Hey, good afternoon, everybody. Travis Steed, the Bank of America Medical Device Analyst. And next up this afternoon, we have Baxter, Joel Grade, Executive Vice President and CFO, and Clare Trachtman, Head of Investor Relations. So welcome. Maybe just high level before... Definitely want to dig into some of the different parts of the quarter in HST, but just high level before we get started, maybe just kind of go through how the quarter played out, how you thought it played out, and kind of level set everybody there.
Yeah, sure. Thanks, and thanks for the opportunity to be here and for your interest in Baxter. You know, I think just generally speaking, we had a strong quarter. I think, you know, we beat our guidance on both the top and bottom line. We had three of our four businesses that exceeded expectations, obviously offset partially by HST that did not. We had a strong quarter from a margin perspective. We had 180 basis points increase in our operating margins, you know, through led, you know, primarily by really good work from our ISC group that continues to drive margin expansion. We've had pricing that continues to add to... Especially in, you know, markets outside the US, that's really continued to add to our margin expansion as well.
So, yeah, I would say just in general, it was a good quarter. A lot of good things there, and obviously, some challenges as well.
So obviously, we want to kind of dig into the one challenge area.
Sure.
-HST. So I guess that business in total was down 9% in the quarter. What surprised you, you know, the most as the quarter played out? And I think you took actions mid-quarter. Just kind of curious how those actions are progressing.
Sure. Yeah. Let me break it down between the two main parts of the business, between Front Line Care and CCS. I'm going to start with Front Line Care. You know, I think, I'll start with sort of macro factors. What surprised us some was the degree to which the primary care markets had slowed. You know, there is some, I think this is, you know, more than we had anticipated. We did have some year-over-year difficult comps relative to the prior year, where we'd had a lot of, again, some of the backlog from 2022 was used up in the first part of 2023. But obviously some of the primary care markets slowed, you know, related to spending.
Some of that we think is related to, you know, the change in healthcare and, you know, reimbursement in the prior year that didn't exist this year. There's also some slowing of a new start construction that's happened in that space. So I think those are some of the elements that were slower from a macro perspective. We also had a large government order, about a $10 million government order, that we anticipated happening in Q1 that is likely now to happen in the second half of the year. Keep in mind, that's not a market share loss. We're the sole source provider in the VA hospital space, and so that's something that was delayed further. Again, that was something we didn't expect. And I'd say, you know, one of the things that also came up was just some...
We talked about some operational issues. Let me identify that for you. It was really, really in Western Europe, in our respiratory business, we had sort of self-identified some things from a quality and supply chain perspective that, you know, gave us some delay in terms of the timing of shipments. That's something we anticipate having resolved by the end of this quarter. Again, so, you know, again, working through that as well, but it's, you know, there's nothing structural, nothing foundational in FLC, and we do anticipate that business continuing to recover over the course of the rest of the year. From a CCS perspective, again, I'll start with, you know, there's some phasing and timing of both. I'll say the timing of orders.
Here's the good news: We've got a strong book of orders, and that actually has continued to accelerate. But the timing in the first quarter, some of the orders came in later than anticipated, which then allowed us... Again, there was some timing element of actually being able to ship some of those orders out. So I think that was certainly one element of that. And then installations, also from the actual installs, was something that in some cases got pushed back to the later part of the year. Now, we did talk about some operational impacts, and then let me define that for you in terms of what that is and also maybe what it isn't.
One of the main operational impacts we had related to CCS was, as part of our supply chain initiatives, we're actually looking at rationalizing or optimizing our manufacturing footprint. In this case, we actually went from two manufacturing facilities to one. There's the one in Massachusetts, one in Mexico. We consolidated that into Mexico, and that transition didn't go as smoothly as we'd like it to have gone. That's obviously something we're resolving and making good progress there. That's certainly something more, again, temporary in nature and something we're addressing. I think the... You know, from a sales force standpoint, we continue to drive some of the sales culture in that sales force. There are things from an incentive perspective that we're working through.
