Baxter International Inc. ($BAX)

[Audio Gap] Presentation of the morning. So welcome up next Baxter International. We are lucky to have Andrew Hider, President and CEO. This is our first time having a fireside chat. So thanks for coming. And then Kevin Moran, VP of Investor Relations. I think you wanted to start out with the legal stuff, Kevin.

Yes. Thanks, Travis. Just a reminder, we will be making forward-looking statements today. For more information, please consult our IR website or our SEC filings. Back to you.

Thanks. Andrew, maybe starting out like your initial time at Baxter I think you talked about changing the culture to 1 that's more accountable, maybe just kind of talk about kind of what kind of changes you've made so far and where you're at in the process?

Great, and good morning, everyone. Look, I came to Baxter with a belief around where we sit in the markets, the engagement with our customers and really the ability to get back in line with execution. And if I do a step back, that's only -- my view on the business has continued to evolve, but the thesis around where we sit with our customers, our progress on performance. And then ultimately, where we're taking this has been in line. And I would just say Early on in my journey, we started Baxter GPS and it's Growth in Performance System. And the reason we did which it's an alignment to the critical few metrics that we're going to hold at the highest level, and we call them value creators. And by the way, there are 8 of them. They never change. Every business, every site, every division has those. Revenue, margin, free cash flow, ROIC, top 4 financial, on-time delivery and quality from a customer perspective, internal fill rate and turnover from an employee perspective. And the reason why that's important is as we've gone to a more decentralized organization, I don't like secret decoder rings as the CEO. I want to go on site, and I want to know in 3 seconds, where do we need to focus and spend our time. And so to the culture question, we've moved the needle. Now we're early in that journey. And I want to be very clear on culture takes time, but I've been really encouraged by the engagement of the team around what that looks like in proof points Q1, we did 231 GPS events. 231. Now no single event is going to be a silver bullet. I'm here to tell you, it's a series of events that continue to change over time, but we've made progress. Additionally, we've restructured the business to be very focused on our end markets, what we call decentralized management. And to be -- to think about it cleanly, it's we put the power in the P&L in the business unit to drive effective change for our customers and ultimately shareholders. Then the last piece is I'm a big say-do ratio person. What we say we got to do. So Q1 -- look, we're -- I'm pleased with the progress. We have a lot of work to do where we've made progress. And I would say we, Baxter, need to continue to build that focus on execution and then alignment to high say-do ratio. So moving, a lot of work to get done between now and when I would say we're at our high point of execution, but it's moving in the right direction.

So you've broken down the turnaround in kind of multiple phases, Phase 1 holding people accountable. Maybe what's in Phase 2? And when does Phase 2 start? When you kind of move from Phase 1 to Phase 2?

Yes. And 1 of the -- when you look at a continuous improvement culture, 1 of the questions I get often is, do you have the team I would say everyone wants to do continuous improvement until you have to do it. And so that's going to evolve over time. But we've made significant progress. We've delayered the organization, we put the power in the business units, and we're starting to execute. One of the next phases, and I've been very clear around this, is getting our leverage under 3. And the reason why that's so critically important is it allows us to press the other areas of capital allocation. And if you join my team, you get 2 books. And 1 is the outsiders. And the reason I want you to have that in your back pocket is going to want you to know how I think about investment, how we think about investment, how we look at operationalizing our business and how we expect execution. So when we achieve under 3x, it allows us to open up that ability to execute from a capital allocation for long-term shareholder value. That will be part of the narrative for the future.

The Q1 obviously beat. Is that part of the accountability already showing up in a better execution right away? Is it too early to say?

Look, we have a lot of work to do, right? First half, second half, and I walked through why we're confident in second half. Again, I'm pleased with the progress, more work to do throughout the year. But proof points, GPS events, training and engagement. We started the first week in January. We did a president's Kaizen event. There was 10 events, big impact events. I did it, my senior staff were involved in Kaizen events. The reason that matters for culture, it shows nobody's above continuous improvement. Everyone here has a stake in ownership around that. But the other proof point that I would say, we're pleased with the progress, not there, but pleased with the progress is our free cash flow. And so we've made progress there. We're going to continue to laser focus on how we drive free cash flow in the business. It's not where we want it to be, but we have seen improvement, more work to do.

