All right. Welcome, everyone. I'm Robbie Marcus, the MedTech analyst at J.P. Morgan, and happy to introduce our next session with Baxter. CEO José Almeida will give a presentation followed by some Q&A. José
?
Thank you.
Good morning. I'd like to start with our Safe Harbor Statement. Take a moment. This presentation will be posted, and you'll be able to read more details. Also, how we report our non-GAAP financial results. So I'm here today, and I'm very happy to give you a highlight of our business. We're on the cusp of finishing our transformation, and it's a broad strategy that brought the company to a different portfolio of businesses by the separation of our renal business, as well as the selling of our pharmaceutical services business, and the addition of Hillrom that changed our portfolio quite a bit. There was quite a bit of value created by bringing Hillrom into the company in terms of connected care. We're going to get into more details of our new products that are being developed.
Also, it's a diversified portfolio and a portfolio of products that actually are of necessity in every hospital and healthcare setting. We are completing the sale of kidney, as I said. Vantive should be completed shortly to Carlyle, and we are also presenting and have presented the 2025 preliminary guidance. So all in all, it's a pivotal point for Baxter, where we're moving our portfolio to a connected care one, one that creates momentum in the company for sales between 4% and 5%, and continue the growth in our operating income this year that will reach 16.5%. So with that, I would like to just highlight the areas that in 2023, standing up here, we set to be complete. First was finalization of the model. We changed quite a bit our model. It used to be a regional operating model for Baxter, and today it is a segment operating model.
We have three segments: our MPT segment. We also have our HST segment and pharmaceuticals. Those are vertical segments, global segments. We also completed the divestiture of biopharmaceutical solutions. We integrated Hillrom, and we are very close to finishing what we set to do with Vantive. Vantive, to give you a little update, we are at the very final process of the selling. It's just getting approval for a few more countries, and the transaction should close early first quarter 2025. To recap, it's a $3.5 billion sale to Baxter after tax between $3.15-$3.25 billion, which will be used exclusively to pay down debt first, reinvest in the business, and potentially buy shares back. What is the new Baxter? The new Baxter has a significant increase in its connected care business. BaxConnect is our cloud connecting system that brings all these businesses together.
Our Medical Products and Therapies and Healthcare Systems and Technologies are quite integrated in terms of how we go to market, as well as our pharmaceuticals business brings lifesaving formulations to hospitals that make it easier for them to administer drugs that are lifesaving for patients in hospital. We have a very diverse portfolio and have amped up quite a bit our innovation, so you can see for the slide that is on the screen just a representation of what's coming out. We have a new pump that launched in 2024, a new platform called Novum. We have a lot of software that we're launching in the near term that will augment that. Also, our low-force vial adapter, which is a modification of our very successful business in recomposition of drugs called Mini-Bag Plus, and in the future, we have a PCA pump and an ambulatory pump that we'll be launching.
The infusion therapies and technologies is a very successful business. It's one that has significant contribution to the company's bottom line, and the launch of Novum has been fundamentally important for the growth of this business in 2025 and beyond with great momentum in the next two years as we continue to take market share. When you look at advanced surgery, advanced surgery is a niche business for Baxter, over $1 billion in sales, growing just above mid-single digits. Continue to do well, a series of hemostats and sealants. We augmented that with some tuck-in acquisitions in the last five, six years that have been doing very well as well. We're excited about new launches. We have some recombination of ingredients that will make our FloSeal even faster to reconstitute in operating theaters.
I think we'll continue to be a great margin business for the company. I'm very excited about this business run by very good company and people. This is a vertical business within Baxter on a global basis. Our Care and Connectivity Solutions is our business that has our PSS, our patient support system, our surgical systems, and our nursing calling systems. It's communications, beds, and surgical tables. We had a great launch about a couple of years ago, our Progressa Plus. It continues to do well. We continue to be successful in growing the business and taking competitive accounts. The near-term launches include some new products that we don't currently carry and have very low market share in those spaces.