Historically, that team has been more annually incented than quarterly incented, which at times drives some variability in the timing of things, and so we're working through that. Also working through things like territory splits and utilization of technologies from a sales force perspective, you know, AI to help predictability of the funnel. And so long and short of it is, you know, is that we had some impacts in Q1. And just as a reminder as well to people, we actually did, we still are up against some rental revenues in the prior year that actually should clear through in the second quarter, but that's a bit of a headwind we have. So all in all, a lot of stuff came together at one time.
I think, really, the punchline here is that there's nothing—that's not a structural issue or a market share loss issue. It's stuff we're working through, and we remain confident in our ability to continue to move forward and the importance of this business to us.
What's giving you confidence that they're not losing share in some of these businesses, and then, and two, the confidence that some of these things that are getting pushed out, that they're actually recoverable and not fully lost?
Yeah, I mean, number one, I would tell you that the, you know, one of the things, my early questions on this business was, okay, so how does an order translate into a shipment? And what I would tell you that the batting average is extremely high. So once you have orders come in out of the, you know, there's like a funnel, then there's orders. Once the orders come in, the likelihood of that shipping is very high. And so part of the confidence that I have is that as momentum continues to build in these orders, I think that's, you know, that's a big part of what we're seeing here. That also gives confidence in the shipping issue.
This, the business from a capital perspective, I'm not sure is something to be able to look at on a, any single quarter basis and evaluate share. It's really around taking a look at the broader, the broader year, and, and so we, again, just given the volume of orders and the work that's being done, we feel confident in that.
Clare, too, and I—when you think about the models and stuff like that, I wanna make sure that the Street's not getting too far ahead of itself on the recovery of this business. So kind of what's the expectations for this business in Q2 and kind of the back half of the year?
Great question. So for the second quarter, we do expect it to continue to decline. It is expected to decline low single digits within Front Line Care as we continue to anniversary some of those comps. It's probably down closer to, you know, mid-single digits. On the CCS side, probably, you know, flattish, you know, maybe down a little slightly, but closer to flattish. Now, that is sequential improvement for both businesses, so that's some, you know, meaningful sequential improvement, which will carry through the rest of the year. So I'd say the first half of the year obviously will be down, and then, as we've said, the second half of the year will be up closer to, you know, I'd say that mid-single digits, you know, around that. For the year to end around flattish.
You know, it could be, again, plus or minus on that, but, you know, around flattish for the year, with Front Line Care ending the year down low single digits and the CCS business growing.
Super helpful. The other side on the quarter on that business was the margins as well.
Mm-hmm.
So again, touch on how much of that margin compression was just the revenue and how much that gets recovered over the course of the year.
Sure, I'll start with that. So, we do see significant margin progression for this business over the course of the year. Joel referenced earlier to this manufacturing, rationalization, footprint rationalization that we had. We did have some incremental costs associated with that in the first quarter. Again, longer term, this will drive savings, but again, just given some increased logistics costs, that did impact the margins in the first quarter of that. So that will resolve as we go through the year, and we actually get the benefit of shifting to this one location. In addition, obviously, this is a business where I will tell you, it's unlike some of our other businesses, the raw materials, so the material component costs are actually kind of the biggest piece of the overall COGS.
So we don't actually face as much of a volume issue, plus or minus, on that. So as sales improve, you do get that benefit on the margin. And then also, similar to this business, you have good leverage on the R&D and SG&A side. So you'll see that. We have implemented, though, some cost actions with this business as well, and those will start to carry out, and that's where you're going to really see meaningful margin improvement in the second half of the year relative to the first half of the year. And I expect you will have, just to set it, margin expansion on a year-over-year basis for this business.
Okay. Any sense for how much at this point? Some-
Yeah, I mean, I'd say, you know, north of what we're calling for for total Baxter, you'll see more than that in the HST business.