As you've kind of evaluated the portfolio, is this the right mix of businesses for Baxter? How do you think about the quality of the different businesses? Because obviously the team and culture things, but there's also the businesses in the markets that you compete in?

Yes. And I'll answer this in a few ways. First, Baxter has gone through a lot of portfolio shift. And then that's largely behind us. And I would say, sure, there's some TSA next year, but I would say a large part with the Kidney Care business being spun out of Vantive, that's now behind us. And so when I talk about stabilizing, that's part of the equation for stabilizing. Number two, we faced some headwinds in '25 that I would say we had to call. One of them was IV solutions. And when I talk about IP solutions, we initially had the perspective that it was going to come back in a shorter period of time. And I'm here to tell you, we made that call. It's -- we're not talking fluid conservation. It's the new norm. And we've now rightsized the business for that. And so we would expect that business in the future to get back to low single-digit growth. And so what you're going to see in the future for Baxter is there's going to be 3 major categories that we're going to put our businesses in. There's going to be invest and grow, areas we know we can drive and continue to outpace the market. There's going to be sustained, which is how we look at those businesses for cash generation. We look at them on investment to return at a higher level of expectation, but they're the fuels. And then there's going to be fixed and/or divest. And I would say you're going to find lower in that threshold, but we are going to look at businesses we need to fix and be laser-focused on it. And so I would say our portfolio is good. We're going to continue to listen to customers. We've done a lot of work around the markets we serve. We've done a lot of insight around where we play in the value chain for our customers. But at no moment, is that going to be kind of defining our future, meaning our portfolio will evolve, but we like our position today, and we have a lot of optionality for the future, but we need to execute on our plan.

Any sense or color on which business is kind of fall into those different categories?

Yes. And I'm careful on this. And I would say we're not outlining that externally right now. But just to give you a couple of examples, advanced surgery would be one we put in to invest and grow. There's a lot of options to drive that good strong position. As a matter of fact, I'm meeting a couple of customers tomorrow as -- standard work as a CEO as I meet with customers, and I'm on site at our facilities. And so really seeing it firsthand the impact that we have with that product set. The strong value we have with our customers, the technology and power we have in the product allows us to put it in that category. And then just to give you an example of what would be in the sustain, we want to sustain our position, our strong share position in our IV solutions, and really drive that business and make sure that, that continues to remain very relevant because our customers rely on Baxter to provide a solution, high-valued solution where we make it easy for them on their workflow. And so we've also outlined our Pharma business to be closer with our ITT business. So we now have it as combined because it's very similar selling process, high-value capability, high patient impact and makes it easier for the customer to run the workflow. And so you're going to start to see that evolve over time, and we're going to be very open around what that looks like.

You talked about pushing down P&L responsibility. How deep in the organization is that going? Is it changing incentives and bonus structures? Or how are you making those changes?

So a couple of things I'm going to walk through, and I'm just going to hit how we think about it from a cultural perspective, where it sits in the business, but -- when I start with, if this team were to travel with me to the facility I'm going to tomorrow and Friday, what you would see is we start with the value creators. And as you walk through the facility, you're going to see how we measure that daily, weekly, quarterly, monthly and on an annual basis. And the targets we set around how we drive it. [indiscernible] is early in its journey, but the team is taking this head on around red or green, not pink, purple or yellow, red or green. And if you're red, it's okay, but it's not okay not to do something about it. So when you're red, it means action. And what do you do to drive root cause, countermeasure and what's the target to get back on track? And why that matters to me as a leader? It's because then when I go on site, I understand are you taking the critical actions because remember, businesses are going to be faced with many different variables along the way. Are you training your leaders to drive action in that. And that's what we're looking at. Number two, around our position and how we think through how we drive our businesses. And the leaders with P&L have that overall accountability. So they own the P&L, but they drive very deep in their business. And I would say our bonus structure was good. But where we missed, and I'll just say it cleanly, we were low percentage in how we held people accountable to objectives and then what that looks like on impact. And we have driven that at the top all the way down to full organization, and it's a much higher percentage, close to 100% of our team is now -- objectives are aligned with the performance that we expect on the business. And the teams are accountable to those numbers in driving those numbers.

