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

All right. We're going to get started here in the afternoon session of the 45th Annual TD Cowen Healthcare Conference. I'm Josh Jennings from the TD Cowen medical device research team, and we are lucky to have executives from Baxter joining us this year in Boston. We have Joel Grade, Executive Vice President and Chief Financial Officer; and Clare Trachtman, Senior Vice President and Chief Investor Relations Officer. Joel, Clare, thanks so much for joining us today and spending time in Boston.

Thank you for having us.

Yes. Great to be here.

Absolutely. A lot is going on at Baxter, has been going on and is going on.

For sure.

And one of the big changes is at the top seat, the CEO search is ongoing. Maybe just help share your kind of -- what you're looking for in the next CEO and what they need to bring to the table that may be different than what Joe did for years.

Yes. So I guess I'd first of all say a couple of things on that. I mean, obviously, it's -- Joe has been around for 9.5 years and certainly had a big impact on the company, led us through a lot of that transformational work. And sort of we -- I think I'll view this as now, here's our next opportunity as we head into a new Baxter future. And I think what I would say is the following. I think you -- the CEO that we're looking for is going to be, I think, reflective of sort of the way we view this company strategically moving forward. And that -- to me, that really starts with how do we become an even more innovative company that is consistently rolling out new products, consistently going to market and in doing so, accelerating our growth. I think the -- as we sold kidney, it allows us from a capital allocation perspective to really be even more focused on those high-return projects that ultimately drive innovation and growth. And I think there's an element of that, that we'd certainly love to see from a CEO. I think the -- I'd say, operational consistency in terms of how we operate, being a company that -- it becomes more predictable, that becomes more consistent in terms of how we execute and drive operations. And so I think on a macro level, taking -- take a strategy like this, kind of drive it through the company and really embed it in the DNA, the culture of the organization would be the way I would say is what the -- what we're looking for in a CEO. And I think just from a process standpoint, again, obviously, internal candidates as well as external candidates, I think the Board is doing a fulsome review of both.

Okay. Great. And you kind of wanted to move into some portfolio management questions. And since the Hillrom acquisition, Baxter sold the BPS business and Vantive. Where is Baxter in terms of completion of major portfolio management moves?

Yes. So I guess my answer to that is that on a -- kind of on a material level, I think we've settled into a place that I think we like, meaning to say what you should not expect is a certainly large-scale acquisition or large-scale disposition, if you will. That doesn't mean that over time, we won't continue to critically think about our portfolio and more tweaks than kind of large-scale moves. On the -- over time, I think we'd love to earn the right to be able to do some fold-in, tuck-in deals that would supplement product areas that are adjacencies and things that could look to accelerate both our WAMGRs and our growth in our markets. I think on the pruning side, if you will, I think continue to find opportunities, whether it's in products, whether it's in geographies, certain things where we make sure we're optimizing ourselves. I think an example would be we've talked a little bit about on our last earnings call, we're looking to exit our solutions business in China. And that's an area that was, I'll call, marginally profitable for us. And those are the types of things that we'll continue to do over time. But I think, again, nothing of a material nature.

Okay. And just on the balance sheet, Baxter paid down $3 billion of debt following the Vantive sale and the plan is to get to roughly 3x net debt to EBITDA by the end of '25. Maybe just can you review some of the milestones to get to that target at the end of 2025? Anything we should be looking out for over the course...

Yes. I would say, first of all, to start with, I feel good about our ability to progress towards that target, so maybe start with that. And I think, obviously, a couple of the key milestones that have already happened is post separation of Vantive, we had about $3.4 billion of after-tax cash proceeds, $3 billion of which has already been used to pay down debt. We paid down our delayed draw term loan of $1.8 billion. We paid down $1 billion of our 2026 term loan, and we paid down some commercial paper. So key milestones there. I think the other part of that really obviously is the business that as we ultimately generate EBITDA and then free cash flow that until such time as we get to that point, we will be really primarily focused on paying down debt. But I don't know that I'd call it necessarily key milestones, but certainly our progress on our forecasted results and our ability to convert our earnings into cash, certainly, are the key elements of this.

Got you. And is 3x kind of the longer-term target as well? How do you think about that?