Some to highlight, remote communication systems, which will be wireless to nurses to communicate effectively in doing things such as arming beds or giving instructions even with artificial intelligence built in. They'll be able to help them in managing patients. We're very excited about that launch that will hopefully happen at the end of 2025, so it's a good momentum for the company. We also have the new robotic table update, which we work very closely with Intuitive Surgical just to give you some areas. We continue to improve our product offering when it comes to bed technology, and we're going to continue to shorten the interval of innovation in this area. We put about 250, soon to be 500, engineers in Raleigh, software engineers, which work very closely with our Indian Bangalore R&D Center.
Between this business and our MPT business, we have a significant amount of momentum in research and development. Baxter became a vertically integrated R&D company. We do have the ability to develop products 100% internally to the company. We use collaborations with universities and companies and startups. Baxter transformed itself from a pharmaceutical company back in 2016 to a company that can design and launch new products on its own without having the necessity to go outside. We also have in Front Line Care a few launches that are very exciting to us. One is our RetinaVue with artificial intelligence that gives the clinicians in a couple of minutes the feedback into the patient's status of having or not having the retinopathy caused by diabetes. That product is launching very soon. We have a new monitor coming out this year as well.
I'm excited about the MCT, which will come later this year, beginning of next year, our cardiology monitoring. Good things happen in Front Line Care. As you can see, between all these businesses and our pharmaceutical business, which is doing 10 new products a year, very successfully growing 7% in 2024. We're excited about this business. We've got the right momentum now in our new premixes. As you can see, we now have more than 20 products launched in a year, a company that came a long way from being sparsely innovative to a company that has 20 new products that are driving our mix and our profitability as well. The transformation that is happening in Baxter has two very important areas of two important pillars, I would say.
Financially, when we target 4%-5% growth on the top line, if you think about Baxter's business is growing 3%-4%, 4%-5% shows 100-200 basis points of acceleration in the current weighted average market growth rate, as well as the ability to deliver a bottom line that is highly leveraged and continue to grow our research and development groups. So investing in innovation, investing in technology, but delivering a growth into the operating income of the company with allocation of capital that will be done, as I said, first priority debt payment, second priority continue to invest in the company, and third is to buy shares where we don't find opportunities for better use of cash. As I said, somebody asked me today about acquisitions.
Baxter is focused on tuck-in acquisitions, small adjacencies that will augment our businesses and grow our base to continue to deliver 4% to 5%, and hopefully beyond that in the future years. The capital that we have, more specifically, we're targeting 80% cash conversion rate, as well as we're focusing, as I said, in the leveraging the business. Let me walk you through very specifically how we're going to go from 13.5% this year to 16.5% in 2025. When I say this year was 2024, what you see is because Vantive went into discontinued operations, there's about 250 basis points that the company absorbed in 2024 of cost that otherwise would not be there. So that cost reverses back in 2025, as you can see on the green bar of the first on the left.
Then we have also some headwinds in terms of our TSAs, meaning the TSAs are costing the company on its stranded cost. Then we have the Hurricane Helene offset that happened in 2024, not happened in 2025, operational margin improvements and enhancement, which is about 100 points of gain. And then the MSA impact, manufacturing agreements that we have with Vantive. When we sell products to them, we sell at a transfer cost plus a small margin. So it's less profitable than if we would sell the product otherwise in the open market, which is part of our agreement in separation. So that's why it shows the 60 basis points. So this is the composition of the 16.5%. It's pretty straightforward.
I want to make sure you understand that we have plans in place primarily for the operational margin expansion that is going to happen so we can deliver on our commitments. Important to notice that these changes in profitability will continue on as Baxter will deliver enhanced operating income and leverage in 2026 and 2027. I just want to take a moment to recognize our employees who have worked very diligently in taking a plant that is about 1.5 million sq ft in North Carolina responsible for the vast majority of IV solutions in the country. From a devastating situation where we had Hurricane Helene devastate, you can see the first picture. You barely recognize the plant, and within three months, we're able to get all production lines restarted. As you know, we have invested heavily in automation. That plant is almost fully automated.
