Baxter International Inc. ($BAX)

Let's get started. Thanks again for joining us, everybody. Very happy to have with us at our conference Baxter. And from Baxter, we've got Joel Grade, EVP, Chief Financial Officer; and we've also got Kevin Moran, new addition to the Baxter team recent sort of new addition to the Baxter team in IR. And I want to send it over to Kevin for a couple of comments on compliance.

I'll be quick. First of all, just one, thanks for having us here. It's been a good conference. And two, just a reminder that we will be making forward-looking statements. And for more information, please just visit our IR website or SEC filings.

Perfect That's good. I wish I could be as concise with these thing. So with that, Joel, one of the obligatory questions for any of the global multinationals that we cover is around the conflict in the Middle East, the price of oil. So in particular, I don't know if it's the easy part of the 2 questions, but maybe just can you -- have you given some idea of the size of that business. I think investors have found it helpful to understand is this sub-5, sub-2 or how to think about the business in that region?

Yes. Thanks, Matt. And again, thanks for your interest in Baxter. Yes, I call the sub-2. So it's -- we do have some business there, but again, it's small.

Okay. And then any operations? Manufacturing or other, obviously, people in...

I mean we have some commercial people [indiscernible], but that's -- but really, it's primarily that. And again it's sub-2 on the revenue side.

Okay. Well, best to the folks who are in that region. In the last week or so, things have changed a bunch. Second part of that is oil, price of energy. I think there was a time, and some of it was maybe justified some of it was maybe a bit of a knee-jerk reaction over the past say, 4 or 5 years that went and energy prices went up, Baxter was going to get hit. It was kind of the simple investors street reaction. How has that changed post that and maybe how should we be thinking about the way higher energy or resin or transportation costs would be absorbed.

Maybe I'll start with the punchline. The punch line is that the exposure that we have today relative to what we said at our 2022 Investor Day is somewhere less than half.

Okay.

Okay? So in other words, at that Investor Day, I think was said that there is about a -- for every $10 of movement in barrels, $25 million of impact. So again, punchline is, it's less than half of that. Now there's -- I'll sort of take this from a couple of different angles. Thing one is what I'm going to call our exposure to oil in particular. And that is less today. And the reason it's less than it was at the time of that Investor Day is really around our Kidney business, and particularly our PD business. That was -- that business is very much a -- was a home delivery business. We had a fairly extensive last mile that we were exposed to at that time that -- now that we've actually obviously separated from Kidney, we don't have that same exposure. So that's really kind of thing one. And again, I'll call that the exposure to oil side. The other is just on the materials side, again, there are certain materials, obviously, that are driven by the oil price. And even in that scenario, whereas in the past with when we had the material cost is exposed, obviously, for all that, today, for part, we have MSAs with Kidney. And for us, that business that actually is something we can pass through as part of the MSA price. So while we still do have some exposure there. I would say to that a lot of decent piece of that is obviously covered by the MSA. And then the other thing I would say is just from a timing perspective, and there's a lot of movement in spots right now. Again, just sort of the timing of how that all flows through. We obviously -- materials cost could capitalized for us and sold as we roll out those products. And so it's -- there's a lag in that even.

Sure. Is that like a 2-turn like 6- to 9-month lag? Or is it...

That's probably on the lower end of that.

So, 6-month lag.

But I think that's -- but I just think -- so just to summarize again on the punchline, exposure for us is somebody a little less than half of what it was in the last time we've talked about that back in 2022 for a [indiscernible] multiple.

Okay. And so a combination of -- this is the good part of being cost plus, I guess, in MSA is that, that goes through. And then it's a combination of that and the elimination or elimination of the PD home delivery part is what constitutes that half reduction.

Yes. Again, we simply don't have that level of last mile delivery that we had in particularly our PD business at [indiscernible].

And just to underscore that point. I've talked to folks who have this muscle memory idea about Baxter. I mean Baxter has its strengths and weaknesses and challenges ahead of it, opportunities. But there's this association with just trucks and diesel and things like that. So without the delivery, without -- and that not only being home delivery, but oftentimes, home delivery in like places, emerging markets or developing markets around the world. So a big lift in the PD delivery side that's now gone away. But in terms of trucks going to hospitals? And how much of that is still on your P&L or how to that are you doing new distributors? How should we think conceptually about your exposure to a bunch of Baxter trucks driving in and out of hospitals?

