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

On the unplugged day here at Citi headquarters. And very, very pleased that the next presentation is with Joel Grade, the name from Baxter in case you missed that. And Joel, thank you for being here again. I love this conference and thrilled that you're participating.

We're happy to be back. I had the flu last year, so I was missed at last moment. So it's great to be back here, Joanne. And just a reminder, I will be making some forward-looking statements. My legal and IR team told me I needed to say that. So that's...

As long as you don't read it word forward for us. I appreciate that.

I haven't memorized that one.

Okay. So starting big picture, and we're starting all these conversations big picture because the underlying fundamentals of MedTech despite what the stocks are doing, strike me as actually being solid, stable. And the things that I usually worry about pricing, patient volumes, CapEx, snow days, whatever it may be, to the degree you can, could you share with us what you're seeing?

Yes. So I would say, first of all, I generally agree with your comment. I think the fundamentals of the -- again, you said it, despite valuations to some degree are decent. I think they are -- I think volumes, patient volumes, procedure volumes, some of those things, I think, are in a decent place. We talked about capital spend and the concerns about that. We really haven't seen that, and it's reflected in some of the order volumes in our CCS business. So I would say, again -- and we don't really have a lot of things that from a input side or like sort of hyperinflationary or anything like that. So I think there's some -- I think the marketplace in general is in a decent spot. And I think that's certainly encouraging as we continue to go forward. There are obviously a few things in our world that are offsetting some of that. I'd say the most prominent being the impacts of the marketing IV solutions. I think one of the things that since the hurricane happened, there certainly have been some clinical changes in the way that hospital systems are utilizing IV fluids. And so that is one part of our -- I would say unique to us, but important to us that actually is a market that does have some impact. We've talked about the fact that overall demand in that space is probably 10% to 15% down from where it was pre-hurricane. And that's sort of almost our new baseline in that area. And so that's certainly one area that I would call out. And I would say almost residual to that or sort of combined with that to some degree is we're seeing some of those impacts in our pharmaceutical injectables space, too. I think some of the IV protocols, including IV push and some of the other things are sort of trailing that as well and have impacted that space to some degree. So while again, there's some -- there's certainly -- I don't in any way disagree with your comment on some of the fundamentals being solid. We certainly -- there are some things that are part of our world that are throwing a little bit of that again with some softness in those areas.

Excellent. One of the things that's also different or new for Baxter over the last year is there's a new CEO or new share from town, some might say.

That's what they say.

That's what they say. So without costing you your job, what are you seeing in terms of sort of the change in tempo and maybe how it's flown through to changes and thoughts around guidance.

Yes. I think I would maybe just start out with the idea that there's -- I think the timing of Andrew's arrival is good for Baxter. Why do I say that? Well, these last few years, there's been a lot of, I'll say, distraction. We've sold BPS. We've had the kidney sale. We've had the -- a lot of things that were announced in January of '23 related to some of the verticalization of the business, et cetera. And I think we're through a lot of that now. And to the degree to which this -- I almost look at it as a bit of a jumping off point. We've, to some degree, established sort of tried to be really clear on here's where we are as a company. But I think Andrew's arrival comes to us at a time where we have the ability really now to build from this base of kind of here we are. So I think timing-wise, that's good. His background, I think, fits well with what Baxter needs. He obviously comes to us with really kind of an operational background in terms of his time with GE, with Danaher, obviously, certainly at ATS. And I think that our need to continue to be more consistent in terms of how we operate, how predictable we are is, I think, aligns really well with the skills and things that he brings to the table. And I think -- and I think since he's been here, there's really, I guess, a couple of areas maybe I'd call out of, kind of what's new and what's different with Andrew being around. I mean, first and foremost, you hear him talk about GPS, which is really kind of this operating model that really allows for more consistent operating cadences, more consistent measurements of how we operate and the tracking mechanisms to ensure we're on track or off track. And I think that's really an important part of how we operate. I think it's going to lead itself to more consistency in terms of our performance. The second thing I'd call out is just there's been some restructure that's happened since he's been in. There's been certain layers of management and certain -- just parts of restructuring the business that actually, I think, are going to certainly allow him and others to be closer to customers, closer to the businesses, but also align our -- again, our organization and our structure in a way that allows us to be both more sized right for volume, but also more nimble in our decision-making. And that includes, by the way, some of the, I'll say, kind of additional evolution of some of the verticalization that was already started. And then finally around innovation. I think you will hear from him and us moving forward like more consistent innovations. You've heard a couple of things now already with our Connex 360 in the frontline care space as well as the -- our stretcher. We talked about Dynamo, the new stretcher platform. And so I do think he is really continuing to focus the organization on innovation. So those are things I think are really good outcomes of him being here.