Yes. Look, it's obviously -- it's something that I think is a target level that allows our company to be both solidly in the middle of kind of investment-grade land from a ratings perspective and at the same time, allows for a very balanced capital allocation as a company, meaning the ability to invest in our business the way that we should be investing in our business and the ability to return value to shareholders. We certainly committed to a dividend. Obviously, we downsized it some related to the sale of Vantive. And we look forward to reinstating our buyback program and as part of, again, a comprehensive and balanced capital allocation program. And so I think 3x leverage allows us to do that to not let our balance sheet be lazy, so to speak, but at the same time, comfortably in an investment-grade space.

And just thinking about your earlier comments just on maybe some tuck-ins, I mean, have you guys kind of put a ceiling just in terms of size of an M&A transaction that would be fit in within the strategy? Or is that getting too deep...

I guess my view of the world on that is -- I mean, again, this is just a broad range, but I look at that as $250 million to $1 billion deals, I think, is probably a reasonable view of what I consider a...

Sure, sure. The tariff question has come up. You've got -- Baxter is a global business. But any -- just wanted to see if there's any major changes or issues arising just from some of the formal announcements earlier this week with Canada, Mexico and China tariff issuances.

Yes. Yes, I heard about some of that. And actually, if I answer this question, then you ask me 5 minutes from now, we might have a different answer. But in all seriousness, I'll maybe start with Canada and China. Those are areas for us that actually I recall have very, very small exposure for us in terms of -- both from a sales standpoint in China, we've only got a couple of percent at the most of our sales across all of China. Mainland China is even less than that. Our manufacturing exposure in China and Canada is small. And so I kind of look at those areas as, again, really just almost completely insignificant risk. From a -- from Mexico standpoint, we do have 2 plants from HST in Mexico. But again, having said that, it's -- as an organization broadly, it's fairly modest exposure. One of the things Baxter has done a good job of, just broadly, is where we sell, where we manufacture in a lot of cases. Like even when we talk about the Canadian exposure, we have a high -- fairly high share in that country and the majority of everything we do there is manufactured in Canada. I know there's been some talk about tariffs even in the EU at some point. And -- but back to this point I'm making, a significant amount of what is sold in the EU is actually manufactured in the EU. And so -- and likewise, we have a lot of -- our U.S. business is manufactured in the United States. So I guess I would just say broadly, certainly, it's an impact, again, on -- from a company perspective. It's not -- again, it's not a highly material impact for us, but certainly something to keep an eye on and obviously, look at -- it's still pretty early to tell. We haven't -- we've decided purposely not to come out with some quantification of this just based on what seems to be kind of an ongoing...

Moving target...

Yes. Movement there, and we'll see where it goes.

Great. And I know there's been a plan to host a Capital Markets Day and Investor Day. And the CEO search is going to kind of determine that foundation, that press will determine when it happens. But I think previously, the expectation was maybe management would issue longer-term targets post the Vantive sale, but it might be tough -- a new CEO, until they get their arms around.

Exactly. I mean, I think that we had previously plans to do it. But in light of kind of the search for the CEO, I think that we're just kind of pausing, and we'll give that candidate a chance to get familiar with the business and then determine when the -- we will do one. It's just the timing, obviously, is highly dependent on whether it's an internal candidate, external candidate and where we go from there then.

Understandable. Should we be thinking 2026, maybe just as a -- hard to know?

Yes. I mean, ideally, but I'm not going to put a time frame on it right now.

I think the one thing I would just encourage all of you all to think about on that is we've talked about this 4% to 5% growth rate as something that I'd consider a really solid sort of baseline in terms of how to think about our company. And obviously, we certainly look to do things that would hopefully over time, be able to accelerate that. But I think it's really -- that 4% to 5% is something that as we're thinking about a long-term target, I think it's a reasonable way to baseline our company. And then we've also said that with the 16.5% that we talked about for 2025, over time, that would be something we would continue to look to continue to expand as well. So just -- I know that's not an official long-term guidance of any sort, but those are the kind of things I would...

Yes. And the free cash flow, we've targeted the free cash flow as well, 80% free cash flow conversion. So...