We're able to restart that plant and by early first quarter, we will have that plant at volumes at or superior than pre-Hurricane Helene. Our employees have worked diligently. We had more than a couple million working hours dedicated to the plant, and we're able to get product back on the market. Very proud of the company. Baxter is a strong company with the ability to harness its global footprint in IV solutions. We're able to put that back into the market in the U.S. We brought products from Spain, China, Mexico, Canada, U.K. to be able to supply the U.S. market. We did the best we could, and now we're almost back to pre-Hurricane levels. Very proud of the company. And so to close, the momentum is strong and goes beyond 2025.
We're building the momentum on innovation, capital allocation, and the ability to deliver leveraged bottom line year over year. Our growth to 4%-5% is what we target for 2025, and hopefully after that, closer to a 5% mark. And hopefully we can get this innovation in the hands of our patients and clinicians to make a significant difference in people's lives. Baxter touches close to 300 million lives a year. It's a large company that provides products that are essential to healthcare. And I think now we're ready for Q&A. Well, great.
Maybe we could start with just an overall update. You have preliminary 2025 guidance out for 4%-5% organic sales growth and around 16.5% operating margin. Any qualitative comments you're willing to provide on how you ended up 2024 at this point?
I think, look, you've seen a couple of things that I would just say. We have continued solid momentum in the businesses, particularly our MPT business, even despite the impacts the hurricane has performed substantially well. Our pharmaceutical business continues to show solid growth, and as we've seen much of the year in that business. I'd say from an HST perspective, we do continue to see some improvements there, and as one of the businesses we've talked a lot about is our Front Line Care, we continue to see recovery of that and anticipate some decent momentum there, and our order size, our order book in our CCS business is strong heading into 2025 as well, so I would say in general, we feel good about that.
We have a positive mix of business that I think we'll see some growth in again and some good momentum heading into next year.
Maybe we could start with HST. You had 2023 coming out of the acquisition, a really good year in HST, and then a little bit more mixed in 2024, and you've been very vocal about what happened, what you're doing to fix it, and where you want to go into 2025, so maybe just give us an update on where you stand on the HST business.
If we just think about FLC and CCS, so let me, can you hear me better? I don't think it's on. Is the microphone on? Hello. Okay. This is on. Sorry for that, so the Front Line Care business is the one that had a tough 2024, mainly driven by the dynamics in primary care physician practices.
We saw a decline in new construction in primary care physicians and a complete shift from retail primary care from companies like Walmart and Walgreens walking away from primary care physician clinics. We saw that as one of the headwinds. The other one was we had a significant growth in 2023. We caught up with a significant amount of backlog, and that impacted 2024. As we see today, we see this coming back to normality, and we predict growth in our Front Line Care business in 2025. When it comes to CCS, the business had experienced operational issues in 2022, early 2023, and I said we worked very hard to fix those. We show 11% growth in the U.S. capital business in that division. We're very happy. We've been very competitive and taking competitive accounts, which has been good and drove the 11% growth for capital in the U.S.
That business, in terms of operational performance, varies significantly between the U.S. and OUS. I think in the U.S., that business has found its cadence. Of course, it's a capital business. It can be choppy, but it found its cadence with good management. We are fixing right now OUS. We had issues in softness in Western Europe and also in China, and these issues are being fixed as we speak now, so if I wrap a comment on HST, we were able now to provide a much better integration with much less disruption in the field, more consistency in this execution, and we see positive growth for this business in 2025.
Within HST, there's a couple of different components. One of the soft spots in 2024 is the primary care market.
What's the latest you're seeing there, and do you think that's a market that could return to growth moving forward?
