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

Less of a benefit.

So not negative.

Not negative.

Got it. That's helpful. HST, so you're launching several new products, you talked about it earlier at CCS this year. How should we think about the impact to growth in the second half and into 2027 from CCS.

So I would say I would just say we've been clear all year. We expect our growth to be back half weighted. This is due to the order book, again, strong orders at the end of last year. Also reflects kind of continued traction from new product launches. So both Dynamo and CCS as well as in the Front Line Care business, the Connect 360. Let's say no change.

That's helpful. So -- but frontline care, so just 1 follow-up on Frontline Care. It's been -- was soft in the first half of the year. So it sounds like you expect that to improve -- is that fair based on what you said?

Yes. So Front Line Care grew, I think, 2% on a full year basis last year. It was down in Q1, but it was up 2% again in Q2. We expect the entire HST segment to grow low single digits. And so I think between CCS and Front Line Care, you should think about them both growing in that same range.

Okay. That's helpful. Andrew, just curious on the portfolio. How are you feeling about the portfolio at Baxter. And I'm asking in the context of frontline care. It's mostly like the old well challenge business, whereas a lot of physician office products. We think of Baxter more as a hospital product company -- why does the Front Line Care business fit in the portfolio just -- and maybe zoom out on the whole portfolio.

Yes. And so I'll walk through a couple of items on this. First, if you look at the -- what our customers are faced with today and what they're faced with over the, call it, the months and years to come. They're looking at alternative sites of care. They're looking at different ways to approach the patient to have a high level of care for that patient and understand the data. And I'll tell you, given our breadth right now, Welch Allyn actually positions us very well for whether you're in the doctor's office to alternative sites for surgery to -- in the hospital. And it allows us that continuity. The second item is, as you look at Baxter and you do a step back on our broader portfolio, we have patient monitoring -- we've got the beds platform, which is a smart bed allows us to collect data off that bed. We do nurse call. We do other areas around that aspect with CCS. We do the pump portfolio, which also has data collection. It allows us to help to understand a workflow to drive greater impact. No, I would say this. We're not there, but we're moving closer and closer to that mark to really collect the insight to have tangible impact for our customers. And I'll just say, as our customers move to a challenged space work, whether it's nursing staff or the ability to support for patient care we want that flexibility. We want the ability to draw data to drive a to support patient care over whether it's in a doctor's office setting to an alternative site to in the hospital and really maximize that capability for our customer set. And it allows us to have an even greater impact on that.

So I mean, I've asked you the question a few times on earnings calls. And now I guess what I'm hearing you say is you're happy with the portfolio at Baxter today.

Yes. So I would say, look, we're always going to assess portfolio. And if you look at our portfolio today, we have stuff in the invest and grow. And 1 of the exciting products that we have is our ambulatory cardiac monitoring platform with Bard -- that is a very exciting area, which we also have white space to be able to build out capability and you're going to see us laser-focused on that. We like that area. We've got advanced surgery that also fits in there. We also have to sustain and sustain is -- think of things like the IV solutions. We have a strong position in the market. We have high value with customers. We're a trusted brand. We want to continue to maximize that capital -- but then we also have some fix. And I'll tell you, over my tenure, we're going to be looking at our portfolio to make sure it aligns with high value creation. And so while I would say, look, we're pleased with where we sit today. That's going to change, it's going to evolve, that's going to grow. It's going to also look at things to say, maybe it's not a fit over a long period of time. And so you're going to see us go through those cycles. And I would say -- it's more pruning than anything. We've gone through a lot of stages to get to where we are today, and we are going to maximize that performance as we sit to where we are.

One big picture question. You've made a lot of progress. Anything then harder than you expected?