I mean we do still do some direct delivery in certain categories of products, but -- and as you've already said and others, it does go through distribution. I would say what I have outlined here in terms of our total exposure, is captured by the fact that that's how our model is set up.

Okay. All right. So some distribution, some trucks but that's super helpful. All right. So maybe -- so on to sort of like fundamentals, a bunch of changes in the -- since the Vantive not the least of which you've got a new skipper running things at Baxter. Maybe talk a little bit about -- the term BPS comes up a bunch, new operating model comes up. Sometimes we hear these and as folks who haven't run divisions or corporations or managed operations for global, sometimes the -- where the -- what this actually means when the rubber hits the road, it's hard for us to kind of understand. So maybe explain what are the underlying benefits of this, where are you in terms of rolling it out? And when will investors maybe start seeing some of the benefits of this?

Yes. Let me put just a little bit of context around this, and then I'll get to direct answering to your question. I mean, I think one of the things that's important to remember is that from a timing perspective, I think some of these changes that we're talking about here with a new leader to do operating model. I think I'll really at -- I guess, I'll call it a good jumping off point to some degree for our company. Why do I say that? I say that because back in January of 2023, the company outlined some strategic changes that had to happen post the Hillrom acquisition that included sale of BPS that included sale of [indiscernible] and that included verticalization of the business structure. And I think that resulted just really on 3 years of a lot of moving parts, some you call possible just distracting and really are focused on those areas as opposed to really trying to -- how do we run this business more effectively and consistently. And so I think now that we're through those things, I think this is where I could now go back and say, "Hey, this is why this timing, I think, works well for us right now." So with Andrew coming in, he obviously brings with them a really strong background of operational and having run a number of businesses, obviously, in GE and Danaher, obviously, as a CEO at ATS. And [indiscernible] focus and sort of continuous improvement focus on it. And obviously, with that comes what you talked about now with GPS and growth and performance systems. And I think the -- this is really around how do we think about running -- the operating model at which our company runs in terms of the cadence, the ways that we expect resets goals, we track goals we set through KPIs. There's a regular operating cadence in ways that I think is fairly substantially different than happened in the past. And so what's -- so on the kind of what's different side as it relates specifically to GPS. It really is around that operating cadence. And again, target setting, goal setting and getting KPI tracking in a much more rigorous way. So from an investor perspective, what does that mean to me, what that ultimately means -- and again, this doesn't happen overnight. But what this does mean over time is that we are -- I would expect us to be a much more consistent company that consistently operates in a more efficient, effective way and predictable way. Somebody that is more efficient, effective at our forecasting and our predictability of our own results in the sense that, again, the way these cadences allow us to measure, predict performance in a better way. And then ultimately, obviously, I think about it as a cycle that allows us to ultimately expand margins, generate more cash and then reinvest in innovation and growth. And so that's kind of a summary of how I think about that. And I'd say the other changes since he's come in, there's been a couple of things that I would call out that are important. One is a -- some restructuring changes that have happened that have -- I'd say, thinned out management layers that have been a part of sort of his view of how do we get it, he and all of us closer to the business closer to our customers and obviously, in a more streamlined way across the organization. The second part of it is really around just the broader structural elements. And some of this comes into where we talk about stranded costs, but just reducing infrastructure in the areas to ensure that we are getting a more nimble, agile organization. And then third, really focused even more so on innovation. And I think the -- we've talked about some new product launches. We'll probably get into that in a second. But I expect you should hear more and more of that from us as we go forward. But again, we're more focused, again, better execution and a better ability to continue to reinvest.

Got it. Yes. I mean just to having covered the company for a while, there was a time when there was a lot of costs being taken out of the organization. There was some kind of ship-shape program that was put in place. This goes back a bunch of years -- and so I would imagine some of that fruit's already been picked, but this may be takes that up a level or...

