Good morning, everyone. I'm Robbie Marcus, the med tech analyst at JPMorgan. I'm happy to introduce our next company, Baxter. Joe Almeida, the CEO, is gonna come up and do a presentation, and then we'll do some question-and-answer afterwards. Jeff?
Thank you, Robbie. Good morning, everyone. It is a pleasure to be here with you today, and I'll like to start by the safe harbor statement. Please take your time. Baxter is a 100-year-old company that has a history of technology and healthcare, in healthcare that has spanned in every continent over more than 120 countries. Baxter is transforming itself. Here today, I'm gonna cover some aspects of this transformation. We are recognized as employers, as not only for our social responsibility, but also for what we have done to improve lives in society. Baxter treats 350 million patients a year. Over 300,000 patients depend on us every single day in their homes for their peritoneal dialysis treatment, the rest in hospitals and clinics, as well as new sites of care.
We have been listed in the Dow Jones Sustainability Index, the Newsweek America's Most Responsible Companies, Disability Equality, 100 Best Corporate Citizens. The company has paid significant attention to its social responsibility. We'll continue to put targets out there that will be challenged every single year to get to become an even more responsible company in every aspect, not only in the environment but also its workforce and its ability to care for its customers and patients. We have a pretty compelling story for value creation. We're transforming the company in a third phase of transformation. We have four very specific areas of focus: innovation, market expansion, operational efficiency, and capital allocation. Today, we're just gonna speak more about operational efficiency and capital allocation as we speak about the go forward for Baxter in terms of our announcement last Friday.
It is important that we never deviate everything we do in terms of strategy from the mission of save and sustain lives. It is a company that has 60,000 people committed to its future, to the people that we treat, the 350 million people that sees our products every single year from a hospital bed to injection of IV solutions to injection of PD dialysis solutions in the home so they can go to work every day. This is a very focused company. With four strategic pillars, we'll be able to release more value in the long term for our shareholders. On January 6th, we made a very significant announcement. For a while, we've been studying the portfolio of Baxter, the complexity, the locations around the globe, the customer, the endpoints, who buys, how we make it, how we distribute.
Does it make sense to be together? To reduce complexity, we announced a few things that we're going to cover today. The first was the creation of a new company, Kidney Co., which we plan to spin off in 12 to 18 months. It's going to be a leading healthcare company in the Renal Care space. We also said that we're going to create new business units by combining what we have today in more simplified, vertically focused companies that will be able to operate within Baxter to promote our products and deliver on best return on investor capital. We also are pursuing new strategic alternatives for our BioPharma Solutions business, which is a business that provides services to the pharma industry and is a very good business of Baxter.
It's a business that is not quite in the core of what we do, but it's a great business that in the hands of the right company is gonna do even better than it does today. We have faced a significant amount of challenges in 2022. Some of them are not over yet. We had highly diverse product portfolio that makes our global transportation and logistics and cost of goods highly complex. We move products from continent to continent. We have 65 manufacturing facilities, and that is what creates complexity and cost to Baxter. These portfolio moves will help us diversify in the right areas and allocate capital much more effectively between the two companies once they're separated. This inefficiency and the complex aspect of our business requires that we optimize our manufacturing structure. We're gonna reduce the footprint of Baxter.
We're gonna adhere by the simply rule of make where you sell, buy where you make. This has not been Baxter's past because the company has an infrastructure created in the '60s and the '70s and early '80s that was more driven for taxation optimization as well as labor savings. Those become highly complex and give us really a disadvantage in the world going forward. We have a great deal of plans. We're gonna shut down several plants. Also, we're gonna highly automate few plants that require our labor force to be much more engaged. I'm excited about the plan that we're gonna be executing starting 2023. When we think about our announcement, we're going to create two leading companies in healthcare.
Baxter, with essential products to healthcare, with software that promotes a great deal of connectivity between hospital staff, nurses, and the patient. The ability to connect them electronically through our devices, our software, our infusion systems that allow patients to be treated anywhere in the sites of care that we serve. We will create a company which is the RemainCo of Baxter, of about $11 billion. On the other hand, we're gonna have a very successful kidney company with about close to $5 billion in sales in three different areas of focus. The way we will continue to create additional shareholder value in, is by delivering on a very well-designed strategy. The kidney company is gonna have about four specific areas, and they are renal-focused in healthcare.