And that went into place January 1?

Went into place, Jan -- I would say over Q1. As you recall, right, you go through strategy, go through what we call goal deployment, which is [indiscernible] matrix around where are you going to stretch the business to drive and outpace and then and then AOP and then that trickles down into what we expect from your supervisor to a manager to if you're an engineering, how are you launching products, expanding your ability with customers and driving that for value creation. And we're being very focused on what that looks like. .

Where are we with the CFO search? And like what kind of attributes are you looking for?

Look, it's -- and I said it on the call, it's a desirable job. And I would say we're fortunate that we have a strong finance organization, and Anita Zielinski has stepped in as the interim and she's -- she joined -- she's our Chief Accounting Officer. She has -- understands the nuts and bolts of the business. So comfortable on where we sit. We're looking for an operationally focused CFO, -- and I -- and so when we think about the business, it's about how do we maximize our performance. And then longer term, what do we do with that cash? And that's the capital allocation piece. And getting somebody on that understands who Baxter is, knows where we sit and then also the ability to align the business around execution and performance is somebody that we're looking for.

I want to touch on the macro inflation, what you're seeing on kind of the cost pressures that are coming in from a macro standpoint.

So -- and I'm not going to reiterate the call we had, but we confirmed our full year guidance on our Q1 call. Now what gave us the ability to do that? First, we talked -- I talked a little bit about the oil impact and how we view it today versus where we were in the past. And to give you clarity -- when we had our Kidney Care business, it was a higher level of exposure. It's roughly half or less now. So it's less exposure on that from a standpoint of oil impact. And I even said on the call that if it stayed flat to where it is today, we view that we're able to manage that. Number two, being proactive in how we really manage our supply base and how we drive our supply base to minimize any type of disruption on increasing costs, et cetera. And we have driven that from a proactive approach. And then the last piece is just to let -- we went through a cost structure change. And part of that was 2 items. First, we delayered the business and we have outlined that. And that's part of the first half, second half equation. Number two, we took action on our IV solutions business. And we had carried a cost that was a burden cost and never easy, but we've realigned it to the new norm of the business, and we expect that to flow through in our inventory in the second half of the year. So comfortable where it sits today, but we are not immune. And I want to be very clear on that. It's about how do we take proactive approach, how do we drive our business but we're not immune. And so we often look at how do we potentially offset something that could come down and we're constantly looking at what are the areas that we might be challenged on and take action.

What are the areas to kind of watch out for? Is it mostly all resins and shipping costs? Or is there anything on computer chips or other areas that maybe we should be watching?

Yes. And I walked through a little bit around the chip aspect, and I would say it has not been a big impact on us today. We're being very close and intentional on that. Oil, we watch, and we do look at that from a resin perspective, but I did walk through what that looks like. And so I would say we continue to monitor the global impact and tariffs, obviously, being one of them that we monitor to make sure that we're positioning the business to continue to drive to what we signed up for.

What other maybe cost savings programs or offsets do you have in the business if things do get worse to offset some of it?