Got it. The kidney business this quarter was actually-
Mm-hmm.
on the upside and outperformed. For at least the revenue side, is that strength something we should expect for the rest of the year, too? Or kind of puts and takes there?
Yeah, I'll start with that. I mean, I think the certainly kidney had a strong quarter. I think there's a couple puts and a couple takes, I would say, just to consider in that business. I mean, their Acute Therapies business was up 15% in this quarter. That's had some really strong demand, both in the U.S. and internationally. That's a solid margin business for that as well. So they certainly got some mixed benefit out of that work. They did have, well, I guess, one what I'll call one-time benefit out of this that certainly should be thought about in the quarter, and that is, we had actually closed our Opelika facility.
What that resulted in is, you know, kind of a surge, if you will, in terms of the demand and, you know, and production, if you will, that caused a level of absorption in terms of manufacturing that we don't anticipate, obviously, going forward. And so I, you know, I think just generally speaking, those are some of the puts in the business. Then keep in mind, I mean, that's really good performance, even against some of the things that they've been doing from a product and market exit perspective. So I think there's certainly strength that we're seeing there. We don't anticipate that same level of both top line and certainly in margin as the year goes by, but they're certainly going to continue to have a solid year.
Great. And then kind of putting the two together, I think, looking, thinking about the margin in the renal business and the ex-renal business, a lot of the cost inflation was in the renal side. And any way to think about what your guidance, at least for this year, implies for year-over-year margin expansion in both of those businesses, kind of renal and ex-renal?
You know, I'll start, and then I'll let, let Clare chime in. I mean, I think the, the way to think about our margins broadly and, and certainly ex renal in, in particular, is just, you know, the idea that we're gonna have a, a few kind of key areas of margin expansion. You know, one continues to be our ISC. You know, I think the-- we have margin improvement program, manufacturing improvement programs that continue to drive the way that business is, is working in terms of automation, in terms of just various things that ultimately are helping us expand our margins and, and offset costs that might be coming through from an, from an inflationary perspective. We certainly continue to think about pricing. I think as we, we've talked about, you know, we, we renegotiated contracts with GPOs.
We right now are negotiating the IDN portion of that equation, but we anticipate pricing to continue to be a favorable outcome. And certainly there's a mix component to this as well. We've talked about this year, where some of the areas of our business that actually cause, you know, again, with HST being down, our anticipation for that improvement next year. We have a high level of compounding growth in our pharma business. And again, so I think there will also be an anticipation of some favorable margin benefit from mix. And finally, what I would just say is new products innovation. There's again certainly we started with Novum, where that certainly we'll have now a full year effect of that, as well as, you know, products that are coming in.
We have, you know, we had 13 product introductions coming out in our pharma business. We have products coming out in the HST. There's. So I think just generally, innovation is going to help cause continue to drive margin enhancement. Is there anything you'd add there?
No, I think, the only other consideration, obviously, for this year, in terms of if you think about the Baxter margins ex kidney, is just absorbing the incremental costs associated with moving to a contract manufacturer within our Pharmaceuticals business. So previously, our BPS business, obviously, we're self-manufacturing some Pharmaceuticals. We've now moved that to a cost-plus arrangement. So that will be in the base as we go into next year. And we're, you know, continuing to launch products and launching those products that really more leverage our own manufacturing, so it will become less, but that's a year-over-year headwind for us this year.
Particularly in the first half of the year.
Yes.
Yeah.
Mm-hmm.
And so just to put some numbers around that, the kidney business in 2023 had 6.7% operating margins. In 2024, is that 10%, 12%? Just get a sense for what that is in 2024 on a full year.