They're gonna have three different product lines: peritoneal dialysis, hemodialysis, and acute kidney injury products which are delivered in the ICU. Their focus on a strategy to unlock value is innovate to cost. Create in a world where capitation is common, technology and processes that allow them to compete much more effectively, and therefore allocating their own capital to the products that make more sense to them. Baxter, on the other hand, is a medical technology leader in many areas of care. We're gonna continue to double down on that through tuck-in acquisitions, post the spin, creation of more software-connected products and products that connect through software to deliver better healthcare, better efficiency in the hospitals, as well as the hospital at home, which is the extension of products that are sold in the hospitals today for Baxter.
They need to be adapted for a more dynamic treatment of the patients. We are working to finalize our simplified organization structure. We also have a restructuring program going in place to be able to size the SG&A for the companies appropriately, as well as measures to continue to face off and offset as much as we can the cost increases that we had experienced in the last 18 months. Kidney company has a very clear and well-defined objective. In peritoneal dialysis is increase of PD penetration. Pretty straightforward, we do it by delivering better technology that has cost in mind. Meaning the products sold today, the new product has to have lower cost, so you can increase your margins, not by reimbursement changes only, but also providing efficiency in the delivery model.
Hemodialysis is the expansion of our HDFs and turnover technology across the globe. Acute therapies is the adoption of that technology, which is in most places in the world, quite underutilized. The pandemic proved that this technology is quite essential for patients in tremendous distress in the ICU, primarily with sepsis. The spin is expected to accelerate the value creation potential of the company in all areas of the operation. Commercial innovation and operations, all of them with specific transformational actions that will help us get there. The transaction that will be undertaken is complex in terms of time, 12-18 months, but it's something that Baxter has done in the past. If you go back many years, Baxter execute very successfully in transactions such as Allegiance back in the '90s.
Caremark, Edwards Lifesciences, and more recently, Baxalta, our former, bioscience business. We did this very, very well, and we have the playbook. We know how to execute. The structuring time is gonna be 12-18 months. We also have, you know, the customer approvals of the regulatory agencies across the globe. The leadership of the business, we're in process of, recruiting internally and externally. When we think about this, it's gonna be a successful spin. It's one that is necessary to create a simpler company and separate two very distinctive business on the go-to-market, front. Manufacturing, disentanglement is in process. We spent four to five months producing plans, which, by the way, is the first time I've seen in a separation.
We do so much work to get to where we need to be. We, with our automation, which became much more feasible after the pandemic and the labor rates went up so much, that becomes much more feasible for us to put automation in our plants. Doing that, we'll be able to separate the units in the next three to four years and we'll be probably 85%-90% separated, which brings tremendous relief for the team managing Kidney Co., as well as for the Baxter team that can focus on its own manufacturing operations. This is all in all a positive strategy for Baxter. It's one that launches the new phase of transformation of Baxter associated with the ability to create a much more simple organization within the company with a lower cost.
Remember, Baxter has one of the lowest SG&As in the industry, about 20% for a med tech company and a pharmaceutical generic company. Allows us to go into areas of Front Line Care, areas of connected care that will create much more momentum for the RemainCo. When we think about the actions that we have done to simplify our operation, our operating model, it's in the three areas of the business, in the commercial, innovation, and operations. The ability to reinvest in those two groups, into the two companies rather, is essential to Baxter. Invest commercially, invest in innovation, and invest to reduce the cost that is today a 65 plant portfolio that needs to come down significantly, and the ability to create the momentum in terms of automation and rationalization of our portfolio. We're excited about this.
Just to spend a little more time in how we're gonna be optimizing our manufacturing is the footprint, as I said, as well as the enhancing of our operation systems. We're deploying software across the globe. Our procurement systems have been quite busy in the last 18 months with semiconductors. We have created offices that today we have great understanding of our bill of materials, where our electronics go. Electronic components is the life of 50% of our business, so we've gotta be good at this. There's significant changes in manufacturing. We had replaced almost everyone at top of our supply chain operations and have great confidence. They have a strong and doable plan. When we think about the allocation of capital for Baxter, once we start getting this done, is through portfolio management. Debt repayment is very important.