That's helpful. Thanks. I wanted to talk about the MPT business and North Cove, remarkable recovery process from Hurricane Helene. And production is back to pre-hurricane levels. Some customers you relayed almost uniformly committed to supply from Baxter despite potentially having taken on another supplier. But maybe just address those dynamics and your comments that the recovery process is hold and there won't be a permanent impact to the IV solutions business.

Yes, sure. So I think, number one, just always get a chance to do a shout out to the team in terms of how that recovery process has gone. I think there was a -- understandably a lot of anxiety around what that might look like over the long term. Our plant at this point is now actually back up to 100% of its capacity. And so that is just a huge tribute to a lot of work that was done, and I'm not sure there's a lot of companies that could have pulled that off in this way. So just maybe start with a shout out there. I think in terms of kind of where we are on -- from a customer and a production standpoint, I'd say a couple of things. Number one, maybe hit a punchline. We don't anticipate a long-term share loss as a result of this impact that happened. Certainly, in the immediate term that followed, there certainly was replacements that needed to happen, but I can tell you, I think we have come out of this. At the time, we said, hey, this could be our finest hour when all this happened. And I think we came out of it in a way that our customers have been very, very pleased with the way we reacted to this. And so the confidence I have in their level of commitment to us as a company in that product space, again, over the long term, I think we feel really good about. A couple of other things I'd say. Certainly, there was some conservation that happened along the way. And then obviously, I think is still, to some degree, building back. I think the -- when I talk about being at 100% production right now, we're essentially selling every case we produce, every bag we produce. What we're still doing, though, is working to continue to reestablish what customers they have had on hand that is at the moment, less than what they may have on hand today. And so I think that process of somewhat building back some of those stocks is something that is continuing to happen. That's over the -- certainly, I think we see that continuing over the first half of the year. And we head into the second half of the year, I think getting back to a little bit more normalized state as it relates to that. And then entering the fourth quarter with obviously an ability to have a pretty reasonably strong comparison to the impact that we had in the fourth quarter of 2024.

Great, great. And just on GPO contracts, you've shared that 2 major U.S. contracts starting January 1 and February 1 reflected favorable commitment levels to Baxter and some positive pricing momentum. Maybe can you quantify the pricing comment and maybe a sense of magnitude and timing of the positive price premium?

Yes. So what we've talked about on that is that the -- we anticipate about 100 basis points on an enterprise level from a pricing perspective as a result of this work on the GPOs. That is, I'd say, primarily kicking in, if you will, around February 1 for the majority of that impact. So -- but the negotiation itself, these are now complete. This is another really important part of the work. And again, if you think about the work that was done, this happened during the aftermath of a hurricane. And so there was, again, a lot of -- I think there was some anxiety around what that would look like. We came through that very well. I think -- and again, we're now past that point. And again, that pricing should start to kick in February 1.

Are there any upcoming GPO contract renewals of note this year where that could impact pricing...

Yes. So not this year. So we've -- so 2 out of the main 3 were negotiated in 2024 for this 2025 impact. The next -- the third one of significance is in -- will be negotiated in 2026 to have a 2027 impact. Outside of that, I think what we continue to believe is we'll have, I'll call it, modestly positive pricing in our normal years, so say, 2026, for example. But that -- the third GPO won't happen for a couple of years.

And maybe leading into the margin improvement trajectory. Pricing is a nice driver, but 2025 can help to get you guys to that 16.5% target. Maybe how big of a component is pricing in terms of driving that margin uplift versus some of the core business dynamics and operational efficiency programs that you guys are working on?