Yeah, I mean, I will say that we expect meaningful improvement in 2024. So I'd say probably towards that, you know, the low double digits. You know, I don't think 12 is probably-- I think that's probably too high at this point, so at the lower end of that. The one thing just to note is we will start to incur some increased supply chain costs, some logistical related costs. As we continue to prepare for the separation, we are moving to more of a one plant, one segment approach. And so, initially, kidney will incur some increased supply chain and logistics costs as they kind of work to optimize their distribution over time.
That will start in the second quarter, and then, you know, I think over time, they'll be able to address some of that, but that will cause some margin pressure this year as well.
Then the HST drag on the ex-renal business, that margins probably are down versus the 18% last year, I would assume, with HST?
So, Baxter renal.
Ex-renal, yes.
Yeah. I mean, again, what I would tell you is HST is going to grow year over year. MPT is anticipated to grow year over year. It is the Pharmaceuticals and more driven by the BPS side of it. So those are really kind of the main things.
Okay.
Otherwise, you know, we are seeing underlying margin improvement on a year-over-year basis for those. So and just back to the pharma, and Joel referenced this earlier. Over the course of this year, we will see meaningful margin improvement from the first quarter. Mix is part of it. We did have a good quarter within the pharmacy compounding, but we're continuing to look for ways to enhance the overall profitability of that business. It is a lower margin business. There's tremendous demand for our services, but we have to make sure that we continue to optimize this from a profitability standpoint. We are focused on launching those injectables, which are higher margin, so we'll continue that rollout. And then in addition, there are some manufacturing improvement programs like there are across all of our businesses. And then finally, just leverage as well.
We had some investments we made in sales and marketing in the first quarter ahead of the new product launches that we have. So we'll get better leverage out of those, the OpEx pieces towards the second half of the year.
The pricing, is that—I know you've been getting a little bit of a benefit from price already this year. Is that incrementally better next year when you do some of the repricing on that ex-renal business?
Yeah, that's how I would think about it.
Yeah.
I think, you know, one of the other differences this year is just, to be clear, we're the pricing we're getting this year is primarily in the outside US, in certain outside US markets. One of the things to remember is that in 2023, we had actually taken some I'll call temporary price measures with our GPOs in the US that were up against this year, which is why, from a US perspective, our pricing looks the way it does. But again, OUS this year, again, next year, with some of the again, the anticipated impact of some of the GPO negotiations, we are considering that as another incremental impact from pricing.
Is the negotiations happen this year, and that kind of reprices January first next year?
Early January.
It's in the month of January.
Yeah, it's early January.
I don't think it's January first, but it's in the month. It's early.
It's two of the three GPOs, right?
Yes. Yeah.
Yeah, that's right. We've actually completed the negotiations with the GPOs. So two out of the three GPOs in the US-
Mm-hmm.
were actually up for negotiation this year with a 2025 impact. The third is gonna be really, I believe, negotiation in 2026 for a 2027 impact.
Okay.
We did not deal with that obviously.
Yeah.
Right. And that mostly impacts the HST business?
MPT. The MPT, in terms of the pieces of the business, it's MPT and pharma that are in there. Now, it does not include Advanced Surgery at this time. It's more the ITT piece of the business and then some of the Pharmaceuticals as well. HST is on its different, and Advanced Surgery is on a different contract. The pump is part of the overall, but it's more the consumable sides that are covered by this, these longer-term contracts. But the pump is key with it, but it's just not covered specifically on the contract.
Got it. Okay.
I would just say one thing, though, while you brought that up. I mean, one of the things about the timing, obviously, we're excited that the Novum has been approved, and we've now, we've now obviously gotten started working on getting that rolled out. And I think the timing of that coming out actually is fortuitous in a sense that, you know, with some of the negotiations we have now with the IDNs, part of those GPOs. I think there's some kind of a good timing element, even though obviously that took longer than we'd have liked it to.
In the guide, you included $25 million from Novum incrementally versus the Spectrum revenue. Is that more price uplift on the new product, or is there more volume that you're assuming with that? Just kinda thinking about what we've assumed in the guidance.