We're gonna continue to pay our dividends, and we're gonna re-initiate share repurchases once we get through this period that we are satisfied with the debt level of the company to a certain degree. I just wanna underscore that portfolio management is just the beginning of the transformation. We are in three-phase transformation that started in 2016 to 2017, 2018 to about 2021 and 2022. The future is about managing the portfolio of Baxter, simplifying our operations, and delivering better growth than our WAMGR. To do this, we're gonna continue to go after opportunities in portfolio management. These actions on our BioPharma Solutions is just the beginning.
We're gonna continue to look at opportunities to have the company more focused on its core business and be able to then deploy capital for tech and acquisitions that would create the momentum for the future. The creation of this momentum of 2023 and beyond is very important to Baxter. We have a proposed spinoff, a kidney company that will create a leading healthcare company in its space, focused very specifically $5 billion in sales. We are simplifying our operating model by restructuring the company as well as our the way we have our labor force spread across the globe. We're rationalizing that. We're transforming, not only restructuring that. We also are working and will be working on the disentanglement of the kidney co from Baxter, the RemainC o. Additional capital will allow us to focus investment in research and development.
I want to stop a minute here. With so much done in the last 18 months, in terms of cost containment, cost offset, the company has put a significant amount of pressure in its expanding controls to be able to offset partially the great deal of input cost increases that we had. Consequence of that, we feel there's investments that we have missed and should have made in areas like R&D and commercially. The ability to actually reinvest in the business is critical for Baxter to be able to grow above WAMGR. That would be incremental investment in Front Line Care, which has business doing extremely well. In our software, in the creation of the new version of Voalte, more open software based, more easy to deploy in hospitals.
The ability to create connectivity even further for our new pump that we hope to launch in 2023. To create the artificial intelligence algorithms to help us in drug delivery safety. These kinds of investments are very, very important. As we manage the short term of the company, we've gotta think about the long term of Baxter. Baxter, as I said, a 100-year-old company that has been part of healthcare and has innovated in healthcare for the last 100 years. It's important for us not to forget that. Despite the fact we're transforming the company into three different vectors, very specific portfolio, optimization of operations, and rationalization and reduction of complexity. We've got, at the same time, not forget how much we have to put in our research groups.
We have completely revamped our research and development groups in the last five, six years with significant operations now in India and other parts of the world that allows the company to be more self-sufficient in designing of products, which back in 2016, we didn't design one medical device within Baxter, was mostly designed by subcontract houses. We today are 100% insourced, and that has given us the advantage in R&D. We just need to double down on that. We will be providing additional commentary when we have our earnings call for Q4 in how the organization is gonna be structured. I think, at this point I'm going to adjourn, we're gonna go for Q&A. We'll be joined by Jay Saccaro and Clare Trachtman, our Head of Investor Relations and our CFO.
Is this the one I hit? Thank you.
Oh, they have it there.
Extra time.
Yeah. That one's been wrapped.
Yeah, I know.
Which one do you want?
This one right here?
Yeah. Perfect.
That's what you're trying to do?
Yeah. What are you trying to do?
Just go up with that one.
Yeah. Thank you.
Great. Well, maybe I'll kick it off with the disclosure that due to JP Morgan's involvement in the Baxter SpinCo, I can't ask questions on SpinCo specifically, so feel free to answer however you want or feel free to ask questions on it. Maybe just to kick off, you know, you've said on past calls that you've been in a portfolio review for several months now. You know, why 2022, and what brought it about, and why now?
Is it mic? Phone on at number two.
Yeah.
Okay, great. I just connected the level here just in case. When I started at Baxter in 2016, we had a phase to be able to improve cash flow, improve operating income. We were able to deploy capital for very small tuck-in acquisitions and things that made sense for us. Once we evaluated the future of Baxter and how we're gonna transition the portfolio, we decided to go and acquire Hillrom, which has been added to Baxter's portfolio and has brought our connected care, enhanced our connected technology, created Front Line Care, which is a great business in cardiology, ophthalmology, monitoring.
We also, at the same time, looked at the rest of the portfolio and said, "What are the things that are core to Baxter versus the things that are here and have significant value but do not contribute to the future of our vision?" That was specifically... Now we have several analysis on that, so we came across the BPS business. Also we looked at what is in Baxter that make us be a renal company and a hospital company and a hospital at home company. The relationship between the renal care business and Baxter is one of simply manufacturing synergies, not one that creates commercial synergies, not even research synergies, because they have different products altogether in the way they operate. We decided to continue this analysis.
