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

Welcome, everyone. I'm Robbie Marcus, the med tech analyst at JPMorgan. I'm very happy to have Baxter as our next company presenting. Andrew Hider, the new CEO, first-time presenter at JPMorgan. We will do a presentation followed by some Q&A.

Great. Good afternoon. A little silent. Andrew Hider, CEO of Baxter, and I've been here a whopping 5 months. A little bit about me. I started my career at General Electric. I was there for 6 years, then I went to Danaher Corporation. I was at Danaher for 10, ran 4 companies for them anywhere from semiconductor to x-ray diffraction, underground tank storage as well as instrumentation for dairy food, beverage and biopharma, took over a business, private company, and then I ran ATS Corporation for almost 9 years as the CEO. I tell you that as a framework because I view an operating system and continuous improvement at the core of everything we do. And why I was excited about Baxter, it's an iconic brand that brings high value to our customers. And where we are in our journey, not only we have a lot of opportunity, a lot of areas we want to drive improvement. So we know the safe harbor statement. You can look this one up online. I won't go into detail here. So a little bit about us. We're an essential global partner servicing our customer needs. We help over 350 million patients per year. We do business in over 100 countries. We have over 38,000 dedicated employees that are really aligned around our mission to save and sustain lives. We're over 40 manufacturing locations. And as a CEO, I have a standard work and part of my standard work is to be on site, and I've visited almost half of our facilities so far with that alignment to understand where we are in our journey and how we need to improve to get better. And a little bit further of the insight, we're a little over $11 billion in revenue, 55% of that in the United States, rest is international. And we're in 3 operating segments: Medical Products and Therapies, Healthcare Systems and Technologies and Pharmaceuticals. And to give you a little indication around these, our technology and products really play a role in delivery for patients throughout all of our customers, across all of our sites. So whether you're in the hospital, you're an outpatient or an alternative site of care, Baxter plays a critical role in that. They depend on our solutions. And I'll double-click on these in Medical Products and Therapies, we have our Infusion Therapies and Technologies business. Think IV solutions, the pump portfolio as well as many others. We advanced surgery. So we're in the operating room, helping surgeons when they're in surgery, enabling patient care. We're also in our health care systems and technologies with care and connected solutions. Our beds platform, as well as lighting, tables and connected products. Our customers are looking more and more for Baxter to provide ability to drive higher level of patient care with efficiency. That ability to take data and turn it into actionable insights, and we're down that journey on this business. And then our front line care business, whether that's cardiology, respiratory or patient monitoring, continuing to expand that ability to bring high value for our customers and delivering strong solutions for patients. And then pharmaceuticals. And pharmaceuticals has a lot in common with our ITT platform. If you think about our business, the prick to the drip. We provide the solutions around that and the capability around that, whether it's specialty injectables or inhaled anesthesia to our compounding business, providing Elixirs that help patients as they're in outpatient service or other areas. And as we think about the markets and the dynamics that our customers are faced with, we help in many areas, whether it's chronic illness and age, with an aging population and the ability to provide higher levels of service and support for these patients, Baxter helps. We're going to advancing technologies, whether it's digital, working on workflows or AI, maximizing your patient safety and maximizing your efficiency, Baxter plays a role. And lastly, care across settings. Our customers are looking at different ways to bring their value to the patient. They're going more decentralized, not just in the hospital, but also other areas. With our product portfolio, we protect and help in all areas. We provide stability and bringing that solution to life. And as we go through our next chapter, I'm going to walk through a little bit about where we are. Because as I took this job, eyes wide open, but we've got a lot of work to do. But we've got an iconic brand. We've got some areas that we need to target, and we need to drive improvement. So it starts with stabilizing the business, really identifying and driving impact in the areas that need addressing. It's people, process, then performance with a clear area of focus of our value creators. We have 8, not 7, not 10, 8. It's that common sheet of music. As a CEO, I don't like secret decoder rings. When I go to facilities, I want to know in 3 seconds where you're winning and where do we have to focus, red or green, not pink, purple or yellow. We have to strengthen our balance sheet. We're over 3x levered. We took decisive action around this. We need to get our balance sheet under 3x. It allows us to have that focus on capital allocation, driving expansion into our business. It's a consistent discipline on how we allocate capital, both ongoing investment and potential future new investment. If you join my team, you get 2 books. One book is the outsiders. And the reason why we give you that book is I want you to know how I think about capital allocation. It's investment to return, that alignment on innovation to drive expansion, to drive ROIC. And lastly, we've launched our continuous improvement journey, Baxter GPS, growth and performance system with an emphasis on growth. We launched it my second month on the job. My team