We see slight momentum on that. I think 2025 is a transition year that will show growth, and because, one, the easy comes from 2024. Second, the volumes are starting to be reestablished. We're starting to see the order normalizing and not continue to decline, so we see that as a positive. Also, for that business, remember, that business is about a third primary care driven. The rest of the business, we see opportunities primarily with a couple of product launches and better execution for the business OUS, primarily in Western Europe.
When I think of capital, I try and segment it into revenue-generating, non-revenue-generating, high ASP, which let's say is over 100,000, and low ASP.
And a lot of Baxter's falls into low ASP and much of it into revenue-generating, which I would say is in the good buckets. So how do you feel about capital equipment as we're moving into 2025? We see rates maybe not going down as much as we had been hoping for as we sit here today. So what are you seeing in the market and the outlook for Baxter Capital?
I think if you look at what do we have as capital, we have infusion pumps, we have beds, we have monitors. And like you said, all of them do not exceed $100,000 in ASP, right? But they're quite different. Even within the classification of sub $100,000 per unit, they're quite different. So I would say that right now we don't see any issues with infusion pumps.
As a matter of fact, we see us with great plans in 2025 to continue to take market share. We see the order books going into 2025 for HST in the U.S. as much better than it was going into 2024 last year from 2023. So I see positive in both sides of it. I'm not claiming that we have a crystal ball that will look into capital performance the rest of the year, but so far we haven't seen any impact that has any correlation with rates at the moment, which would be probably less than what was expected six months ago in terms of rate decrease. And neither we see any issues with hospitals ordering things that we sell. So I would say cautiously optimistic at the moment.
Yeah, Robbie, if I could just add one thing to that.
I think to José point on the small capital side with pumps in particular, we find ourselves in the middle of a replacement cycle that we also anticipate carrying on here over the next two years or so as well. So I think from that standpoint, there's actually some good momentum in that part of our capital business.
Maybe we could touch on pumps. You have Novum IQ approved now in large volume. You also have a syringe pump on the platform. This is your first new pump in, I don't know the exact number of years, but a long time. So maybe I know you had strong double-digit growth in 2024. Maybe you could touch on what you're seeing so far in the launch and how to think about that business moving into 2025 in the context of the guide.
So to your point, this is the first product that Baxter has launched in the pump space made and designed by itself in probably 30 years. So we feel very proud of that. And we designed a world-class product that has tremendous acceptance. We saw growth of the pumps in 2024 of 50%. And we see the replacement cycle that Joe just mentioned as an accelerator for the next two years. So we see us continue to take share a year, at least 100 basis points a minimum a year. And we feel confident that the technology that we have, plus the software that actually powers the communication between the pumps and the electronic medical record systems, very powerful. So we're excited about that. And our teams in Northern Illinois and India did a phenomenal job in bringing the product to the market.
Within the fluid side, and I know you worked really hard over the past few months to keep your customers, keep your volumes flowing from around the world into the U.S. You said, "We'll be back to normal volumes or at least pre-hurricane volumes in first quarter." How should we think about that business moving forward? Were there any share loss to competitors, or has Baxter been able to retain most of its customers?
We retained most of our customers, first of all. Second, we are in the middle of signing IDNs for two GPOs, and for one of them, we're fully signed, and the second one, we hope to be fully signed by the end of January. So we have acted as fast as we could in the best interest of our patients.
We did medically necessary allocations, and we thought that we did a fair process in getting products to everyone who needed. I think Baxter's recovery is evidence of our capabilities and our ability to mobilize on a global basis within two weeks of this and shift products from overseas. We flew over 200 flights, 747s into the U.S. and brought products from all over the world. Despite the fact it was not sufficient to offset what the plant was making, it was beneficial to put products into allocation levels of 60% that migrate all the way to 100%. I would say that we have still a backlog, and we feel that Baxter has the right cost position and the right flexibility in the supply chain to attend to the U.S. demand. I think most of our customers see that.