Yes. I mean, I think I'd call out a few things that are important components to this. Certainly, pricing is a significant one. But there's a few others I'd call out. Number one is the continued impact of some of our new product launches that we've had across the organization, even, for example, our Novum pump does have a -- come at a price premium to Spectrum. So there's an element to that. The new product introductions across pharma are areas that ultimately are driving positive margin impact. So sort of kind of categorizing it is generally new product introductions. The second is around what I'm going to call mix. So the -- we had a headwind in 2024 from a business mix perspective that we actually anticipate being a contributor to margins in 2025 and beyond, by the way. Our -- some of the recovery of HST as we head into 2025 is margin accretive from a mix perspective. The transition of some of the -- last year in 2024, we had a fairly big dichotomy between our growth in injectables and pharma and compounding. Our anticipation this upcoming year, we talked about 5% to 6% growth in pharma, balanced between those areas. That's a positive mix impact from injectables, our -- things like our Advanced Surgery, MPT has been -- has had some good growth. We anticipate that to continue and again, margin accretive. So mix is another component of this as well. The third thing I would call out is our ISC. We continue to have our margin improvement programs in ISC that both are impactful, both absorption of increasing cost, but also -- as the name suggests, improvement of our margin programs there as well. And I think finally, I would just say is that we, from a G&A perspective, look to continue to gain leverage on our growth, so as we continue to grow. And notice I didn't say SG&A, there's going to be continued investments in sales and marketing and certainly in R&D as well. But from a G&A perspective, some of the work we're doing on stranded costs and those type of cost impacts over the course of the year will continue to drive leverage and margin improvement as well.

Awesome. The recovery of the HST franchise has become a focal point that you guys have called it out and talked about some recent stabilization within the primary care market. There were some challenges last year, just declines in construction and shift away from retail primary care. But can you help us understand what your view is of the stability in the primary care channel? And are you seeing this new growth? Or is it just headwinds subsiding a little bit or you're anniversarying the headwinds on -- off of a softer comp?

Yes. I never consider this my most strategic comment, but it is a headwind subsiding where we have some better comparisons versus some of the significant headwinds we had in 2024 that we're not anticipating in the same way in 2025. And I want to be clear, we're not -- this doesn't -- while we do see some level of recovery in the primary care market, we're not projecting some substantial growth vector change in that way. And again, stability, yes. But again, this is really as much as anything, a recovery against some of the things that we saw in 2024 that we are not anticipating as significantly in 2025. The other thing I'd just maybe add as an and-then part of your other -- your question, as part of HSD overall, the other part, though, I would continue to call out as a positive is in the CCS part of that business, we've talked about now for a while in the last number of months about the size of the order book and some of the impacts that we've seen there. And in fact, in our U.S. PSS business, we had the latter part of the year, some double-digit growth in that area. That was an area you'll also recall was challenged in the beginning of 2024. We certainly see some of that continued momentum heading into 2025. And so I think when you combine some of that more positive work, particularly again in U.S.PSS and some of the recovery we talked about in FLC, we are looking to see some recovery in that business this year. And to be candid, we're off to a decent start here to start the year.

Great. And you mentioned Connected Care Solutions, and I just wanted to get a better handle on the recent evolution and where you are now currently in terms of realizing the vision tied to the combination of Hillrom and Baxter during that acquisition process.

Yes. Well, I would say -- so for CCS, part of, again, some of the challenges we had in the early part of last year were really around -- there's a couple of operational things we called out. But I would just say, in general, there's been a lot of work done to improve the mechanisms and the visibility to the way our orders come in and ultimately translate into sales. I think the -- you'll recall, we headed into the last January in 2024 with a very, I'll call, meager-sized book of orders that actually came in very late in Q1. This year, some of the improvements that have been made in terms of how we drive outcomes in that business, how we, again, focus on competitive wins, this has been part of the incentive change that we've made with some of our sales teams in that space as well. But driving competitive wins, focusing on really having, again, specificity and visibility to when these -- to the order book itself, but also then the timing of when they ultimately translate into revenues. That's just kind of what I'll call operational sales work that's significantly improved over the course of the year. And you can see some of the results of that as we head into this. We have had some challenges, OUS that we've worked through, particularly in countries like France and in China to some degree with some anticipated government stimulus payments that have been slower than expected to come through. But again, we do expect that to stabilize over time as well.

Okay. You also mentioned Novum IQ earlier in one of your answers, and that launch has gone well as your team has described, real strong growth in 2024. Maybe just help us think through whether that growth was driven by replacements versus winning share, a combination of both and the same continued momentum into 2025, I think, is the expectation.