was pressing me, Andrew, we need to drive this in everything we do. We need to start to align around Kaizen events around the critical few. So we launched our platform, and it's now taking shape of becoming our DNA. And a little bit more about that. Baxter GPS starts with people, winning as a mission-driven team. Process, being simplified and optimized, streamlining, aligning around your customers and constantly looking to improve your process. And lastly, performance. I'd like to say we're ex-athletes. We like a scoreboard. We want to win. And when we're off, what do we do to get back on track. Then along the bottom is our focal areas -- it's our focus areas. Our mission-first culture, save and sustain lives, customer first because if our customers win, we win. And long-term shareholder value creation, that constant drive to know that when we take action, we have to align it to shareholder value. And across the top is how we operate, our operating cadence, whether it's daily visual management or annual plans to the tools we use to drive impact. And lastly, our tracking, how we measure our progress with our 8 value creators around financial performance, people and customer to the KPIs that enable those. And I'll tell you, the first week of the year, last week, we did our first annual President's Kaizen. 10 Kaizen events focused on impact for the business. And our leaders drove those. And it's the tone we set at the top around nobody is above continuous improvement. We will focus on improving in every area we operate, and we measure our performance. We're setting the tone around the future. And the 8 value creators, I'm going to start on the right side, financial, revenue, margin, working capital and ROIC, that constant drive to always get better. The focus on how do we drive long-term shareholder value through these 4. But to create repeatability on those 4, it's the first 2 with people, hire from within, our internal fill rate. Are we building our talent for today and tomorrow? Turnover, making sure when we get the right people on, we don't lose them. And then customer, on-time delivery and quality, 2 areas we own. And when I talk to customers in my meetings, tell me if you give me the product on time with the highest level of quality, we want to buy more of it. These are the 8. Whether we go to our facility in California, Puerto Rico or in Spain, we start with these 8, red or green, are you on track for your annual performance or are you off? And if you're off, what are we doing about it? How do we drive to root cause and how do we drive countermeasures to get back on track? With that it's also innovation. When we talk about internal investment, the greatest return to our shareholders Internal investment is a key enabler. We can't be more excited about the first product, our Welch Allyn Connex 360. New platform in patient monitoring, patient care, building out capability so we can continue to add on. Our IQX infusion platform, bringing Spectrum and Novum together. So they're talking the same language. And you'll see a little plus sign there. We're bringing Pure-Vu in later this year. So we can help our customers understand the data inputs to drive efficiency, to drive improvement in their process. And lastly, today, launching our Stretcher platform. Our Dynamo Stretcher, acute care, we are taking orders and announcing before market opens tomorrow. This product will be delivered and being delivered as of early Q2, even maybe late Q1. We can't be more excited about this platform. We took voice of customer and drove it into our capability. This safety features around ensuring that you're minimizing people falling out, minimizing bed falls, really aligning around the metrics so we can help our customers build capability. But more importantly, it's the philosophy we have around innovation, base hits that constant drive to launch products to meet our customers' needs. So you're going to hear us talking more and more around not only product launch, but extension and how we bring and create value for the markets we serve, that drive to always be in front of our customers and to always looking at what their needs are and turning into reality. Just to start. On to capital allocation. It's 5 areas. As I walked through on the last earnings call, our #1 is getting our leverage back in line, driving to be under 3x. But while we're doing that, we're reinvesting in the business. investment for growth around CapEx and R&D. When we look at our R&D spend, aligned to ensure we're bringing vitality, new product launches, new product extensions. The innovation and R&D leaders now hold a quarterly review with me, are ensuring that we're meeting the project time lines, we're driving execution and we're launching on time, meeting the needs of the customer base. Now when we get our leverage back in line, it opens up to the right to, M&A and share repurchases when we see it as an opportunistic area, Get it back in line and start to look at where we can deploy capital to drive further growth. And our dividend, we took down to $0.01 for a specific reason to bring our debt back in line. We don't plan on changing that in the short term. So GPS is at the core of everything we do. We look at our business, we are a market leader in the markets we support and serve. We're focused on improving margins, growth and cash generation. And our value creators align around this. We're advancing innovation across our portfolio. We're launching products and having continuity of the ability to continue to meet our customers' needs and building our capability to move at a faster pace. We're enhancing our capital allocation, lining around the critical few to ensure we've got alignment for long-term value creation. Where we sit today, driving the business such that we can meet the long-term fundamentals to continue to expand and where we want to go from a business perspective and a market perspective. So with that, I'll now open it up to questions. Thank you very much.