There's a phrase you used in there. The evolution of verticalization. I don't know if I've heard that phrase before. So describe to me what that means for Baxter.

Yes. So you'll remember that when we -- part of the goals of the three years from starting in January '23 was to verticalize the business. And what that meant was really this idea of having this more end-to-end ownership of P&L that includes, say, the commercial and manufacturing versus what was previously a country-led structure where you had countries that sold that weren't necessarily -- didn't have responsibility for kind of the end-to-end P&L. And while that started to happen when -- prior to Andrew's arrival, I think what Andrew has done is continue to more -- move more and more functions within that. And so you'll hear him talk about decentralized his view that there's -- that really truly is an end-to-end decentralized ownership of those businesses, that -- which includes more areas that are actually underneath that vertical. And so it's -- I think when I refer to an evolution in that way, it is more and more of the functional areas that are actually now under what is the -- actually now the division presidents within our...

And I would assume that, that streamlines decision-making. I would assume that maybe streamlines cost also -- and maybe remove some layers of organization.

Yes. And yes, in all those things. And also from an accountability standpoint, it's -- obviously, it's -- I'd say, clarity on role definition and accountability is probably the other part I would add to what you said. .

Okay. I want to go back to something you spoke earlier. You gave me like five different leads off of one of your answers. So I think almost sell-side analysts like. But you talked about the IV solution conservation in the U.S. hospitals. And you've pivoted this past quarter from walking from recovery back to where it is pre -- or where it was pre-Hurricane Helen to this is a new baseline. And what was the recognition that allowed you to say, Okay, fine. This is where we are and how do we build from here?

Yes. It wasn't necessarily one thing, as you can imagine, but it was one of those things that as we continued to evolve in the year, meaning we originally started with a perspective that there was an expectation of what was going to happen from recovery. We somewhat indexed that based on 2017 hurricane that was -- I don't know, I'll call it a proxy for what we thought may happen. Having said that, that was a smaller bag. Those are many bags that were produced at that time. And what became clear as the year continued to evolve is that there just simply a change in clinical practices. Now we did a lot of things to try to validate this for ourselves because number one, we wanted to be really clear with ourselves that this is a clinical practice change and not a share loss. We had hundreds of conversations with customers. We also had external, I'll say, external sources that went out on a no-name basis and interviewed customers and said, "Hey, how -- what are you thinking about this? And all of it so much came back to the fact that you know what, there are clinical practices that have changed. And in fact, here's our new baseline. And that impacted us last year in the sense that we had the assumption of that recovery set us up for years how the staffing levels in our manufacturing, inventory production levels. But -- so it's really important for us to understand this internally and then to be transparent with you all externally that basically said, look, here's kind of our new baseline, and we're going to continue to build from here.

And there's -- it also impacted some of the premix products within Pharmaceutical. And so does that go back to a new -- is this a new baseline also from here?

We're certainly assuming that. Now there's a couple of elements to the premix story and that I'd say one is, as you said, there's IV pushing in some of these protocols that changed that have impacted the injectables on the pharma. There's also some element in the marketplace there that I would say there's been more purchasing of vials than the premix. Again, that's something certainly -- that's been a value add for us for a long time. I think over time, that will return, but that certainly has been an impact. But then there's also an element of that space that was on us that we called out in the fourth quarter that said, hey, look, there's -- we've had some supply challenges, and we've had some production challenges that we've identified that we are on top of and expect to improve really starting, I'd say, in the second half of next year. But yes, to answer your question directly, there is an element of this that contributed to some market challenges in the injectable space as well in pharma.