And I would say -- so we call it PPV, purchase price variance, we're being much more proactive on that. And I would say the team understands what that looks like. And oh, by the way, part of that is also getting free cash flow because we expect also payment terms to be something we view with our supply base. . We're also looking at how do we look at levers within efficiency in the business, and we hold ourselves that -- we call them our improvement process internal, and we look at automation for that. We look at efficiencies on labor with that. We look at how we go to market on that, so all those areas. And then there is some element of price that we look at as well. And I would say Baxter has gotten better. We're not perfect, but we've gotten better from where we were in the past. There is an element of if our costs go up, we have the ability to go back in the discussion. It takes time. And as you're well aware, last year, we had about 100 basis points of price in our number from last year. And we are looking at that for the future because we offer a high value for our customers and that constant driver on value and value creation. And that's why innovation is also a key element in our future. And base hit innovation where being in front of a customer listening and launching solutions that really enable them to do their process better and be more effective on care for patients. And so we're very aligned with what that looks like. And a clear example of that is the Dynamo stretcher. Very proud of that launch. A whole lot of excitement around it. We've seen a tremendous feedback from our customers in a positive way. It's a connected stretcher. And it's about that listening and launching solutions that offer higher value for our customer base.

On margins, first half to second half was a 500 basis point step up. I think a lot of people are looking at that and seeing how is that possible. So can you just help us bridge that gap?

Why don't you start and then I'll add on the high level.

Sure. So we tried to put out a fair amount of color on the call kind of helping people understand and process what those buckets were. So call it, 500 basis points from what we said about first half and kind of implied at the midpoint of our guidance. About half of that is simply an improvement in volumes and capturing an appropriate level of leverage associated with that. And that, frankly, has not been the case recently here. And so kind of getting back to that more normal leverage that we would expect. The other 2 areas, one would be realizing the benefits from the cost structure actions that Andrew discussed. Those are mostly taken in January. Those are going to be realized and we just have to see them flow through the P&L. And the third piece is cycling through the higher cost inventory or the absorption headwind that exists in the first half. It was around a $20 million impact in Q1. It's probably going to be closer to a $50 million impact in Q2. But importantly, as we exit the first half, we think that will be behind us. Again, it's a very mechanical thing. We're just going to sell through the inventory that was produced at the end of last year before we took those cost actions. These are the 3 biggest areas. Obviously, not all encompassing. We talked about inflation. I think importantly there, based on the cap and roll and where we sit today, that would only be a month or 2 impact for the full year. And so as we took a step back, looked at all the risks and opportunities for the year felt comfortable that, that was a manageable risk in the context of everything in totality.

Yes. And look, I don't have much to add, Kevin laid that out appropriately. I mean if you look at it, right, 50% is -- and like you said, typical market for our business. And it's just math. It's how it's going to roll through. And so yes, of course, we're going to continue to face areas that we're going to drive in the business. And there's a lot of wood to chop between first half and second half. But we do view that we are very comfortable with reiterating our guidance for the year and what that looks like and how we're executing towards it.

You've also kind of talked about 2027. You said grow -- ability to grow revenue and EPS, both you've been saying that for a few months. What's given you the confidence to kind of say that a year in advance, what are some of the risks to that?

So a couple of items. First, I want to be very clear about something. Our path to '27 is through our ability to execute in '26. So I want to be crystal clear on it's how we execute throughout the year and of course, there's a lot of dynamics between now and next year. And I'm not here to go through all of what that could look like because we're going to be faced with different challenges throughout the year that we're going to take head on. But as we look at next year, our typical market growth is low single digits. We would expect it to be that in next year. And through that, as we look at how to drive the business, we would also look at -- forms our ability to expand our margin profile through that increase. And so I'm not here to talk about '27. We're going to talk about our path there is through '26, and through that is launching new products, executing our plan, driving the business, and that puts us in a better position to execute '27, '28, '29.

When you look at like this year, obviously, below your weighted average market growth rate, which assumes -- implies share loss. Like if you look at where you're losing share. What's kind of giving you the confidence to get back to stabilize share in those businesses?

Yes. And I wouldn't agree with losing share. What I can say is we did have -- and I talked about fluid conservation. That is a real item in Q1, it was bigger quarter last year. and that comp was a challenge for us. And when we look at the year, getting back to a more, I would say, we let it out to [indiscernible] just above. When we go through our businesses, it's how do we align them for driving expansion with customers. And we've largely now have gone through and lapped some of the conservation that we've seen and/or ordering process around that, and we're setting up to a more normalized approach on Baxter. And I would say we were very comfortable in our share position. We're very comfortable with the market dynamics, and we're very comfortable with the value for our customers and then realizing that over a long period of time.