Joel, maybe I could jump to some of the P&L. And up on the slide is about 13.5% on the bridge for 2024 operating margin. You're guiding to 16.5%. It was a really helpful bridge to walk through. Maybe if you did a pro forma year to year, how should we be thinking about the underlying operating margin expansion and the sources of that?
Sure. Thanks for the question. So maybe just a quick, simple bridge once more. I know this is a question we get a lot, and so I'll try to simplify how we get there, and then I'll answer your question directly.
I think if you start with the 13.5% that you talked about, adding 50 basis points back in 2024 for the impacts of Helene plus about 250 basis points of stranded cost that all sits in, again, the continuing operations takes you to a 16.5% on a normalized basis. We then talked, as we head into 2025, of about 100 basis point operational improvement. That comes from primarily, I'll say, five sources. One is the growth that we've talked about in terms of across the businesses. The second is from a pricing standpoint. Again, the GPO pricing that we've talked about, a sizable 100 basis point impact across the company this year from continued expansion of our ISC margins and improvements that we have in that area, leverage of our G&A costs. And then finally, a positive mix.
Some of the things of the business that we are selling in 2025 will have a positive mix impact. So that takes you from 16.5% to 17.5%. And then there's about 100 basis points of dilution that occurs really from two sources. 60 basis points from an MSA perspective, as Joe talked about. The MSAs are at a low double-digit margin, and so that's dilutive for us. And the second is 40 basis points of the net of TSA income cost reduction activities and, again, what remains of stranded cost. So that's the bridge in both, and again, the sources of the 100 basis points.
A couple of items within there. How should we be thinking about pricing? I know you've been renegotiating some of the GPO contracts. How did that end in 2024, and what does that look like in 2025?
Yeah.
So in 2024, we had also about 100 basis points on a company-wide basis from pricing impact, but that was actually primarily outside the U.S. in the MPT business. In 2025, we're also anticipated, again, across an enterprise-wide 100 basis point impact positive pricing, which is also primarily from MPT, but in this case, it's primarily from the GPO negotiations that we talked about. And so it's primarily in the U.S. And so I think there is, again, there's pricing here and there on other parts of the business, but really it's primarily driven by the MPT business. And again, about equal 100 basis points impact on an enterprise-wide 2024 and 2025.
Is 100 basis points a sustainable annual number, or is that more of a one-time benefit just from the pricing contracts?
Yeah, it's certainly a larger impact in the year in 2025.
Because again, just for the group to remind ourselves, two of the three main healthcare GPOs were negotiated this year, again, to impact in 2025. The third one of those will actually be negotiated in 2026 and have an impact in 2027. So again, there's going to be some of those larger impacts in those years, but on a normalized basis, that certainly those impacts are much larger than would be the case in a normal given year.
I've always looked at Baxter as being more exposed to currency than other large-cap companies, just given the large OUS exposure, particularly emerging markets. But now Vantive leaving in first quarter or early 2025, I think is the categorization. Your geographic mix shifts pretty dramatically.
So how do we think about what Baxter's geographic exposure looks like and the impact of currency, both on the 16.5 and just the company overall moving forward?
Yeah. That impact lessens. Again, for those not aware, the Vantive business is about 25% U.S., 75% OUS, with a sizable amount of that business in emerging markets. Therefore, you've seen some impact. We saw it in the third quarter of some FX impacts that are caused by that business. Once it separates, our FX exposure is substantially less in many of those types of markets. Even, for example, in a country like Turkey, where we have obviously a lot of currency volatility, the Vantive business has a fair amount of business in Turkey. Once that leaves, our exposure is much less, and the business we do in Turkey and our main core is actually in U.S. dollar denominated.
And so those are the types of impacts. We do hedge. We do some currency hedging to offset some of the risk for now. But Robbie, to your point, we'll have a sizably less FX impact going forward post-separation.
Maybe I could wrap two questions into one here. Vantive, I think it's about $3 billion. You gave the updated number a little higher. Cash proceeds. Cash proceeds. I know a lot of it's going to debt pay down. How do we think about the complete usage of the cash proceeds? And if you could just update us on the priorities of capital allocation.
