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

Thanks for joining us for our next session. I'm Matt Taylor, the Jefferies, medical supplies and device analyst in the U.S. And I have with me management here from Baxter, including Joel Grade, the CFO; and Kevin Moran, doing Investor Relations. So if you'd like, we're going to start here with the traditional forward-looking statement.

Thanks, Matt. Thanks for having us here today. I appreciate having us on stage. Just a quick reminder, we will be making forward-looking statements today that are subject to risks and uncertainty. For a full description, please check our website or our SEC filings. Back to you, Matt.

Okay. Great. Well, I think we should start with talking about a lot of the changes in the last few years. So there's been a lot of portfolio management going on, kind of divesting some businesses to get back to a core. Maybe you could just give us a little history to talk about why you did those divestitures and talk about what Baxter is getting back to and why these core businesses belong together and give you a right to win.

Yes, sure. Thanks. And again, I appreciate all of you being here today. Look, I think I would start with just obviously, in December 2021, Baxter acquired Hillrom. And from there, there's a lot of, I'd say, put debt on the balance sheet and some integration challenges, supply chain challenges that resulted from that. And so as part of that, in January 2023, we announced a number of different key strategic changes that were being made. One was selling our BPS business, which is the contract manufacturing business. The second was selling our kidney business, which is obviously called Vantive nowadays. And then third was really restructuring and verticalizing the business. And so I think those portfolio moves were designed for a couple of different reasons. One is clearly from a debt paydown perspective, but also to put the portfolio in a place that was, again, to your point, kind of strategically set up the way we wanted it to be. And so I think where we find ourselves today is I'd say at the -- we're through some of those really key large strategic moves. And I think that's really important for a couple of different reasons. And I'll get to your portfolio question in a second. But just getting through some of those things, clearly, there's a lot of cash invested in some of those areas. There was a lot of, I'll say, distraction, if you will, and focus on getting through some of those versus focusing on some of the things that are going to ultimately drive organic growth, focusing on really clearly integrating Hillrom into our company in a better way and just in general, operating in a better sense. Our portfolio today, I'd say -- look, I would not anticipate other large kind of material changes coming out of where our portfolio is today. I think we certainly feel we can continue to operate and get better from where we stand. Having said that, I think it's on us all the time to continue to evaluate, especially with the new CEO, evaluate the portfolio of companies, but also products of geographies that we're in. You may recall last year, we actually exited IV Solutions in China as an example of something where, again, from a profitability perspective, it didn't make sense for you. And you can expect us to continue to make moves like that. But I'd say, again, coming through the strategic objectives, those kind of key strategic things that we talked about. Really, the focus today is how do we continue to become more consistent operations. How do we consider -- how do we continue to become more predictable, more consistent, again, operate better and then ultimately generate more cash that then allows us to reinvest for growth and down the road to be able to accelerate growth in a better way.

Great. And obviously, with the new CEO, there's kind of more to come on the forward-looking plan, the long-range plan. But maybe you could offer some thoughts on the growth profile of new Baxter, RemainCo Baxter. And if you want to touch on the different segments between MPT, HST and pharma, anything like that would be helpful.