I think that's a good way to think about it, because like -- again, I want to -- I'd like to say this to make sure I reinforce a key point here. This is not a, hey, we're taking out, trying to SG&A our way to prosperity. That's not what this is about. But when you think about the -- Kidney was 30-plus percent of our business. And there is an infrastructure in place I'd say particularly outside the U.S., that business had a 70-30 split OU.S., U.S., which is much more OU.S. than Baxter is. Right now we're around 55-45 U.S. would be in the 55%. And so there's just things that -- and just one example of things where infrastructure needs to be realigned with the way the business is. And so it's not just a, "hey, we're just trying to take cost out to drive profitability." It's really trying to set up our business to make decisions to be better for our customers and more focused in that way. And so I think that's really the key.

Got it. So some -- we think about portfolio management all the time at some geographic portfolio geographies sort of management and decisions that you're making, it sounds like as well. Okay. Fair enough. So let's talk about maybe some of the performance exiting as you wrapped up sort of last year. And sort of some of the things that we're working and kind of came in ahead of plan, Advanced Surgery and HST. Maybe -- I know -- we all know kind of where you've set guidance, which is, call it, for stability, and we'd like to see there some conservatism in there. but it's not overly ambitious here with the stage of the new management, new program, kind of all the things that you just talked about. But what's happening at those businesses that's working and how durable and sustainable is that this year? This is Advanced Surgery and HST.

Yes. So maybe I'll start with that. I mean I think, look, our Advanced Surgery business, really continues to produce a set of very differentiated products that I think are extremely well received. There's really good global demand for those products. There's -- I think surgeons see those products [indiscernible] is, again, unique and differentiated in the industry. And again, that business continues. Again, it had a really good year last year, but it's had a series of good years, and I anticipate that as a continued strong area and then margin accretive business for us. I think CCS is the other one, as you've called out here, look, we've had a continued strong order book in that business. I think the -- one of the questions we often get is, have we seen hesitancy from a capital spend standpoint from the industry broadly, and we really haven't. And that's one of those things that we just continue to -- obviously, we certainly have a close eye out for it, but not something that we've seen and our order book remains strong there. And so I think, again, we had a little bit of what I would call the novel in the fourth quarter in the sense that we had a lot more business ship outside the U.S. and particularly to our emerging market countries than the U.S. But again, I don't -- I look at that as a quarter a bit of a lumpy business at times versus the long-term trend. And so feel good about that space. I think -- if I just run down a couple of other businesses.

Sure.

I think the -- in the front line care business, that was also a business and this year that kind of returned to a growth state. I think the primary care markets have -- we have predicted this coming into '25 that there would be some stabilization in the primary care markets, and we saw that. And so again, I think that was an area that we see as a, again, a continued area of sort of building strength for us. Obviously, those are really -- so both the parts of HST in general and a decent year. And again, we continue to expect that heading into '26. I think about our ITT business, again, I think the what are the areas that has been, again, some of the impact on our guidance, if you want to call it that and sort of what's on the opposite direction there is really around -- it's really 2 parts. One, we've said now that we don't expect Novum. We don't expect to be selling Novum pumps through 2026. We certainly remain committed to that and continuing to do good work to get that back to market as soon as possible. But we -- but that has been, I'll say, a detriment from a guidance standpoint. And we also -- last -- in the fourth quarter, we basically said that once we have some clarity around that, there would be an expectation of some different customer behaviors. And we didn't see as much of that in Q4 so we've carried some of that risk into 2026 as well. And then from a solutions perspective, I think the -- one of the things we've tried to be really clear on is the fact that we do have a new baseline of essentially a demand for our solutions products. That was somewhere in the 10% to 15% range from relative to pre-hurricane. So those are some of the things going in the opposite direction. And then in Pharma, in the Pharmaceutical business, certainly on the positive side from a growth perspective, our drug compounding continues to be a very strong growth area. Do I expect that to be at 18% ending in the next year? No, I don't, but that is a business that continues to grow well. And it's -- while it's margin dilutive, it is our shortest cash cycle in our business. On the flip side of that, we have continued to have some challenges in the injectables and anesthesia space. And some of that is, I'll call market driven, some of it is on us. And we've talked about the fact that the -- there were some operational challenges that we identified in that business. We think we're making good progress on that, and we do expect that to improve as we head into particularly the second half of '26. Some of the things, the IV push and some of the protocols that came out of the hurricane are still having some level of challenge in that space.

Okay. So a bit of a reset in IV solutions, which I think for some part of last year, there was some hope that those would sort of reverse back to historical trends and now are sort of saying that this is where we are.