Yes, that is it, and that's a net incremental, so it's not a gross number on Novum. It's a net incremental. There is a pricing element. Novum is at a premium to Spectrum, but there's a volume benefit we're getting as well. So it's a little bit of a both there.
How, how should we think about kind of that moving into full rollout? I guess it's more of a limited launch this year.
Yeah, it's, it's definitely more second half of the year weighted, and even if I think about just the ramp, it even ramps further into the fourth quarter. So I think we'll exit the year on a nice run rate. And again, we've talked about, you know, really being able to, one, upgrade our existing base of it, but also looking at, you know, opening up the opportunity set to look at some, you know, competitive accounts as well. We feel very good about the offering we have with Novum.
Your Spectrum revenue is kind of above trend already?
Yes. Mm-hmm.
Can that step up again, you know, from there with Novum?
So, obviously, even if I think about this year, it steps up pretty meaningfully. We had said originally, our infusion pump business in the US would be up kind of north of 20% this year. Obviously, we've added to that, so I don't know if it will grow above market even into next year. You know, is it 20%+? I think we'll have to, you know, figure that out, but I think very nice growth into next year as well, off an already accelerated base this year, so.
What are you seeing on the competitive front in the pump space?
Again, I would say we're extremely pleased with Novum. It has, you know, some great features. It has some of the most advanced features out there. It does offer both the syringe and LVP with it. So we're excited about the opportunity to introduce this to customers. I think that we've had outreach already from a number of, you know, existing customers and some competitive customers. So the teams are out there discussing the benefits that it will offer. So, you know, we're very optimistic about what this means. We've kind of said that this is not only an opportunity for us to, you know, continue to maintain our installed base, but look at that competitive set as well.
Now you've got kind of the ambulatory pump and kind of the whole set, right?
So we, yeah, I mean, we, we will eventually have both the PCA. So it did, you know, admittedly take us a little bit longer on the LVP. We are now switching focus to getting the PCA. That will complete kind of that full suite there, and then also in addition, we'll have an ambulatory pump. Now, the ambulatory pump will help us, one, also in the acute space, but also in the alternate site space as well. So those are, 'cause that's where that pump is really used to. So in an ER setting and then also in that ambulatory surgical centers.
For the renal separation, wanted to touch on that. Separation committed to second half this year. Curious how you're thinking about the kinda spin versus sell decision and maximizing shareholder value.
Sure. So again, certainly the starting point is we're gonna do what maximizes value for our shareholders. And, you know, we continue to go down a dual path. You know, we've talked about the fact that, you know, we've been obviously working for an amount of time now on the spin, and in March, we mentioned, of course, that we actually were in negotiations with a number of private equity firms on a sale process as well. We continue to make good progress on both. You know, we're not sort of, you know, stopping one to focus on another. You know, we've got, you know, over 90% of our legal entities that are actually going live on the spin. And so we're certainly moving down that path well.
But in addition to that, we continue to have very productive negotiations, again, with a slate of private equity sponsors. And I think... You know, I would say the way I would look at it as follows: again, you know, there's certainly valuation matters, obviously. There's also an element to this that, you know, what are the other considerations, certainly from, you know, from a sale perspective, again, there's some level of value, there's valuation certainty. There is some timing elements of their ability to deleverage in the event of a sale that says, you know, we get to keep more, you know, cash sooner and the ability to deleverage. But again, it's, you know, both... We're certainly very carefully considering both paths.
As you said, from a timing perspective, you know, we're certainly, you know, I'll say targeting, you know, 2024 as the time to get that accomplished. And what I mean by that is not a notification of something. It's actually, you know, kind of finalizing whatever that path is. Again, that's our target, and so we continue to go down both, and I feel good about the overall health of the process in both cases.
Can kind of both be in the second half of the year, kind of either route you go on, kind of committed either way into the second half of the year?
Yes. That's our target. Yep.