Yes. So when you look at the business, I would say, look, I've been so impressed with Baxter's team alignment to continuous improvement. I would say we launched GPS a month into my tenure, a month into my tenure -- and I was just in our facility in Plevin and that's Provine France, and I was in our facility in Softell Germany last week. And to see the team's excitement about continuous improvement and not just operational. But how we're turning this into technology, utilizing AI to become stronger, faster, better, for patient care, for customer care and aligning that to impact to bringing this to life. And I've just -- I've been so impressed with that capability and that strength. And I would say some of the things that I've been frustrated, 1 of them, and I'll be upfront the leverage. And we had thought when I came in last year that we were going to be under 3x. If you recall in my first earnings call, we took the year down. We took the quarter down, and we took the dividend down to $0.01 to send the signal that we are laser-focused on getting our leverage to under 3x because we've set it for years and we didn't achieve it. And so that stabilizes real, that debt repayment is real because we want to deploy capital, capital allocation as a strategic enabler. And by having a higher debt load, it limits us and we don't want to be limited. Because once we get through that, then you can start to look at where you might invest from an M&A perspective, a tuck-in M&A or technology build the white space. And we know if you have to go through a clinical trial. It takes years to get there where we can bring stuff in and have the Baxter position to bring that to market at a faster pace. And so we've got a have a higher safety ratio. We've got to deliver free cash flow so we can really drive down that, but we're on our journey.

That's helpful. Maybe sticking with capital allocation -- so your goal is to get net debt to EBITDA down to 3x by the end of this year. Did you accomplish that with the recent $860 million tender offer last month?

A good offer. Actually, our team really did an excellent job in this. And we spent $600 to take down $850. I mean it's strong return. So really, really proud of the team's results there. And that comes from our ability to drive free cash flow. But if you look at that, it gets us in a position to be more confident in the ability to be at 3x or less by year-end. -- The best deals we do are going to be cultivated deals. Cultivation takes time. And so we're training our presidents. We're enabling our presidents around opportunistic areas where we see a strategic enabler and knowing it's going to take time. And so getting there allows us to start to think about things differently, capital allocation-wise.

And what is your philosophy around capital allocation? Are you -- some CEOs like to have an algorithm, this percent return to free to shareholders, et cetera, some CEOs prefer to maintain some flexibility. What's your philosophy?

Okay. A couple of things. First, if you join my team, you get 2 and 1 book is called the outsiders. And the reason you get that is I want you to know how I think about capital allocation, and you guys know this, but as a reminder, there's 5 points that we look at for capital allocation, and we're going to look at all internal investment is 1 we're going to continue to support. -- greatest return to shareholders. We're look at M&A, strategic M&A as an enabler and share buybacks when we see the opportunity. And I would say we like the flexibility because 1 of the things when we talk about capital allocation, things will move, but we don't want to be beholden to something. And so we'll set the parameters and John and I will be working through this to set the layout and structure. But again, things are dynamic and you might be cultivating an asset for years and then all of a sudden it becomes available, you want to be in a position to outpace your competition for adding that as a high value for our business. And so the net-net is it's all aligned to long-term shareholder value creation, and we're going to keep driving that.

That's helpful. All right. So let's turn to '27. Everyone says, "Hey, we're not going to provide any updates. We're not going to provide any guidance, but everybody gets the question. You're not being picked on, and Kevin knows that. So I guess the first question on '27. On the Q1 call, I think you talked about modest sales growth and some EPS growth in '27 despite the TSA headwind. And you didn't reiterate those comments on the Q2 call. So my question is, what changed?

Yes. So look, I mean, to be quite candid, we are focused on '26. And as we know, Q1 was at point, Q2 was a point. Q3 and Q4, we got a lot of work to do. And so while certainly, we'll update on '27 when we get closer to that time period. We've got some results to deliver on. And we owe it to our shareholders, we owe it to our customers, real to our employees on execution and delivering on those results. So well, we're not saying something changed. We're just focused on getting through this year because '27 is through '26 and delivering strong results in the back half of '26.

That makes sense. Okay. I mean I guess I was going to ask if you think organic growth could improve in -- be better in '27 versus '26, but I don't think you're going to...

I could repeat the same answer if you want.

Well, then just on the EPS, we know you've got a couple of headwinds. You've got, I think, the tariff refund this year, you've been transparent about that. That's about $0.11. You do have the TSAs going away. We're all trying to figure out kind of what that means. We came up with about $0.10 headwind for that. That's our own math, and then the recent debt refinancing may be a little bit of a tail -- a good guy. So we're coming up with maybe about a $0.15 headwind next year to EPS. I guess the question is, maybe, a, what are the pieces we should think about; and b, any of the reaction to our numbers. So the puts and takes and just whether blast any of the numbers $0.11 you've been as you've disclosed.