Yes, for sure. And sir, we -- again, we're not going to necessarily provide guidance here from a numerical perspective, but certainly walking through the businesses, I'd share a couple of things. Certainly, it's a combination, I'd say, as Andrew said when he got here of stabilizing parts of our business and obviously delevering our balance sheet. But the business itself, I'll start with MPT, certainly, continued opportunities and challenges as it relates to the Novum pump. I will remind everyone that we do have a portfolio of pumps and that our Spectrum pump has been something that has been in the market now for a number of years. It's in 1,500 institutions around the U.S. and Canada and presents a really good alternative as a pump for customers that, again -- are again, very loyal to Baxter in the pump space. And while we're working through things with Novum, Spectrum is available. And so that's clearly a key focus while we work through the -- for the opportunity at some point to remove the ship hold from Novum. I think from a fluids perspective, I think the other part of ITT is really around that. And clearly, there's still elements of fluid conservation that are at play. I think in some ways, we've essentially reestablished almost a new baseline that we will then continue to grow from in that space that is still below the demand levels that existed prior to the hurricane happening. But that's certainly something, again, I think we essentially, in some ways, reset our base that will continue to grow from there. Our Advanced Surgery business, MPT continues to be a bright spot for the company, and that's an area that last quarter grew 11%, has historically had a pretty high single-digit CAGR and one where I think continues to make really strong progress with its hemostats and sealants as part of that program. HST. HST this year has been a solid story. Our CCS business, we've had a positive order book all year. We've talked about that. And even in the last particular quarter, we had some really strong competitive wins and talked about the fact that our order book was actually up 30% over last year. And so we feel good about that business in the U.S. We have often been asked, are there concerns around capital from some of the hospital systems, but we really continue to see good progress in our capital space in HST. And in Front Line Care, this is a business where the primary care markets really, as we expected them to, have stabilized in 2025. We had a very, I'll say, stable year there and anticipate heading into next year with some modest growth there. And then finally, on the Pharmaceuticals side, on the positives, compounding continues to be a strong growth area for us. And while that is a lower-margin business, it is the fastest cash cycle in our company. So there's, again, advantages to that business growing at the rate that it is. Anesthesia, a business that's had some number of challenges over the last couple of years, actually did -- is actually growing this past quarter in a high single-digit way. And the challenge we did have was in our U.S. injectables business, mostly related to some areas that I'll say is, again, what feels somewhat a bit of a market shift in terms of IV push and some element of, I guess, I'll say, caution around spend in hospitals where buying vials is cheaper on the surface than some of the premix, although clearly, we continue to believe, as we have for many years, that that's a value add from a total cost of ownership. So hopefully, that gives a little perspective on the different kind of parts of the business and how we're thinking about that moving forward.

And assuming you'll guide on the Q4 call, when do you expect to give a more fulsome Analyst Day LRP sort of update?

Yes. I think certainly looking sometime in 2026. We haven't established that as of yet date-wise, but we will look forward to having an Analyst Day and giving more fulsome kind of, I'll say, algorithmic guidance on how to think about the company and some of our strategy going forward then. Obviously, we will likely, though, give more guidance from 2026 typically on our last quarter earnings call.

And then we talked about some puts and takes on the top line. Maybe you could just do that for margins and talk about the trajectory into next year and the year beyond. What are some of the kind of good guys and bad guys that could help you to grow margins?

Yes. So I guess I'll start on the top line from that perspective and some of the things that are coming down the pipe in terms of some new product launches. Just the thing to always remember about Baxter is, again, we're not a company that has really just, again, large splash things that come out. And if you think about our pump sales, again, there's a lot of conversation around Novum and other parts of our pump that's less than 2% of our sales as a company. And so these are the types of things that I just want to be clear on. But it is something from a new product launch perspective that is -- we talked about ConneX 360 our last quarter as our new next-generation monitor. We're really excited about. Our customers are as well. Minimal impact in this year, but something we're excited about as we head into next year. And other things down the line, we'll look forward to continuing to talk about from a new product launch standpoint that would be margin accretive. I think from a mix standpoint, we will continue to focus on driving mix, both from a product, from a geography, from a business standpoint in terms of how do we continue to drive margins through enhanced mix in those areas. We talk about the continued cost leverage. Certainly, starting from a manufacturing perspective, we obviously have a broad manufacturing network. Every year, we have margin improvement programs that are focused on things from an automation, from continuing to drive down material costs from labor efficiencies, et cetera, et cetera. And so those types of things ultimately are also part of our margin enhancement story as well as continuing -- and I've said this many times before, we are not going to be driving our way to prosperity through SG&A savings. At the same time, we're still working our way through some of the stranded costs that we had from the sale of our kidney business. As a reminder, we said that we would be through those by the end of 2027. We're on track to do that. But as we continue to make progress there, those are also ways that we'll continue to drive some cost efficiency in our organization. So again, lots of different areas there to drive ultimately continued expansion of margin as well as improved cash flow for the organization.

So I'm curious if you could expand on the new monitor and just the connected care strategy overall that was part of that original Hillrom thesis. How is that evolving? Can you give us a sense for how that ecosystem looks now and where it could go in the future?

