Baxter International Inc. — 2024 Q1

Good morning, and welcome to our first quarter 2024 earnings conference call. Joining me today are Joe Almeida, Baxter's Chairman and Chief Executive Officer; and Joel Grade, Baxter's Executive Vice President and Chief Financial Officer.

Thank you, Clare, and good morning, everyone. We appreciate you taking the time to join us today. I will begin with an overview of our first quarter results and then provide some updates regarding our ongoing strategic transformation. Joel Grade will follow with a closer look at our financials as well as our outlook for the second quarter and the remainder of the year. Then, as always, we'll open it up to your questions.

Thanks, Joe, and good morning, everyone. As Joe mentioned, we are pleased with our first quarter results, which came in ahead of our expectations. First quarter 2024 global sales of $3.6 billion increased 2% on a reported basis and 3% on a constant currency basis, and as mentioned, compared favorably to our previously issued guidance.

For MPT, we expect sales growth of 4% to 5%. This is an increase from the prior guidance of 3% to 4% and reflects the first quarter outperformance and the inclusion of Novum, which is currently expected to contribute an incremental $25 million to infusion pump sales and reflects some cannibalization of prior planned sales of Spectrum.

I guess, my first one is on top line here. When I look at the business here, the Hillrom portion health care tech part of the business underperformed, all other segments came in about right. And Joe, when you think about this exiting fiscal '24, can Baxter get back to like 4% top line, like when does Hillrom normalized? And perhaps talk about what gives you confidence that this business is actually growing? Is there any reason to fear share loss within that part of the business?

Vijay, we are committing to a 4% -- around 4% exit rate for the year. We see what happened in HST in the first quarter as a postponement of orders and some operational issues that we have, that we're addressing very diligently. We're starting to see good results coming out of it.

That's helpful comments, Joe. One on maybe margins here. Q1, both gross margins and operating margins came in above. What drove that gross margins? Are we seeing benefits of cost actions or is this any timing element? Are we seeing pricing contribution? Because when I look at the second quarter EPS, it's below 3. So was there any timing element here on that margins?

Yes. This is Joel. And so a couple of things on the Q1 margins, I would call out. Number one, the ISC drove a substantial portion of that. We had strong operational efficiencies. We had positive manufacturing variances that flowed through. And so I think just in general, our ISC performance was a strong contributor there.

Going back to the softness in Healthcare Systems & Technology, can you give a little more detail on what exactly were the operational factors that impacted the first quarter? And why it should ramp sort of in the back half of the year? And also on the capital orders, I guess, why did those not flow through in the quarter as you guys were expecting?

I will take the first part of your question and Joel will take the second part of your question. We saw the operational issues were more related to how we were integrating our enterprise accounts and our folks who are every day in the field. We had made significant changes halfway through the quarter but did not catch up fast enough.

Yes. I would say your question around the second half of year, why are we not recovering fully all the way to the 3%? I mean, I guess what I would say, the first quarter was a fairly sharp decline relative to expectations. And I think more than anything, it's simply that we're not fully anticipating making that up throughout the rest of the course of the year. Having said that, to Joe's point, we certainly do remain optimistic about the growth prospects in this business.

Okay. And then a follow-up question on the gross margin. Is it just such a key part of the Baxter story here. Can you quantify the impact of the closing of the dialyzer facility in the quarter?

So Pito, I'll take that. There are a lot of questions in there. What I would say is that the key is within our integrated supply chain, a lot of this comes down to the execution on our margin improvement initiatives. They've always been designed to offset inflation.

Joe, there was a lot of strength in Q1 outside of HST, but the guidance implies growth slows in all segments. Why would growth slow so much relative to Q1 in Q2 through Q4 in those other segments? And I had one follow-up.

So Larry, maybe I'll start with that and let folks. I would say most of it -- we did see some strength within our Kidney Care that came in favorable to our expectations. So I think that we are still anticipating that to slow in the second half of the year as we get the impact from some of the government-based pricing initiatives in China. Also just the impact of some of the market exits that we will be incurring for the rest of the year.

And you'll see a tremendous acceleration for HST, Larry, that is reflective of the pace of the business but also acceleration of some of our actions that we took mid-Q1, that is starting to get effect in Q2. We have accelerated our pump sales.

And if I could just add one thing on the kidney piece for a little bit just 1 order of magnitude. That business that we talked about going from flat to 1% from a guidance perspective would be closer to mid-single digits without some of the market exits. So to Clare's point, that is a fairly sizable impact as we head into the remaining part of the year as well on a holdco basis.

That's helpful. Just one quick follow-up. Joe, on the plan for Kidney Co. spin versus sale, when do you expect to make a decision? And how do you guys think about the pros and cons of the spin versus a sale?

Larry, we will be separating the business in the second half of 2024. And I don't want to comment at the moment and which option is a better option than the other. We're contemplating both options, and we have said that before that we will maximize shareholder return for the option. So whatever option we choose is going to be one of 2. We will separate first of all. Second, when we separate, we will separate with maximization of shareholder return in mind.

