obviously is certainly financially beneficial, if you will, to exit that. We're certainly looking to continue to drive benefits from our vertical operating model. Again, in a world today where we are in a, again, a more agile, more nimble place with vertical structure and doing work to reset everything from sort of our manufacturing to our distribution operations where in the exit of the home care delivery from Vantive is a significant opportunity for us to simplify our distribution network. And then finally, we are expecting to appoint a new CEO into this next chapter. That person will be focused on a more innovative company, a more streamlined company, more agile company and one that again operates effectively and consistently. And again, the timing of that, certainly, again, I would say our Board is working expeditiously, but doing so in order to get the right person and looking at both internal and external candidates. So with that, I will end the presentation and take any questions.

Well done, Joel. Thank you. We've got a few minutes left. So maybe I'll just start for both Joel and Clare. One, I guess, what do you think is your weighted average growth rate today? And then secondly, this time last year, the business was expected to grow 3%, 4%. Now you're talking 4% to 5%, if you have to identify kind of where those incremental drivers are, where are they in the business?

Sure, let's start with OEM?

Yes. Yes. I'll start with WAMGR. So as we look at it today and what we've said historically is WAMGR grows somewhere between 3% to 4%. And I'd say it's probably heading towards the mid- to higher part of that, but it's somewhere between the 3% to 4%. As we -- as Joel has pointed out, as we continue to launch new products, get into new areas, and as we think to the future, our goal is to try to continue to increase that WAMGR above that.

Yes. I think the differentiator there to Clare's point here is if you think about the performance, for example, of MPT and the launch of Novum. Again, some of the work that's being done even in the Nutrition space in that area. Our Advanced Surgery is growing in excess of the market growth. And I think in Pharmaceutical, it really comes down to new product launches and things that we're continuingly feeding the system of innovation. So I think Clare has said it. I mean I think the the ability to actually innovate and drive organic growth through that is something that we look to continue to push both the WAMGR and our ability to grow faster than our existing markets.

Second point, I don't know. You asked the question on the 3% to 4% to the 4% to 5%. I'd say one of the biggest changes from 2024 to 2025 is just our expectation for HST. That business did decline last year and is expected to grow this year. The other 2 segments that we have really will grow kind of in line. Obviously, MPT did face the impact from the hurricane in the fourth quarter. So we'll have a slightly easier comp. But I'd say both pharma and MPT kind of growing in line with that to slightly better on the MPT side. And then HST's really kind of what drives that improvement to the 4% to 5%.

And just to be clear, Joel, I think you said it in the prepared remarks, but the thought here is that 4% to 5% on the topline is a sustainable rate going forward?

Yes. That's correct.

Okay. You mentioned Novum -- just would love to get a little bit more of an expanded conversation on the infusion pump opportunity. I think you've talked about share being in the 20s today. Where can it go? And just the general framing of the pump market today? Is it -- are you seeing a bit of a tailwind as some of these older devices get replaced?

Yes, I'll start, and then I can turn it over to Clare for her comments. We are seeing that. We're in the middle of, I would say, a solid replacement cycle that's happening. I think, there's a lot of people selling a lot of pumps. But certainly, we're one of those. And again, from a share perspective, we've always talked about over -- our Spectrum Pump was taking a point here in share and that our Novum Pump actually, we think, is 2x that. We've had substantial competitive wins as well as replacements with the pump. Again, I think, as I've said before, the launch itself went extremely well. And I think some of the fact that this was rolled out in Canada for a year in advance, they gave the opportunity to work out any kinks and tweaks on that. And I think this thing has been extremely well received. We do anticipate the replacement cycle continuing, I'd say, for the next 18 months to a couple of years. And so I think we're certainly -- again, we are the happier out of the Novan Pump last year we'll get a full year in 2025. And we certainly expect continued momentum going forward. Clare, anything you'd add?

Frontline Care, I realize it's only, what, 10-ish percent of sales. It's probably the only kind of blemish or weight on the growth right now. What do you need to do to get that back to kind of mid-single-digit growth?

Yes. So a couple of things there. Number one, and one of the things that we've talked about here is that we had a very rough set of comparisons last year versus 2023 for a variety of reasons that included 2022 backlogs that were actually cleared out in 2023, some government programs, VA hospital orders. There was a lot of -- some anticipated new construction starts that didn't happen. And so I would just tell you, I think some of what you're seeing as we head into next year is not necessarily something that is a -- we're also resetting our growth rates, if you will. But again, some easier comps versus where we were in 2024. I do think though that we're seeing some, again, I'd say, stabilizing of the primary care markets, which is part of what's impacting our frontline growth, and I think our frontline care growth, excuse me. So I think as we head into this year, the stabilization of those markets, we've already started to see as we head into this year, something that I think is actually going to be beneficial for us.

I mean I think one of the key factors is we don't expect to face the magnitude of headwinds in 2025 that we saw in 2024.

Okay. Maybe just as the last one, margin question. I realized that '25 is a bit of a quirky comp. But as you think about margin expansion beyond '25, assuming the 4% to 5% topline still holds, is 50 basis points the right level? What -- how do you balance the growth here? And kind of even if you don't want to peg a number on it, what are the factors that we should consider?

Yes. So we haven't guided specifically to that. We have said that we anticipate continued margin expansion, post the 2025 number. And I think the way I would think about some of the key drivers of that are really the following and fairly consistent with what we talked about this year. Number one, it's the new product launches and the opportunity to actually go to market with new innovations, obviously, likely some type of premium pricing that will actually -- it will be a margin driver really across our businesses. Secondly, I would continue to think about, again, some pricing opportunities. Certainly in 2025. We're expecting that for the new GPO negotiations. We're modest levels of that in normal years like 2026, but still positive. 2027, again, there will be another renegotiation of the third GPO that would happen. Again, the negotiation would be in '26, but obviously heading into 2027. I anticipate continued benefits from a product mix perspective. And from a mix perspective, in general, as HST continues to recover and improve, that's a positive mix contribution. Selling injectables at higher levels is a positive mix selling things like, again, in Advanced Surgery is a mix. And so I think where that was a headwind in 2024. We expect it to be a tailwind in 2025 and beyond that as well. ISC, I think we continue to have anticipated improvements from an ISC perspective. And then finally, just leverage. Again, as we continue to grow, our company will do a better job of actually just generating leverage from an expense perspective as we go forward. Those are some of the key things I would anticipate as drivers of margin benefit for the company.

Okay. Great. We're bumping up against our allotment. Thank you so much, Joel, Clare. The breakout is in Amarante One downstairs. Thank you.

Thank you.

Thank you, everyone.