We started in late 2021 and accelerated in July 2022. Why 2022? I reverse the quest. Why not? Because at one point in time, the way to change a company weighted average market growth rate is to revamp its portfolio. We did it before in different companies, and I think it's the path forward for Baxter. It's time now to do it as we continue to work in making the company more efficient in the future.
You know, if I look back, you did a bunch of additions to the portfolio last year with the addition of Hillrom. It's been just over a year now. I think you closed in December 2021. Over your first year, you know, how would you say it's gone? How has the business performed relative to expectations, both on the top and bottom line relative to your synergy targets?
The portfolio was the right choice for Baxter. We were able to bring the company in and deliver the synergies that actually surpassed our expectations. We are on the 2x initial expectations. The supply chain crisis have created headwinds for that business in couple of areas. Supplies of electronic components were Hillrom had less capability in supply chain and operations. Baxter came in. We're starting to see the results of our better, more capable organization in that area. We see in Front Line Care, for instance, as of late, they're starting to get products out in the field much faster. We're starting to see some semiconductor and some stuff going on.
The supply chain caused a disruption in our sales growth, which were disappointing to us, but we just took on and put the right team in place to be able to cure that, and it's in process of being taken care. The third thing would be that there was in 2022 through the credit, the interest rate and the issues with hospitals' profitability and hospitals' availability of nursing staff, that we saw a reduction in capital orders, going into the, you know, as we announced in the third quarter, going to the fourth quarter. That we thought was a natural process that hospitals go through.
We don't think that is a long-term effect, and we actually think that that probably will last, somehow into 2023, but not acutely in, exiting 2023. We think the nursing crisis in terms of labor is one that eventually plays in the portfolio of Hillrom because, for instance, software like Voalte or Nursing Call, they offer better efficiency and productivity for hospitals, but also we need nurses available to be able to implement. The turmoil in 2022 certainly was a setback for that business, but we see that as a short term. Anything from my colleague?
No, I think you got it, Joe.
Maybe, touching on your call from Friday and the announcement, you know, maybe asking specifically on the RemainCo component. One of the comments I think that's caused a bit of confusion with investors was around the dyssynergies that it might cause. Maybe you could just help clarify. I think, Jay, on the call, you made the comment around the upper end of normal. Is there any way to think about what normal is and how that might impact Baxter RemainCo?
Sure. I'll make my comments relative to we've surveyed a whole host of spinoffs and then also our own experience with Baxalta, where we spent a lot of time studying one-time costs and dyssynergies. I would really characterize that as there are two pieces to this. One are one-time costs. What we've seen in industry is roughly 3%-4% of parent company sales in the form of one-time costs that are either capital or operating expense. We see this as towards the higher end of that, in large part because of the manufacturing entanglements that we're going to be resolving as part of the spin.
It's important to note that much of this is CapEx, and then much of this is one-time expense that may be adjusted out of our financial results as we talk about non-GAAP measures, given that they are more discrete and specific in nature. That's the one-time cost piece. As far as the stand-up costs related to the new company, I think this is in the range, right in the middle of the range of normal, which would be 1%-2%, is what we've seen in terms of stand-up costs for NewCo. Generally speaking, I would say that, you know, we're incredibly excited about this opportunity to drive shareholder value creation. For me, as I went through the analysis, it was very heartening to see that the manufacturing disentanglement could be accomplished so efficiently.
Once we had that in place, it was clear, you know, this will be a great long-term play for the company, for the two companies. Really that's the detail on the two components. Would you add anything to that, Clare?
No. It's perfect.
Just for everyone just to be clear, it's not take RemainCo - 4%. It's that's an amount, but we'll see some of that maybe in EPS, some of that non-GAAP out, some of that on the balance sheet and cash flow.
That's exactly right. That's consistent with how all companies treat spinoffs. I mean, I think we're talking about standard practice here, we don't see any major deviation from standard approach.
Great. Maybe I'll open it up to the audience if there are any questions. No? All right, I'll keep going. You know, you guys did not preannounce a fourth quarter result here. I wanted to see if there's any high-level thoughts you can give us qualitatively about how fourth quarter trended, how procedure volumes or hospital admissions are trending.
Let's divide in two. You wanna talk about the first part of question?
Sure. As it relates to fourth quarter performance, we're still finalizing our numbers for the fourth quarter. We're still in the close process as we speak. We're prepared to discuss that in a great degree of detail on February 9th. Beyond that, it's a little bit difficult given the timing of this conference and the timing of the announcement that we made on Friday to get into financial performance in the fourth quarter. As it relates to procedures, Joe?