Okay. I lasted, I think, 20 minutes now before I got to the Novum pump. And I can't last anymore, sorry. So are we calling this a recall, a shipping pause or just forgive me, OL.

We are calling it a voluntary ship hold.

Voluntary ship hold. So what are the dynamics of this voluntary ship hold and the path to getting it on held?

So the voluntary ship hold in and of itself basically said that we, Baxter, as it sounds like, voluntarily stopped shipping this -- our de Novum product. There's really two areas that are kind of say, what do we need to solve. One of the areas is really around, again, not to get too detailed on this, but sort of the way when there's transitional infusions, there's been some impacts in terms of under or over infusions based on when there is a transition in terms of the infusion. And then the other is really just the loading of a set. There's a potential impact on how a set is loaded. Those 2 things are what we're working through. Now to be clear, those are things that even today, we have protocols about how customers can safely use our products. And there's many customers still doing that. And so they're continuing to use our products safely. And so as we work through these things, again, this doesn't -- it's not -- we're just not shipping new products, but there's still -- again, there's a number of customers that are still using those. Now we haven't set a time line on what that looks like, but we have said for 2026 that from a guidance perspective that we are not anticipating shipping Novum further in 2026. We did say that on the call. The other thing I would just say is that we're certainly continuing to work closely with our customers and working with the regulatory authorities along with us because I think we certainly think that's a best practice so that when the time comes and we -- the ship hold goes away that we won't have any surprises in that way. .

But as a voluntary ship hold, you were responsible for lifting it, not the FDA. .

Yes. .

Okay. There were some hubs which were already shipped. I would assume people -- some chose to keep it while others may have returned it or replace it. Is there a way to sort of parse out those that were like, I'll take a spectrum instead of a Novum I'll keep this.

We -- so again, any of those -- and all of those things could and are happening. We haven't actually parsed it out, so to speak. Now the thing to keep in mind is you may recall in the fourth quarter, part of our top line guidance included I'll say, accounting for some of those uncertainties that these things could happen. Clearly, in the fourth quarter, they happened less than we had anticipated them happening. And so as I think about carrying some of that risk, I would say that we've carried some of that risk or uncertainty, if you will, into 2026 because at such time as we do have more clarity from a kind of timing and where we go from here standpoint. Again, some of those things could happen. But at this point, like I said, they -- we haven't provided that clarity. And so there -- I'll say some of the actions or what could happen with the customers has been somewhat muted at this point.

Okay. What was the impact to gross margins in the fourth quarter from all of the ship hold stages?

Again, I -- we haven't actually quantified the margin impact specifically from the ship hold. There's a few things that did happen from a margin perspective in the fourth quarter. I think, again, and they fell in a few different categories. One was what I'm going to broadly classify as mix that I would break down as sort of business mix, a product mix and ultimately a geographic mix, I'll call it. And so from a business mix standpoint, it was things like, again, our compounding grew at 18%. Our injectables and anesthesia grew minus 9%. That's obviously a significant kind of business mix issue. From a product mix perspective, to your point, the original view that we'd be shipping Novum is different than we ended up. And so that's certainly part of that. And I would say other parts of our business, there were certain things that were lower margin -- more lower-margin products shipped than higher-margin products. That was part of the mix issue. And then I would say in CCS specifically, we had a somewhat -- and I'll call it an anomaly in this way, but a disproportionate amount of product shipped to GEM countries relative to our U.S. shipments. I don't look at that as a trend. I look at that as that it happened in this quarter, and it was one of those things that, I would say, relatively speaking, the margin profiles from our U.S. business is higher than it is in our GEM markets. And so that was also impactful. So that was one thing. The operational items we talked about from injectables pharma was part of the margin impact there. And then also, we did say there are some what I'll call nonrecurring items. We called it out specifically those $40 million that we're not expecting to impact '26. Obviously, that's the word nonrecurring for that. And so there's a few of those items that ultimately contributed to some of the margin challenges.

There were some new products that are starting to percolate that.

There are.

There are. The two that I picked up on the fourth quarter were Connex 360 and Dynamo. There are others that I'm sure we'll talk about. There's an acute care stretcher and I'm sure you're going to fill in on some of the others. But let's talk about -- at least start there with Connex 360 and Dynamo, what are those products and why are they important?