That's right. This is kind of where we are. And look, we remain a market leader in that space. It's a really good business for us. We're very positive on the long term of that business. But you said it well, that's kind of where we are right now.

And then on the pump side, the sort of business planning or guidance assumption that you're not going to sell any pumps this year -- is that sort of -- is that sort of because you see something that's going to happen towards the end of the year that will enable you to sell pumps next year? Or is that in the absence of visibility and some kind of certainty, that's -- we're just going to -- we're going to go with that assumption until we know different.

Well, let me just say something slightly different. We will sell pumps this year. We will sell Spectrum pumps...

Yes, and then Novum.

I know, but I just want to make sure that was really clear. We -- on the Novum side, specifically, I would say it's more that we don't yet have complete clarity and again, working with customers, working with regulators -- and again, have a really good dialogue all along the way. And we still -- we have a lot of customers who are using our Novum product safely based on the protocols we have set. But I'd say just given that lack of complete certainty. We've chosen to talk about it in that way. And obviously love that to be opportunity to beat, but I'm certainly not calling that.

Sure, of course.

I did just want to emphasize, again, we -- this pump portfolio we have, our spec -- there's a very solid demand for our Spectrum pumps. And we're selling them well. We're -- we've got inventory and production to match the demand for those products. And so that's been a workhorse pump for us. Prior to Novum, even while we launched Novum and now again, the demand remains strong for that. So we will -- our pump sales continue to be solid there.

Okay. And just to make you mentioned frontline care. But that -- I mean, I think, again, the investor perception has been, Hillrom has -- the Hillrom businesses have struggled kind of consistently. And I think -- I mean, it seems like surfaces actually had a pretty good year last year. It was really frontline care that's now kind of joined the pack on the right side of growth and kind of momentum again, which...

I think that's right, Matt. I mean I think if you look last year in general, we had a solid year, I'll call it, in our HSC businesses. I think the thing which obviously were the former Hillrom. And I guess what I would say to that, too, is that is an area that is really front and center, around innovation. So a couple of things that we've recently talked about, specifically regarding our Connex 360.

Yes. That's a get segue, new products.

Yes. It's a next-generation monitoring device. Again, lots of good nice features within the monitoring itself, but also cyber and ease of uploads for updates and things it's very state-of-the-art product, and we're really excited about that. And then on the CCS side, our structure Dynamo, we're really launching into that space. And again, this is a product developed with customers in the way that you really get this is where we like to talk about customer-centric innovation. Something we're really excited about. We expect that to come to market in the relatively near future and expect to see some of those benefits in the second half of the year as well.

Okay. So maybe just on margins, we're going to have to make it quick because we're running down on time. But I'll just say returning to below 3x leverage is an important goal right now. And then it's sort of like we'll talk about use of cash after. It's a fair way to characterize the cash flow strategy here. But what are some of the sort like puts and takes on margins in a nutshell, if you would describe this year over last year?

Yes. I'd say a couple of the puts and takes on margins on the one hand, we capitalized a lot of our inventory costs that were higher last year because, again, particularly on our solutions business, we expected an improved recovery on the demand. And so as we capitalize those, we head into '26. And as we sell those products, obviously, we're still selling what I'd call a higher cost inventory, but we're doing that really until the second half of the year. So that's one just kind of mathematical thing that I would think about. In the first half of the year, we also had a tariff impact again, we didn't have it in the first half of '25 that we're having now in the first half of 2026. So those are on the downside. But again, as we think about some of the areas of improvement, number one, some of the work that we've done to restructure. We talked about we expect to see some of those benefits heading into the second half of the year. The fact that we now have leveled out our staffing and our warehouses, our manufacturing facilities relative to demand ultimately will flow through our capitalized inventory and show improvement in the second half of the year as well. Some of the new product launches we talked about will allow us to begin to improve in the second half of the year. And so there's just a few of these key areas. And we talked about from a Pharmaceutical standpoint, some of the operational challenges that we had in -- who identified in Q4, we do anticipate those improvements to happen. And of course, there's a few onetime items in the fourth quarter that we don't expect to recur as we head in 2026.

Super helpful. Well, thank you, Joel. Thank you, Kevin. Good to see you both. Appreciate you joining.

Thanks, Matt.

I appreciate everyone's interest.