Yeah. The way to think about the proceeds from the transaction itself really is, again, as you pointed out, a little over $3 billion. That's really going to be primarily focused on paying down debt.
We had a November maturity in this year that we took out a delayed term loan to cover prior to the closing. We'll certainly prioritize that. It's about $1.7 billion. We do have a EUR bond that's maturing in May of this coming year that will be, again, part of a, again, I'll call it liability management. So either pay down or some type of potentially redoing that. But the other part of it is really we have a term loan that's our highest coupon debt that is due in 2026, and we would certainly prioritize paying forward in order to reduce our interest there. So once that happens, and obviously, as we've talked about, we're targeting three times net debt to EBITDA leverage here by the end of this year. We'll certainly prioritize what we talk about as investments in our company. José talked about innovation.
And again, I'll say both organically and inorganically. And when I say inorganically, this does not mean large transformational deals. It means the opportunity for bolt-on and tuck-in deals in areas we've had a lot of success in historically. So that would be our top priority is that type of innovation investment. From there, we also, again, as you know, have taken down our dividend to right-size, but we are committed to a dividend, and that's also part of our shareholder returns. And then finally, certainly resuming our share repurchase program would be something that both in terms of offsetting dilution from options that have happened over time, but also to opportunistically buy back shares in ways that will, again, allow us to return value to shareholders.
Maybe to focus on innovation. Where are most of the dollars going within Baxter?
Which different businesses and any new product launches this year you can point us to as a result of some of the recent investments?
We spent quite a bit of money in MPT, primarily in our new pump platform, because that was not just a pump. It was two different pumps plus software to connect that. Baxter invested in a connectivity capability. So every product of Baxter connects the same way. It's called BaxConnect. That capability gave us ubiquitous connectivity between or amongst all the products of Baxter. So I would say we're putting quite a bit of money in HST, primarily in new products that are coming out, which we don't have any presence, or the presence is the minimum. We want to make an impact and continue to tackle adjacencies that we don't have.
Maintenance of business has become a smaller portion of our R&D in innovation, such as new monitor, new Retina View, new pump platform, new way to deliver Mini-Bag Plus, and the 10 molecules that we launch a year. We do 10 development, 10 filings with the FDA, 10 launches every single year. We've been doing since 2023. All those investments are proportional to the opportunity. When we do capital allocation, we look at the return on investor capital of these investments, and we're very diligent in how we fund these R&D programs.
You also made the comment about inorganic. Maybe just as a tangential question, you do a lot of portfolio management, both additions and subtractions. After Vantive closes, how do you feel about the portfolio you have at Baxter?
Do you feel like there's a need to continue to add or continue to subtract from here?
I would say that we still have very small portions of our business, more product lines that we may feel that they don't belong in Baxter, and we have some very interesting tuck-ins, small acquisitions that we do quite well in a few of our businesses, and I think those are very beneficial for Baxter. We also do a little bit of investment in venture capital, trying to see in the future what would be beneficial to Baxter. One other thing that we do in terms of portfolio trimming, which is very important for profitability enhancement for Baxter, is looking at geographic expansion, what to sell where, and what products we should not be selling in certain markets, so that kind of portfolio trimming we do constantly.
We do it every single year and continues to enhance our ability to deliver the $16.5 this year and higher numbers going forward. This makes me very optimistic about the company.
Hillrom was a really big deal. You've also done a number of tuck-ins over the years that I can imagine. Is there a size that you're focused on moving forward for M&A?
The use of capital, Joe outlined very specifically. We don't look at any sizable acquisition in the future. We're looking at tuck-ins to augment what we have, first pay the debt, reinvest in the company, have the ability to do share buyback when needed, and tuck-ins, not large acquisitions.
All right. We're about out of time here. I want to thank you very much for a great session, and thank you, everybody, for joining.
Thank you.