Yes. So Connex 360 is in our Front Line Care, which is obviously part of HST. It is a next-generation monitoring device. It is -- has all the kind of neat features of U.S. security and easy updates, and it's a very kind of broad-ranging device to monitor a wide variety of things all in one spot. And so this has been something that we actually rolled out brought to market in the fourth quarter. We had some, I'll call, minor benefit from that in Q4, but something that we see as really exciting new thing and customers have received it really well and part of -- certainly part of the growth story as we head into 2026, and particularly the second half of the year as that starts to ramp up. The Dynamo is our stretcher. It's really our first, I'll say, serious for into the stretcher space. It's a connected stretcher. It has, again, something we kind of officially announced at JPMorgan and look to bring to market, I'd say, in the -- like in the early part of Q2. Again, something again really -- customers are really excited about. We -- when I think about customer-centric innovation, this is something we developed really in conjunction with customers. So there was something that we're really addressing some of their needs and really the kind of next-generation area and where particular company had a pretty stronghold in that space. So really excited about that. And I think, Joanne, the maybe the important takeaway in this is like we're not a company that has sort of one big bang thing. I know no one got a lot of attention, understandably so because it was kind of the, I don't know, the one thing that we -- and there hadn't been a lot of other things for a while. But as you think about our innovation going forward, I do think you're going to hear more and more about some of these really neat products and again, key to our organic growth heading forward.

You postponed the analyst meeting. And is it likely to come back on in 2026?

Yes, still working through that. I wouldn't say that the -- so maybe, first of all, why did we do that? I think the -- I'd say the overarching reason for that is really a couple of things. One, from a prioritization standpoint, our -- you heard Andrew talk about stabilizing the business, going and solving the balance sheet, implementing continuous improvement. These -- from a priority standpoint, those days are a lot of work. And I think it was really important for us to prioritize that. Second is our new org structure is actually pretty new -- and so allowing some time to settle in and get that kind of in place better before we do that. And then third, just being candid, I think getting a few quarters under our belt where we continue to perform with consistency, I think puts us in a better position to have a really credible Investor Day that says, hey, here's look forward and then with confidence, people can -- I think that's just some humility that I think is the reality is where we're at today.

Yes. It takes a lot of time for a fresh management team. Artificial intelligence, digital care, I'll throw robotics. Where does Baxter participate in that? Or how does it become incorporated into your practice? Maybe a better way to asking the question.

I would say that there's really a couple of areas that AI plays a role. Number one, in the spirit of how do we help our customers think through issues that they have and be a, I'll say, a solutions provider for some of the challenges that they're facing. Certainly, there's -- we have opportunities and things we're working through together that are incorporated in some of our products that are really designed to allow that to happen in a better way, whether it's medication delivery, whether it's just certain areas that that I think are just are interesting in that space. We do use it in some of our, again, manufacturing operations as well for certain areas that automations that whether it's quality, whether it's certain things that utilize AI. And then there's a back-office component to that. I can tell you from running even in my finance organization, there's a lot of analytics and reporting and things that we do that actually drive efficiency, hopefully better decision-making and allow our people to spend more time helping make good decisions versus generating content. And so that's the way we -- those I'd call it kind of the 3 areas that are probably most prominent in terms of how we use AI at Baxter.

But there isn't a Software-as-a-Service aspect to it, is there?

Yes. Not really at this point. I think -- again, I think there's -- it's certainly like with everybody, it's still evolving. And that's not really a part of it at this point.

I'm going to get into the financials, which I know you know well. But I want to ask the question, things have changed a lot on tariffs since the earnings call just a few days ago. Can you on your thoughts of those changes?

Yes. I wish I could give you a more satisfying answer than I'm probably going to give you. But the reality of it is it's not yet clear on what that looks like. Now obviously, I think probably like most companies, we're putting a lot of kind of war room effort, if you want to call it that, to really get a determination of where that's headed. Having said that, obviously, as this thing evolved last year, we tried to be very clear and transparent with you all. And again, as things were even moving along from the earlier part of the year to the later part of the year, as soon as we have some clarity on that, we will continue to do that. At this point, I don't really have anything -- anything really to report just because it's -- again, it's not necessarily clear on where that's headed.