Maybe one on R&D. This is one of the first years in a while that R&D is growing slower than sales. How do you think about your R&D investment and where it's going? And are we just seeing some of the benefits of the Hillrom integration here?

I want to start by saying that we actually increased R&D in HST, the former Hillrom business, we call HST in Baxter now. We increased R&D there. We are very, very judicious about capital allocation within the business and what put money in R&D. We also have plans in '24, but also in '25 to continue to increase the dollar's value, not as a percentage of sales, the dollar's value that we put there.

Great. And maybe one, it doesn't get a lot of attention, but I feel like almost every quarter for the past few years, it keeps driving upside and now it's broken out as drug compounding. Nice high-teens growth here. Kind of same question, following up on Larry, but more specific to the drug compounding.

Robbie, we at pharmaceutical relied outside the U.S. in very key markets, the combination of drug compounding and premix and vial pharmaceuticals as well as IV solutions as Baxter provides a full solution to the customers.

Congrats on a good start to the year here. I just wanted to ask about Novum. Obviously, that's probably the biggest event that has happened now since we were all asked on the phone together. So just curious what you're seeing. I know it's early days, but with Novum, how much of that is factored into the Q1 outperformance or maybe drove some of the Q1 outperformance and into the higher guide? And just sort of what you're seeing from a competitive dynamic now that you do have Novum out there?

Thank you for the compliment. Opening the question, it was very nice of you to recognize that, we agree with you. Novum has had no impact in the first quarter. As a matter of fact, that performance is driven by strong volumes all around the MPT portfolio, but Novum.

Yes. And if I could just add a couple of things to that. Number one, keep in mind, as Joe talked about, we continue to see really strong performance in our Spectrum pump. And so throughout the course of the year, we've anticipated still strong double-digit growth in Spectrum.

Amazing. I'll keep it to one given the amount going on this morning. So thank you for taking it. Pharmaceuticals, obviously, again, very strong growth. I'm just trying to think bigger picture. The drug shortage list is still very high. You've got some onshoring certainly of the syringe side of things. And I think the Civica experiment didn't really work and some of the Indian manufacturers have been having a difficult time.

Patrick, we are in an injectable space that is -- it's called a specialty generic. We take ANDAs, and we create premixes. They're very safe, they have good shelf life and they can be deployed to hospitals very quickly. So as we think about drug shortages, we continue to explore drugs that can be put into that format.

I wanted to ask some of the segment margins, like Renal margins were really strong this quarter, HST margins were lower. I assume that's the revenue stuff, but I just wanted to make sure any other color you can provide on kind of those segment margins this quarter just given they were kind of way off trend?

Yes. Thanks for the question. Yes, you're correct in your assumption on that. And then on the Kidney side in particular, there is a lot of impact on that, and something I referred to you earlier in terms of closing our Opelika plant. So again, in that -- in the first quarter, there was -- I call there's a lot of increased production that drove a fairly significant amount of margin in our Kidney business in Q1 in particular. So I think that's really the main driver of that business that you saw that looked like a bit of an outsized margin. We're certainly not anticipating that to continue in Q2.

Okay. And then just kind of bigger picture, when you think about the core Baxter business kind of excluding the Renal business, just the opportunity for continued margin expansion. You're getting good margin expansion this year. But just in general, like what are the line of sight that you have? Is it cost rolling off? Is it based on revenue growth acceleration, cost opportunity that you can take out of this business just to kind of keep this margin trajectory and expansion kind of going longer term?

Yes. I think it's really a combination of things. First of all, it's the volume, as you said, it is continued opportunities from pricing. As you know, we've had some pricing impact this year. And we've renegotiated some of our contracts with our GPOs as we head into next year. We're anticipating continued favorability from a pricing standpoint.

I was hoping to ask Joe and team just about the geographic expansion initiative for the Hillrom or HST portfolio. Has it taken a little bit longer than Baxter initially thought? Or are there challenges to bring Hillrom technologies into international geographies where Baxter are present and Hillrom didn't? It sounds like some of the international softness was based on government order timing in Q1, but just wanted to get an update there as it was part of the strategic rationale for the Hillrom acquisition.

Yes. We have good performance in Western Europe, we see that, and we see good performance in Latin America as well. So we see that Baxter combination with Hillrom has expanded Hillrom opportunity in those markets. We are making changes in our Asia Pacific organization to bring more focus on capital sales to supplement what Baxter is strong, which is general acute market sales.

Understood. And just one follow-up. Wanted to just ask about the Connectivity Solutions technology. It sounds like Novum IQ, the smart beds, they're adding to that connectivity solutions portfolio. But maybe if you could just share with us any pipeline initiatives and how you think they can roll in and then start delivering bigger sales impacts as we move into '25 and 2026?

We, with Novum IQ, syringe and LVP, large volume parenteral, now we have a suite that connects with Baxter, gateway, overall gateway called Connex. And the Connex brings all these devices to talk to each other. So right now, if you went to our center, our customer experience center in Batesville or in any other place that we have, you would see the pump communicating to devices like Volt, the bed communicating to Volt.