Just to build on that. So you touched upon the new market baseline in IV solutions that's impacting '26. But recall, there's also -- we're annualizing or lapping the lost Novum sales as well that were in the prior year. And we are also facing some pressures in the injectables business, and we've talked about some of the supply challenges there. So those are all 3 things that are impacting '26 that don't necessarily have to do with share.

When you first came in, I think you stopped giving quarterly guidance, I think you -- hey, visibility is not there to do that. You gave some color this past quarter on Q2. Is the visibility in your ability to set guidance getting better at this stage?

Yes. And look, I look at it as no single quarter is going to define our business, right? It still we continue to execute year-over-year and that constant drive to always focus on the areas that need to improve. And I would say that was 1 of the areas around why we are very comfortable in looking at the full year guidance. And so when we think about the year, that's how we're going to lay it out. .

That's fair. And then I want to touch on free cash flow. It's going to be an area that Baxter is probably needing to improve going forward. What's the kind of the levers? And how long is it going to take to start improving the cash generation here?

So again, in Q1, it was a nice area of improvement, a lot of work to do. There's 3 areas. There's collections from customers, there's payments to suppliers and how we manage our inventory. We have action plans around all 3. And I would say we're getting better. We're not where we need to be. And you're going to see us constantly drive around how do we get better on this process because free cash flow as I mentioned earlier, is 1 of our value creators, and it's 1 of the areas we look at with a keen eye on we're going to hold ourselves accountable to getting better on this on an ongoing basis.

You're even confident about to put buybacks on the long-term slide that kind [indiscernible] me. Is that still the plan longer term?

So once we get past and get under 3x, it opens up a whole area that we can look at from a capital allocation. And there's 5 points right? There's debt repayment, there's buybacks, there's internal investment, there's M&A and then there's a dividend. And I would say, we talk about it because we're going to be looking at that for the future around the greatest return to shareholders, and it's over a long period of time. So I would say we're signaling it because it will be consideration of course, it's 1 of the 5 levers. But I'm not here to tell you that we're at a point at which we're going to put the percentages of what we're going to do with the free cash flow because we're going to look at that on an ongoing basis around that impact for the long term.

So M&A is still part of the strategy?

Today, we're focused on executing the business. Once we get to that level, M&A is going to be part of the consideration around what we look at, but I'm not here to tell you what that's going to look like.

Okay. I was asking kind of post 3x.

Obviously, so -- and look, my view is having done this before, cultivation is king. I'm a huge believer, I got ABC, always be cultivating. And how do we get out. And we're building those relationships now, but these take time. And I'm not going to be in a position where we feel like we need to jump to something. It's about strategic focus on where we're going to see expanded growth with our position today in the market and how do we drive that from an overall capital allocation perspective. And we're going to look at ROIC as a threshold. And so when we start to get to that level, we want to have built that relationship. And the reason why we want to build that relationship is we want to have the ability to either have last look or have that relationship for when a customer decides they want to -- or when somebody decides they want to do something different. They reach out to Baxter first. And so that type of thing takes time, and we're building that, but we're early in our journey there.

So you're, I guess, prior predecessors that are -- not prior predecessors but your private companies you worked out were 1 of the leading companies in the space. Is that the goal? What does Baxter look like on the other end of this?

We want to be known as strong executors in the markets we serve. And what you're going to see over time is you're going to see us focus on not only expansion in the markets we participate in. So we want to outpace our competition in the markets we participate in. We're also going to look at how do we do systematic M&A around how do we drive our ability to really align to customer and shareholder value. And you're going to see us -- and with that, it's going to be some portfolio shift, but you're going to see us focusing on areas that are high-value return, and how do we be strong stewards for our shareholders.

Anything that I didn't touch on, Kevin? You want to -- all right. Thanks. Thanks for joining us.

Thank you very much. Appreciate it.