Great. And we also have Joel Grade, CFO, up here to help with some of the financials. Andrew, people heard you on the third quarter earnings call, but probably still have a lot of get to know you type of questions ahead. So maybe one just to kick it off. You've been a public company CEO for a long time now coming from an industrial background. What was it that made you want to come to Baxter? And now that you've been at Baxter for 5 months, what are some of the really good things you see in the company? And what are some of the things that are action items you're taking focus on?

So look, Baxter is almost 100 years old. It's an iconic brand and the solutions we bring matter. Our customers depend on us. We take great pride in that. And that's a really strong thesis around where we could take this business for the future. And I look at where we sit in our journey, certainly, we are eyes wide open. There's a lot of work to do. The say-do ratio needs to improve. When I look at continuous improvement, I look at what we can do with GPS, well, it's just started, it's our journey. It's how we're going to take this business for the future. Now when I came on, a couple of things. I was going to launch GPS a little later. The team pushed me. They challenged me and they said, Andrew, we need to launch this now. We know how you operate. We need to get this in motion. Number two, when I met with customers and again, part of my standard work is to meet ongoing, I talked about our solution set, and we have a lot of opportunity to help and support in many of the key areas. And lastly, when I look at our position, we have a market-leading position in many of our areas that we support. And we need to innovate. We need to drive expansion. We need to enable this business to achieve what we set out to achieve. That said, we've got some fundamentals to get done. That's why we've launched the GPS. We've launched the alignment around the critical few metrics. We're moving to a more decentralized model. We're putting in the power in the business units. So they can take insight for the customers and drive it into their process. But it's a journey. And so we've started that journey, but we need to continue to make progress on it.

When I think of med tech, it's top line first, second and third, new products drive the top line and then everything follows beyond that. Margin expansion is great, but if we're talking about that first before the top line, we're usually not in a good spot. So how are you thinking about innovation at Baxter? How you're spending your dollars, what's in the pipeline already? And is there something that's going to change moving forward to improve the top line?

Look, and I said this on the call, I mean, we're going to expect some modest growth as we look at this year. All that said, we have a healthy pipeline in innovation. And all of our businesses are driving innovation. Now some are going to be kind of front and center on what that looks like, whether it's our HST business or even talking about the Stretcher launch that we announced today. But innovation is going to be at the core of what we do and how we focus. And so we're doing quarterly reviews. The area that I would say was a little bit more challenging is we spent a little bit too much on sustaining engineering. Sustaining engineering is only supporting your current product portfolio, and we're shifting that. And the team is excited about that shift. But through that, we also need to look at the number of products and SKUs. And so innovation will become something that's core to everything we do. And that alignment around vitality 1 and 3-year really drives our business forward. So we're in front of customers, bringing capable solutions, but it takes time. One of the Kaizen's last week was a business unit, and they have multiple stages on how they launch a product. And they identified 2 of those stages having the biggest challenge. They drove the Kaizen. And through that, we saw almost a 50% reduction in cycle time, 1 week, concentrated focus, drive for results. We need to do that at a greater scale, and we need to continue that momentum. That said, it is going to take time. Any continuous improvement journey takes time, effort, and everybody wants to do continuous improvement until you're in continuous improvement, but the team is taken to it. They want to align around the critical metrics and drive and launch products and solutions in the markets we support.

Are you willing to give a percentage of what's spent on new versus existing innovation and how quickly that can shift?