Yes. Well, so number one, it's certainly, as you said, was a key element of the Hillrom deal, and it's certainly an interesting part of our business moving forward in HST. I think it's one of those areas that is both what I would call table stakes in some ways nowadays, but also ways that we can continue to help our customers solve different issues they have. And so for example, we have a nurse call device that is really central around how do we help connecting our devices that monitor patients with, again, fewer and fewer nurses who are trying to take care of more and more patients at the same time. And so we continue to make progress in that space. And so again, I would say, philosophically for us, the connected care element is both some of the things that today our customers expect from companies that have devices like we do. But then in addition to that, really working together with them to help solve issues that they're having going forward. And that not only increases kind of the stickiness from a customer perspective, but still, again, more to come in terms of what that overall looks like from a strategy perspective.

Great. I wanted to circle back on Novum. And any updates that you can give us in terms of root cause, regulatory engagement, sort of the path back? Any kind of expectations there? And previously, you had talked about 200 basis points of share gains over kind of a 2-year period with Novum. Does that change in the current situation? Or can you still gain share with Spectrum?

Yes. So let me start with the first one. I think, again, the -- what I would say today is that our teams are working very closely with our customers and with regulators to work through. We have -- from a timing perspective, we've talked about the fact that we do believe this will extend beyond 2025. We haven't given further guidance on timing of that. And again, we also haven't gone specifically into details around sort of what, if any, developments are part of that or what would take to actually ultimately bring it back to market. Those are kind of technical details that we're not going to go into deeply here. We have been asked the question, why are we involving the regulators and how does that work? And I would consider -- I would say it's a best practice for us to ensure that regulators are with us every step of the way as we go through this process, even though, as you know, it was a voluntary recall. I think the thing I would continue to emphasize, though, is the importance of our portfolio of products that we have here because there is strong demand for our Spectrum pump. Again, as one of the alternatives for our customers to minimize disruption to continue this opportunity. And why is this important? It's important because by kind of keeping it, I'll say, in the family, so to speak, the sets, the tubes, the other things that go along with that is part of their interchangeable between Novum and Spectrum. And so that work -- that's important for us to provide an alternative to our customers in that way. And to your market share point, again, you'll recall that prior to Novum, we actually were taking about 100 basis points of share with Spectrum. We did say that, that would increase with the introduction of Novum. I would just tell you, I think we feel very good about our continued ability to sell pumps overall. And so while it may not be at that same level that we had suggested with Novum, we do feel we're still in a good place as it relates to our overall pump sales. And again, the related products to those, including those sets, the tubes, et cetera.

And then on the fluid conservation issue, I was just wondering if you could talk about your efforts to change behavior there, what you're doing to help customers feel good about supply and when you think that might actually impact the way that they're thinking about their fluids today?

Yes. I think -- so the efforts around that really center in a couple of different areas. I mean, obviously, we spend a lot of time with our customers, both educating them in terms of reminding them of both the clinical and economic benefits of those products. Clearly, again, there does seem to be some level of practice change that has occurred that obviously, as our process continued to evolve post hurricane, we ramped up our production. But for a while, you remember we had customers on allocation. And then we gave them a grace period post the GPO signings to actually ramp up back to volume levels. And so our commercial teams are spending a lot of time with our customers now. And again, both from a -- again, here's the commercial and clinical reasons that it's this type of hydration is more, again, beneficial than other oral hydration, et cetera, et cetera, but also working through some of the volume commitments that were made at the time the GPO contracts were negotiated. And again, this I'll call trade-off between volume and price. That's part of that impact. Again, we're doing that in a thoughtful way and again, working with customers to do so, but very, I would say, intense level of effort there. And I think the thing I would just remind people, again, this was something when we had a hurricane back in 2017 that impacted one of our plants in Puerto Rico. It was a better part of a couple of years to get to before some of those buying patterns resumed to be consistent with the ways that happened pre-hurricane. But clearly, again, this is an area we feel very confident in our portfolio in and one that we certainly said we expect the conservation to continue into 2026. I'd almost think of it as at this point today, we have a kind of a new normal that we're going to then continue to grow from as we head into that year.

I'd just play [ Devil's advocate ], like, if that does not improve, when do you sort of lap the fluid conservation headwinds if the behavior does not change?