Okay. When you started to put together guidance, there are a number of puts and takes, many of which we've already spoken about. Would you call your '26 guidance conservative, realistic?

I think yes, maybe the word prudent would be the word I would use. I think it's -- when I think about our attempt to be transparent with what are some of the challenges in the business, what are some of the opportunities in the business. I think it lands in a place that hopefully balances those things in the right way.

And it doesn't include Novum. We know that. -- and it does include a recovery in certain franchises, including HST.

Yes. I mean, I would say maybe a few kind of key things to think about from both kind of a top and a margin perspective. And then maybe I'll comment a little bit on there's kind of an H1, H2 element to this as well. So maybe on the top, the things, I guess, I would contemplate, a, you just said the first one was just, we're not planning to have further sales of Novum in '26. The second really is around the sort of baseline of IV solutions. We really haven't factored in any kind of growth or recovery in that space. It's kind of hey, here's our new baseline on that. And as we've said, that same thing really applies in a lot of ways to our U.S. injectables. However, again, the one part of that, that I think is a bit of a caveat to that, again, is we do expect some second half improvement based on the fact that, again, we've solved some of the supply and operational issues in that space. To your point on HST, I think we've continued to see a strong order book on the CCS side. This is an area that people often ask, hey, have you seen, are you concerned about capital spend, this and that and the other thing? And again, we really, really haven't. And so we continue to anticipate solid performance in that area. And on the Front Line Care side, we projected that in 2025 that, that would return to kind of a more stable place. We saw that. That as you've seen throughout the year, that business has continued to be -- again, I would say, solid, and we expect that to continue as we head into next year. And then so I think those are some of the top line items. On the margin side, there's a couple of things that I'd say are important to contemplate. One is just the -- some of the work that we're doing from a structural restructuring standpoint is we anticipate some of the benefit of that really happening in the second half of the year. And so -- so that's one element of this. There is also a mathematical thing where we capitalized in 2025, some of the -- what I'm going to call some of the inefficiencies, if you will, that happened mostly in our solutions business were capitalized into our inventory. And so we head into '26 as that rolls into the first half, where we're selling against, I'll call it, higher cost inventory. As that has been impacted positively where we have our staffing levels set more appropriately to reflect the new baseline. We anticipate some of that margin improvement that will happen in the second half of the year as well.

So when I think about first half margins versus second half margins, second half sounds like it's going to be accelerating in both gross and operating margins versus the first half.

Yes.

Okay. Is it every quarter it gets better? Or do I think about it collectively?

Yes. I would say sequential, there will be -- I would call it sequential improvement as we go through the quarters of the year. And again, certainly, H2 being again generally better than H1. And so I would just -- again, I would say -- and obviously, the other part of it is last year, our tariff impact we did not have in the first half of the year. So there is a bit of a comparison there. And then the other comment I'd just make in the first quarter is that you may recall post hurricane last year, the first quarter, we actually had a pretty strong Delta distributor build in Q1. Again, we're up against that as well. So there's a bit of a comparison issue there. And so those are a few of the things I would say are kind of some of the puts and takes around our overall guidance for the year.

And how are you thinking about pricing? There's a period of time where you can raise prices and then you had two to three GPOs, which were going to be renegotiated? Where are we in that cycle?

Yes. So last year, two out of the three large GPOs were -- they were -- the negotiation itself happened at the end of '24, but the impacts started in January and February of 2025. And so the benefit we got from those renegotiations. Last year, again, we actually guided last year to have about 100 basis points of pricing improvement on an enterprise-wide basis, which we actually realized, unfortunately, got absorbed by some other things that happened, but that was a kind of a 2025 phenomenon. 2026, again, there will be some kind of a cost of living increase, if you will, on those GPO contracts and our pricing in general, but not the same large impact that we had in 2025 from a pricing standpoint. Just one other thing to remember, the 1/3 of those GPOs that will be actually -- we'll be renegotiating that in the later part of this year and with the impact of that in 2027.

Do you have a back order on anything?