When you think about the metrics to maximize shareholder value, is it, are you focused on kind of the debt pay down metric? You focused on kind of, just curious how you're thinking about, you know, measuring shareholder value.
Yeah, I mean, one of the, you know, one of the questions we get a lot is around sort of the tax. There's been, you know, a tax on tax-free spin versus a spin or there'd be some tax leakage. I mean, I, I really do look at it as from the perspective of valuation that then translates into, you know, net after-tax proceeds, that then allows us to, you know, determine what, what it is that we can do to really maximize, again, our opportunities. I think the, you know, this sub, you know, again, in a, in a sales scenario, the ability to deleverage to then, you know, gets to us, to our, our targeted leverage, that allows us then to accelerate some of our investment as well, is something that we certainly would consider.
But, you know, I think that that's really how I think about this, and I think it's, again, I feel good about the potential outcome we're heading towards and look forward to, you know, giving you more information when we can.
How's the interest level from the buyers?
Yeah, I'd say strong. One of the things that encouraged me about that is that, you know, it's a great business. We certainly had a strong level of interest from, you know, a large number of, I'll say, blue-chip sponsors, which is obviously a great place to be. I would also say, just for what it's worth, you know, the performance of the business in the first quarter was excellent, and certainly one quarter doesn't define anything in that world, but at the same time, it's a reinforcement of the high level of, you know, quality we think that that business presents. So I think all in all, we're in a good place.
When you think about kind of the value to the buyer or kind of what the pitch is on the rental business, is it more of the margin recovery kind of getting back that, or is it accelerating growth over the top line?
Yeah, I think it's actually some of both. I think that's, you know, the strategic rationale for the separation, to begin with, was this idea of capital allocation, of how do you get to a place where, you know, we, as Baxter, have the ability to really focus our investment dollars from a capital allocation perspective on those things that are generating our highest returns, which in our case, in our business, was not the kidney business, but at the same time, it would allow the kidney business to actually make those type of prioritized investments in their world. And so I would say it's both those things, as well as focusing on their own, you know, manufacturing improvements and growing top end and bottom line.
And then thinking about kind of debt paydown and getting back to what's kind of the normalized leverage targets, assuming maybe 2.5x, and then kind of the pathway there, and then kind of once you get there, what's the kind of the capital allocation plan? Is it buybacks, M&A?
Sure. Yeah, I mean, first of all, it is gonna... You know, some of this depends obviously on the timing and where we end up with on the separation. But certainly, what we've said publicly is that, you know, our leverage target in the 2.75 times, you know, again, net debt to EBITDA, to be clear. And, so I, you know, I think this, this 2.75-3 times range is a reasonable range, for us to shoot towards. I think the, you know, the path to that, again, may differ slightly, depending on how the process, the separation process plays out. Again, in a sale process, that would be potentially earlier.
But from a capital allocation perspective, I think, you know, just to be clear, while we're currently in the state that we're in, our capital allocation priority is, really is debt paydown and, and deleveraging. Now, once that happens and, and we're now in a place, you know, post, post-separation, our, our priority for capital allocation is gonna start with investing in our business and investing for growth, investing for, you know, innovation. And, and so I think, you know, the growing, you know, organically and very, very selectively and, you know, fold in tuck-ins, potentially, you know, inorganically. But it really is around that focus on organic growth and innovation.
We certainly remain, you know, committed to a dividend, although we, you know, we evaluate that every quarter, and certainly we'll, you know, may, you know, adjust that structurally as the separation occurs. And certainly, when the time is right, we'd reinstate a buyback program. Initially, certainly, you know, for the purpose of, you know, offsetting option dilution, and then, you know, ultimately then, you know, we have cash available to do that, we would go there. But again, the priority as we move forward, post-separation, really is gonna start with investing in our business.
All right, great. I think we're out of time. Thanks a lot.
Thank you. Appreciate it.
Thank you very much. Thank you.