So we're going to be doing an Investor Day. It's going to be the May or June time frame, and we'll get into a little bit more specific, but we spend about up to, call it, 5% of our spend on innovation and R&D. And we're shifting to making that a bigger, more meaningful piece for new product and product extension, and we're going to continue to drive that and ensure that we've got alignment to it.

I'm sure at the Analyst Day, we'll get a refresh on what your end markets are growing, your weighted average end market growth. Any rough guesses of where Baxter's end market growth sits today and how Baxter compares against them?

Yes. Why don't I take that? I think what we've historically said and we're typically at is in that sort of low single digit on an aggregate basis. Obviously, different markets are in different places on that. I think certainly, over time, the aspiration would be to outperform that. But obviously, where we sit today and think about that, that's the way where the markets are in.

Okay. As you think about Baxter, clearly, it's a market-leading company when you're interfacing with the hospital. That's what you do. How do you think about sort of what ties all the business together? And what's your core competency? Obviously, you're great at selling to the hospital. But is there some common theme, whether it's manufacturing, call points, selling? And I have a follow-up on that.

As you look at our products and technologies, we're involved in patient care throughout our customers' value channel. And so where they're providing that for patients, we're involved in that, whether it's in hospitals. And if you go in hospitals, you'll see the Baxter product portfolio, especially around a patient around their alignment to ensuring they're getting the proper care to outpatient services and alternative sites. And we can bring that stability. And that matters not only for our customers and their capability, but also as we think about the digital potential because our customers want to make sure they're aligned around efficiency, but also high patient levels of support. And we've got capability to be able to provide both.

Following up on that, you've sold the Vantive business, the renal care business. You sold the bioprocessing business, BPS. Are you done subtracting? And how do you feel about additions going forward once the balance sheet is in place?

Yes. So I would say that there's no -- we don't see any other short term, any meaningful change in our portfolio. I will say this, over time, portfolios change. And as we grow and we continue to expand, we're going to be continuing to look at our portfolio. But right now, I don't see any meaningful shift in that portfolio. And you're right, we're largely through Vantive and really stabilizing that business. And that was why that's the #1 priority, the #1 focus area. As we go forward, and we'll be walking through this, we're going to have businesses that we want to invest and grow. There's going to be businesses that we want to sustain. And then there's going to be businesses in the fixed category that we have to determine where we want to take them. But if you look at investment, areas we want to drive and really have capability are obviously going to be the ones that invest and grow and expanding our penetration, expanding our capability, whether it's through innovation or through potential M&A and tuck-ins, but that's a future state where you have to get the balance sheet in line first.

So at your former company, ATS, you did a lot of deals over a number of years. Baxter has done one big deal over the past, however, many years. How do you think about when you're in a position to do M&A, how do you think about M&A? How do you think about returns, whether it's financial or strategic? And anything we could read into from your former life into Baxter here?

Yes. And I'll just say, I mean, my former business, a lot of smaller deals that added a certain capability that we need. Fast forward to where we are, we've got a strong portfolio. Our customers value our portfolio. Now we need to drive it. We need to improve it. We need to expand in areas that we know we can. But as we think through potential M&A for the future, it's going to be more tuck-in and adds to the areas that we view are high value for our customers. I generally don't like bet the farm type of deals. And so to me, I want to understand the ROIC, where we want to take the business, the value creation for customers. And when we think about ROIC, obviously, it has to outpace our WACC, but alignment to that long-term value creation. Anything you'd add?

Yes. I think the one thing I would add too, is, I mean, obviously, Hillrom certainly is the deal that most people think about as it relates to Baxter. But I have -- there's quite a number of smaller tuck-in deals that over the years, whether it's in our Advanced Surgery business, whether it's certain molecules we've acquired in pharmaceuticals that actually have gone really well. And so I just -- I guess what I would just say there is I think there is a capability and a competency that when the time is right, the opportunity to add the portfolios in ways that you say, hey, a buy versus a build makes sense that I think we'll be well equipped to take on.