It is. And it is also both, back to your point on is this -- are these replacements with existing customers or are these competitive wins? I think the launch itself is something as a company, we're really proud of and it has actually gone really well. And I -- the product has been extremely well received. The demand level is high. We're certainly in a replacement cycle for pumps. And so there's a lot of people selling pumps right now. And we're certainly one of them participating in that. We expect that replacement cycle to continue here for the next year, 1.5 years to 2 years. But I think the key part, back to your original ask is this is something that as we sold our Spectrum pumps, we were taking share at a rate of about 1 point a year. We actually believe now that with Novum, we've actually doubled that. We're taking a couple of points of share a year here. And the great thing for us is we got about half a year out of that growth last year. And obviously, we'll now get a full year of it here in 2025. So we feel good about that momentum. And then, of course, the good news of that is the pumps themselves are not necessarily margin accretive by themselves, but the sets and the other things that go with that has been something we've seen a lot of success in as well and I'm feeling really good about where we stand there.

And the Novum IQ platform is going to continue to evolve. Maybe walk us through that and how that can add kind of additional layer of growth for the franchise.

And before I go there, I also wanted to say with Novum IQ, a lot of the digital capabilities that we have with that platform really then leverage -- kind of you were asking earlier about the thesis behind HST and Baxter. And that's what we're able to do with Novum, particularly is really leverage these digital capabilities across the portfolio and across both our HST, across our pharmaceuticals and across kind of MPT. So that's the promise, and that was unlocked really with the Novum gateway. In terms of the platform, so we have the syringe and the LVP, those have been launched in the U.S. and in Canada. And we'll be focused on a PCA pump, which will kind of be on that same Novum. And then we're also looking at an ambulatory pump as well. And then beyond that, we'll look to which markets outside the U.S. and Canada will further expand. So we're looking at targeted geographic expansion for the Novum platform going forward.

And then -- just help thinking about the growth in 2025 off of a tough comp. I mean it sounds like momentum is continuing to kind of outpace the market, but by a couple of points maybe.

Yes. I mean, I think that we're expecting, again, solid growth out of our infusion systems business in 2025. I think to Joel's point, we have the benefit of having now a full year launch of Novum there, but I think it will definitely be a contributor. We've called for MPT to grow approximately 5% this year. And that does reflect some, to Joel's comments earlier, just some conservatism earlier in the year as we think of conservation kind of potentially impacting some IV utilization. But then the ramp of Novum really in the first half of the year and then through the remainder of 2025.

Great. And Advanced Surgery was touched on earlier, but just to build on that, mid-single-digit growth this year in 2025. Maybe help us think about volume versus pricing, and is volume really tracking in surgical procedure volumes where there are some competitive dynamics that are helping or maybe turning into a headwind -- mild headwind? Or how are the competitive dynamics shaping up, I should say?

Yes, I'll start, and then Clare can add anything she wants to add to this, too. I think first of all, back to your kind of pricing and volume quota, one of the things that actually was a driver of growth in that area in 2024 was some OUS pricing in particular in that space. That actually was one of the key drivers of our margin growth and pricing impact in 2024. And so I think when you combine that with the fact that, again, we also continue to experience volume growth really across the global portfolio, so we -- there's good demand for that product, both in and outside of the U.S., and we're expecting that momentum to continue in terms of -- and again, in terms of surgical procedures and again, sort of some of the key kind of drivers behind that. Again, it's been favorable, and obviously, we've had some new and interesting products as part of that as well. Anything you'd add to that?

No, that's exactly right.

Maybe just to last touch on that last answer -- part of your answer, just maybe the pipeline in Advanced Surgery, how is that going to contribute to sustained mid-single-digit growth or even driving a little bit higher?

So certainly, we look at Advanced Surgery broadly as one of those areas where when we talk about mix improvements, it's an area that, again, has some growth potential and obviously at a higher margin. And I think over the longer term, the pipeline for that certainly has both organic and potentially inorganic opportunities. And so when you talk about some of the fold-in, tuck-in type opportunities that are in some adjacencies along the areas that could even further accelerate that, we certainly do see that as one of those areas that from an overall focus on growth standpoint, we could have, again, in both cases, helping accelerate that.

Outstanding. Joel, Clare, thanks so much for Letting us hold a fireside chat, and thanks...