To start off, I think after repeat, we will provide more color at the right time. And I think part of that color is the context of the puts and the takes. I know there's a lot of focus on TSAs right now. And so what I will say around that is when TSAs roll off, we will have had 2 years to contemplate its impact. And so in 2026, we do have the midpoint of the guidance is $160 million of TSA income. You should assume a lower than corporate average margin on that. That's not $160 million of drop-through. So it is a much smaller number, that will be a headwind next year. And then when you think about the cost, both COGS and SG&A, an element of that, the direct piece will go away as soon as we stop providing the activity. And so that comes out pretty quickly. There's also a piece that will take more effort. So think like shared IT costs and things like that. And so the punchline on TSAs is there will be a headwind next year. We have consistently talked about needing to take the stranded cost out as we exit the year and that we will provide kind of the overall puts and takes for 2027 in totality at the right time.

And the only other item I'll just add is we were very specific on the tariff to separate, there's a one-time event. And we were very clear on what that meant because it's about execution on the business and really driving that through the end of '26 to get ready as we step into '27.

Okay. That's helpful. Well, we've got 5 minutes left here, and Kevin didn't think I would get through all my questions. impressive speed -- so well, you guys were efficient. I guess a question I've gotten on injectables. We didn't talk about it is, are there enough molecules out there, new molecules going generic that allow you to grow that business. And we haven't heard you talk much about that.

Yes. So when we look at our position, we like the space we're in. We like the -- we're focused on ensuring that we are strategically aligned with where the market is going and our teams are doing a lot of work around this. We do have some areas that we're I would say, resolving. And I talked a little bit about the focus on operational. I had highlighted a facility that was a challenge for us. We've now largely put that behind us. We have a contract manufacturer that we're on site and resolving. And we did have a little bit of challenge in our facility in India I would say that facility got back online, back on track very quickly. We're actually -- the team did such a good job around minimizing that overall impact, having a supply of inventory and then being able to bring the product line back on track. So we feel that we're in a good position, but we're very focused on ensuring that we continue that alignment for higher-value product set for the markets.

And before Andrew, I give you the opportunity to make closing remarks, what is it -- what are some of the things you're excited about new products? You talked about a couple, but what are some of the other new products you're excited about?

So if I do a step back, a couple of items. First, innovation is going to be an enabler for our future. And we're excited about what that's going to deliver. And just to think through and talk through some items. First, we launched Connect 360 in our Front Line Care business. Customers are really positive feedback on that product set and what it enables. When we launched Dynamo, our new connected stretcher platform. And I'll tell you, it was an area that we needed a new product set. We -- I was able to sit through right before we launched it with a lot of the customers that we're engaged with the thinking around making sure it met the needs of our customer. And they're on this form that allows us to gain a tangible actional insight -- so when we launched, say, it's been -- it's been a really strong feedback from our customers around we have built a product that they want to use. And so we're excited about that. But as we look forward, the ambulatory cardiac monitoring business, a lot of opportunity to continue to drive that business to be a part of supporting patient care outside of the hospital. When I think about our advanced surgery business, we're looking at new avenues, new white space that we can continue to add on as a potential and then as we go down through even into our ITP business around capability, not only with the pharma platform but then also how we bring new solutions to market. And the business is really aligned to ensuring that we listen to customers, build that capability into our process and ultimately innovate to drive new solution sets in the market. And I talked a little bit about the EQX and our peer view. It's these constant drives around building and listening to customers for a response.

That's great. So Andrew, we've got 1.5 minutes left. Really appreciate you being here. First Wells Fargo Healthcare Conference. I believe it is. So hopefully, not your last. But I'll give you the last minute to make any closing remarks.

Well, first and foremost, thank you very much for hosting us. What a tremendous experience. And I'll just say, look, we have a lot of work to do. And I like to characterize I've been pleased with the progress, but we're not happy with the results yet. And we've outlined our stabilized, delever, launch and continuous improvement is our first phase of that journey. And so we're making nice progress in that journey. We've got a lot of work to do, and we're excited about the future and delivering it constantly building the future of Baxter. Thank you so much. Have a great day.

Thank you.