So the balance sheet is in a much better place than it was just a year or 2 ago. By your own admission, there's still more progress to be made in improving the balance sheet. On the last earnings call, you cut the dividend to a nominal amount, free up cash, I imagine, and pay down debt. What sort of progress should we expect in 2026 on improving the balance sheet? And I'll tie it into the broader dividend reduction and how you're thinking about capital priorities?

Yes, I'll start and then Andrew can weigh in. I think that's one of the key focuses you'll hear from us is really about working capital. There's -- this past year, we certainly had some challenges, both from an overall cash flow perspective, but also from working capital. On the cash side, we had a few headwinds, I'll say, as it related to Hurricane Helene. I will knock on wood and hope we don't have another one of those that's going to cause us to use cash, but also with some of the work on some of the part of the Vantive divestiture as well. But on the working capital side, some of the challenges we had in terms of what our projections were, the recovery of the Solutions business, relative to where it ended up, resulted in inventory build. Some of the challenges with Novum that we produce product but didn't sell. So as we head into this year, really focusing on our demand planning and ensuring how that relates well to production that we've made investments in this area to get better at that to drive our inventory efficiency. We focused on the payables side, on ensuring that our commercial terms reflect those that we think are appropriate for our organization. We're a bit upside down in terms of paying our suppliers faster than we receive money from our customers. We're working hard to flip that. And then obviously, a focus on collection efforts between our sales and shared services team. So I would say the near-term focus this year is really continuing to drive our cash conversion cycle and will obviously work on that as well.

You talked about solutions and the pump business. Maybe we could touch on that 2 separate issues. Maybe if we start with the pumps, NOVUM IQ, any update on when we can expect that to get off the hold that you've placed on it and return to market?

Yes. So NOVUM LVP, so we put a voluntary ship hold on the product. We're still shipping NOVUM syringe, and we have, obviously, the Spectrum product pump portfolio as well. And we did that intensely. First and foremost, patient safety is our #1. And with any medical device, when you launch, you learn. And so we identified 2 areas, and we put them -- there's 2 field actions out that we've identified workarounds for the time being. We want to have the final solution in place, and we're working on those solutions as we speak. The team is working obviously very hard to align around those to get the final in place. And so while we go through that, we're building out the Spectrum platform because it's a tried and true business. It's a tried and true pump. And we continue to look at opportunities to expand that with our customers. So you're right, NOVUM LVP, we're continuing to develop and build out for the long term. We've got alignment not only with our business around what those options are and how we're driving to, but then the testing that's going to be needed to ensure that. And we'll update as we have the final plans in place.

Yes. And I would just maybe remind the room, the Spectrum pump, obviously, was part of our portfolio prior to the Novum launch and a very successful part of the portfolio. Even when we launched Novum, we continue to offer Spectrum as a choice. For our customers and a large number of our customers actually continued to buy Spectrum. So I think it's really an important point here that, yes, while we certainly, again, remain committed to Novum and continued progress on that front, again, we certainly have -- there's a high level of demand for our Spectrum pump. And again, we have the inventory and the production capability to handle that demand.

You mentioned earlier, there were 3 categories. I forget the exact words you used. I think it was invest, harvest and maybe fix, and I forget the exact words. The pump business, just not only at Baxter, but across the market, it's just been an incredibly difficult one beset with a number of recalls and FDA actions. And the growth is okay, not great in the end market. Where would you put this? And is this a program that might be up for action moving forward?

So we'll be talking a lot more in our Investor Day through this. That said, we're committed to the Novum platform, and we know that the solution is -- and we're working on it right now, it's around the corner for our business. That said, we're assessing where this is going to fit and it's sustain, invest and grow or fix. And I would say this is an area that we need to get right on the solution, ensure that it aligns well for the long term and really build that capability for our customers. While we're doing that, offering spectrum, not only with the IQX platform, but then Pure-Vu being a part of that being an enabler for our customers to really drive efficiency in their process.

Maybe on the solution side, the hurricane end of 2024 impacted the business. It seems like we had a reset in 2025. How do you think that business can do moving forward from here on out?