I mean the conservation itself really started after the hurricane. But again, I don't know if I -- I would almost again, think of it this way as, again, we have essentially almost a new base, a new baseline that I anticipate us growing from.

Got you. Yes. And you talked about the GPO contracts related to this, but you've had a lot of GPO contract updates in the last couple of years and contributed some to pricing and margin in 2025. Maybe just update us where you are on that journey? Are there opportunities in '26 and beyond to do more of those and to help your pricing and your margins?

Yes, sure. Yes. So as we headed into this year, we actually, if you recall, renegotiated 2 of the 3 large GPO contracts. And what we talked about at the beginning of the year was the fact that we anticipated about 100 basis points of price increase that was at an enterprise level. And so that is -- that's something we have -- we're very much on track for. It's been something that's been a real positive. And in fact, as you saw even in our MPT margins in the third quarter, that was part of the really, again, the positive result that even despite some of the volume softness. Obviously, the offset to some of that in the enterprise basis has been the volume impacts from fluid that have impacted the pass-through, particularly absorption in our manufacturing plants. But our pricing actions have been something that's been a real positive, both outside the U.S. and as it relates to the 2 GPO contracts. On a go forward, to your question, the third GPO contract, we will be starting the renegotiation with that in -- at the latter part of 2026. That would then be impacted in 2027.

And I guess related to this in margins, could you talk about tariff impacts a bit? You've had some headwinds from China? And maybe just talk about how you're thinking about Canada, Mexico and next year. And anything we should consider on the Pharmaceutical side?

Yes. I mean I would -- so a couple of things. From a tariff perspective, just as a reminder, we talked about a net impact of about $40 million. That number actually came down over the course of the year. And I think that's a very reasonable view of where we think we'll come in, first of all, on that. From a cash perspective, that number was closer to around $110 million. And so it's a bigger cash impact even in this year than it was a P&L impact to some of the cap and rolling, et cetera, et cetera. But I think the -- I'd say just as a general statement, I mean, one of the things we've continued to focus on is -- so what are we doing about this? And obviously, it's really focused in a number of different areas. Some of some, what I'll call some targeted pricing actions to pass through in those areas, particularly in our HST business. Your question on Pharmaceutical, at this point, and again, things are fairly subject to change on these topics. I'll just say it that way. So to the best of what we know today, that has been a relatively minor impact from a pharmaceutical perspective. We are -- our pharma is generics for the most part. And so I think that's -- again, that could change tomorrow, but for now, that's where we're at on that. And I would just say -- and then from a supply chain perspective, a number of different things we've done to continue to focus on offsetting some of the tariff impacts, including negotiation with suppliers. We've talked about kind of managing our shipping lanes in a different way. And I'd say just in general, Baxter has done a pretty good job of what I'll call build where -- buy where we build and build where we sell. That I think has been relatively helpful as it relates to this overall tariff impact.

Got you. I checked Truth Social before the presentation as I do for each, and it hasn't changed yet.

There you go.

This is good. Maybe we can finish on Pharma with another one. You had a couple of challenges in the last quarter with some tough comps. You talked about some constraints there. Could you talk about how those issues resolved and the outlook for pharma specifically in the next year or 2?

Yes. I mean I -- look, the comp was really more of a -- we ended up having a strong quarter in the sense that we had a very weak quarter in Q3 of 2024. But I think the thing that we're probably wrestling with a bit on the -- in our U.S. injectables business is really a couple of things. One is some of the IV push and some of the related impacts to some of the IV protocols, I'll call it, post saline and some of those related to some of the conservation efforts. And then the second is really around, I guess there's -- I'd call it a bit of uncertainty in the marketplace around hospital spend. And one of the areas they have been looking more carefully at is this question of do I pay more for value-added premixes versus what would appear on the surface less for vials that will premix ourselves. And I think that's something that we're -- obviously, our teams are working intently with our customers to really talk through both again, clinical benefits and that total cost of ownership benefit of those value-added products. Again, this is something we've been successful at for many years. And so I think I do think that's something that will recover over time, but it is some softness in the market that we've experienced here. over the last couple of quarters.

Great. Well, I think we have to end there. But thanks so much for your time, and thanks, everybody, for your interest in Baxter.

Thanks, everyone.