Yes. Other than in our pharmaceutical business is based on some of the operational stuff, we've talked about -- our back orders are actually in a pretty good place. So we don't have an issue for that. That's the one area I'd call out.

And how are you thinking about capital allocation?

Yes. So I think for now, I mean, we're certainly focused very clearly on delevering the balance sheet.

So 3x.

Yes, 3x is our target. We focused on achieving by the end of this year. But certainly, debt pay down. The other thing I would say though, and I want to remind people that even with that, though, our internal focus on R&D and capital spend is also again sort of one-on-one with that. And so obviously, what we haven't done, again, we had a little bit lower R&D spend in the fourth quarter, but that's not other than call it, an accounting reclassification. As we go forward, our R&D is very much into where we've historically been in the mid-4s plus. So capital allocation-wise, again, internal investments focused on paying down debt, obviously, delevering our balance sheet are really the key focus is right now. We obviously -- this will see the impact of the dividend cut that we had. Obviously, once we achieve our 3x target, then certainly looking forward to that time and being able to then refocus some of our capital allocation really around how we drive value, whether it's bolt-on tuck-in M&A, whether it's share repurchase, those types of things. But for now, we're clearly focused on delevering the focus.

I can imagine the cutting of the dividend decision was very difficult. Is that accurate? Okay. So you have some -- I'm making this up, you have extra cash did you say, okay, we're going to make this acquisition. Do you say we're going to repurchase shares? Or are you motivated to be like now I can put the dividend back.

Yes. I mean, I guess the way I would answer that is I think the -- I would not anticipate changes to our dividend in the near term. I think for now, we've got some debt coming due and early part of '27. We'd like to be able to pay that down with existing cash. Certainly, obviously, continue to positively impact our leverage situation. But again, I would not anticipate near-term changes to our dividend.

Okay. What do you think at this stage the Street needs? And what do you think they misunderstand?

I think the biggest thing I would say is a little bit back to maybe where we started this conversation around this idea that we're at, what I almost call a jumping off point or a point to build from. I think Baxter has gone through a lot of stuff. And I think we find ourselves in a place where we have the opportunity to be, again, a more -- again, a focused organization, one that I think needs to start, again. Andrew has talked about this. There's -- we're going to -- stabilizing our business is an important part of this today where we accomplished that. We accomplished again, focused on delevering the balance sheet, and we really start to drive this continuous improvement mindset in the organization. And I think we've rebased our solutions. We've rebased our -- in a lot of ways, our pharmaceuticals on the injectable side. And I think this is -- again, this is a place where now a lot of the distraction and a lot of the things that were going on give us an opportunity now to build the organization from here. And I think the other one is from a cash flow perspective. I do think we -- these last two years from a free cash flow perspective has been pretty tough. '24 had a lot to do with sort of the cash that we spent on separating Vantive. '25 included some of that yet, but also obviously, expenses that were -- what I call the payables came due for the hurricane. So we paid a lot of cash in the early part of last year for that. In addition to kind of the challenges we had with our inventory build from both the Novum pump situation as well as the not recovering as quickly as we wanted to from the IV Solutions perspective. I think as we head into '26, we certainly expect a better free cash flow the focus on working capital, a more efficient inventory, the -- again, not paying hurricane expenses, I think puts us in a position again to continue to make good progress on our deleveraging and therefore, closer and closer, obviously, in addition to the dividend cut, closer and closer to a point where we'll actually be able to -- as we head into '27 and beyond, really start to think about making better and different investments.

So Joel, when we are together this time next year, what do you think we're going to be talking about.

Yes. I mean what I look forward to talking about is getting through having a year in 2026, where we continue to, again, build credibility with all of you in terms of our operational execution, our performance relative to expectations, our performance again relative to stabilizing our business, deleveraging our balance sheet and really continuing to move the company forward from an innovation perspective and just in general, a place that, again, people feel better and more confident about. I can tell you, again, as I said it, I think we find ourselves at a good jumping off point and really, really excited about the year ahead and look forward to talking all about it with you a year from now.

I look forward to the quarters. Thank you so much for joining us, and we'll see you soon.

All right. Thanks, everyone. Appreciate your interest in Baxter.