Yes. I would say there's a couple of things on that. First of all, one of the important points here is that we essentially really reset our baseline on how we see that. I think for a large part of the year, some of the projections were around some of the recovery in that space. And it's actually really become clear that there is a change in clinical practice in terms of the way hospital systems are utilizing those products. And so I think we've done a lot of work and had external validations of this with -- and talking to a lot of customers. This isn't a case of losing customers, it's really a case of clinical practice change. And so what we've really said is that there's almost a new baseline for us in that space that we're now essentially going to be growing from -- over time, do we think that some of those practices change or get back to a more normal, I'd say, yes, but it's not something we're predicting here in terms of how and/or when that might happen. So I think it's really important to see what the -- it's -- but it's still a great business for us, and I want to be clear on that. This is a business we're a market leader in. It provides a tremendous amount of access to hospital systems that we're in. It connects, as was mentioned earlier, very nicely with our pharmaceutical business and other parts of it. And it certainly serves as a really good funding mechanism for other things we need to invest in as a company.

So realizing you're not going to give guidance for 2026 here, maybe a philosophical question for you with respect to guidance. Numbers at Baxter have been ticking down lower over the past several years, starting with inflation, which really hurt the interest rates and the EPS coming out of the Hillrom acquisition up through last year. And I think people are really anxious to see guidance for 2026. We have a new CEO here, probably a new philosophy. How are you thinking about guidance in general? And how do you think about where you set your guidance expectations and where you obviously like to beat and raise. But what did you do in the past? And how do you think about guidance in general?

Yes. I mean -- so just to -- I'm prudent on the process. And reality is the market, understand where you are and then knowing where we want to drive our expansion. And so we'll look at all those variables and then we set the guidance around that.

Yes. And I think maybe what I would just do is take a moment to just remind some in the room like what we have said up until this point on 2026. We've talked about the fact that, again, a little bit -- we've essentially reset our baseline on our solutions business. There's public information out there that really says, hey, there's about a 10% to 15% demand decline relative to pre-hurricane levels. And so again, that's sort of almost a basis for how we think about our solutions business. And there's been some impact from a U.S. injectables business as well on that front. On the positive side of the business, we have also talked about the fact that particularly our CCS business, as part of HST, we've had a really strong and robust order book. This is something that is a forward indicator for positive results. This is -- there -- we have not seen challenges, if you will, from a capital standpoint in hospitals. We've actually had a really strong book of orders, and so that's a good -- a positive part of the story. Just a reminder on tariffs. This is something in the first -- basically, we had a half a year of impact in tariffs in 2025. That was about a $40 million, I'll say, net impact. So again, to think about what that looks like next year, have a full year versus a half year. Obviously, we'll still be working towards mitigation efforts, including pricing and supply chain opportunities, but that's probably the way to think about that. And then the other thing we've talked about is the fact that we will likely have some headwind from, I'll call it, below the line in the sense that we've issued new debt. So there will be some level of interest headwind there. And from a tax perspective, we had a large kind of onetime benefit in our third quarter that had our third quarter tax rate at 5%. Annualized, we talked to about around 15%. That's something that will likely be a bit of a headwind for us heading into next year as well.

So I like to think med tech is all about the products, but it can't be without the people as well. It's a vital component. Maybe speak to the morale at Baxter since you've come in, the reception you've gotten from the employees and how you feel about the people at Baxter.

Yes. So -- and I mentioned this and the mission resonates so well with our team. And I'll just say it's such a powerful enabler for our culture. And I would say the alignment to continuous improvement being the next step in that journey is really where we're taking the business. And so it's going to become our DNA, who we are and how we operate around building the best Baxter. And I would say we've seen a lot of people really be engaged and want to be a part of driving that. So I've been impressed with that aspect around looking at your business and knowing you can drive change, but it takes time. And we need to help our teams understand how to drive that and really align around it. And we've made some leadership changes, and I've been impressed with how the leaders are taking on those roles and really aligning their business for the critical areas of impact. Testament to last week, first President's Kaizen. That is every one of my staff was on a Kaizen event. They drove an impact. They drove the message that continuous improvement is at the core of everything we do. So that culture resonates. Now we need to continue to have a high say-do ratio. We need to challenge to make sure that red is okay if you're driving action to improve. We don't hide behind it, and we're in a journey on that.

Well, great. We're out of time here. Thanks for a great discussion. Thanks, everyone, for joining.

Thank you.