Yeah. We see procedures, procedure volume stabilizing, probably coming close to the levels in pre-COVID. We want to stop talking about pre-COVID. We need to start thinking about versus prior year because we keep going to 2019, and we are in 2023, right? My last comment about that would be now. The second is admissions in hospitals are slightly below pre-COVID levels. We will be monitoring those. The acuity of disease primarily related to respiratory illness is either COVID or any pulmonary respiratory issues, including the flu, have lower acuity than before. The utilization of health care is slightly lower than we saw in pre-COVID still.
You briefly touched on it before, but you also announced on Friday the strategic review of the bioprocessing division. I guess, what exactly are you going to be looking for in terms of whether it's a spin or a sale, and any timelines you can give us on when you choose?
We are looking at a business that has a fantastic track record. Our BioPharma Solutions business is recognized in several aspects as one of the best on the market, including our ability to deliver fill and finish to oncolytics. We do that in Germany. We have two different facilities, one in Germany, one in Indiana, in Bloomington, Indiana, and they do a great job. We think those assets have tremendous value in somebody's hands who are much more strategic than we would be. This is fill-finish is an industry, and we're fortunate to have a very successful business in that area, which is not 100% core to Baxter. We will look at all the alternatives out there, but I think a potential sale is something to be considered.
Great. Jay, you know, you, part of med tech fell victim to just some of the most intense macro pressures we've seen over the course of the last 12 months. We have seen some of, you know, the negatives maybe get less negative or turn to positives if I'm thinking about shipping costs or FX or some of the plastics prices have come down a bit. On the flip side, chip pricing seems like it's maybe a little better but still pretty bad or supply is pretty bad. Maybe just give us your thoughts on the directional trend of some of those.
Sure. Robbie, obviously, like many other companies in our company, particularly acute, it was a very challenging 2022. At the end of the day, much of our pricing is fixed through long-term agreements with GPOs, through tenders with governments. We have this fixed top line for the most part. On the bottom line, we've seen an extraordinary cost environment, larger increases in things like resin, freight, labor, materials than we have ever seen. The result of that was an extremely challenging 2022. As we move forward to 2023, we don't see those abating immediately. We're cautiously optimistic. There are areas that we're particularly focused on, and a lot of that has to do with semiconductor availability.
While generally speaking, semiconductors are becoming more available, there are certain flavors of semiconductors that are still challenging to acquire. For us, that is a really important element and a critical assumption as we give guidance in February. What I would say is we're weighing all of this very carefully. I think, you know, what we've realized is that the bands that we've, the volatility in the environment is extremely high. We're going to take as much time and get as much information prior to giving guidance and go with it in February.
As investors think about when we see a benefit come through, what does it take, about six months to flow through to get the full benefit on the P&L?
Yeah, I would say three to six months because of the rollout times that we have. We're going to be paying in Q1 and Q2 for inventory from Q4, certainly. From a component availability standpoint, you know, that's another wild card that we'll watch very carefully. I'm hopeful that we'll see resolution in 2023, I think for us, we want to be eyes wide open in terms of, you know, clear expectations, understand exactly what the impact is going to be before we share guidance.
Great. Check the room. Any questions? I'll keep going. you know, we've seen a strong flu season that's sometimes been a modest benefit to Baxter. you know, we have tough comps versus COVID last year and a lot of other complicating factors. Is flu something that may be a benefit to Baxter if it continues to remain high?
The flu season is high, the acuity is low. We saw that in Australia when they had their peak of the flu season was extremely high contagion, but low acuity. Actually, it fizzled out quite fast in Australia. What we see here is more of low acuity. Baxter also, in the past, used to have significant allocation of fluids on the market. We today are fully capable to supply the market with all the volume needed. We don't see the flu as an extraordinary event in this season.
Okay. That's right. One of the other headwinds from COVID was your availability to go into hospitals and sell some of the pharma products.
Mm-hmm.
Have hospitals opened up now, and do you think you can start to see improvement in the selling of some of the pharma products.
If you think about how our products are sold, With exception of some of the Hillrom products, and that those are beds and some software, everything else is a GPO contract. We do have sales reps in hospitals selling the product. What we found was that the nursing shortage, as well as the strikes and some of the other factors involving the interest rate hike that happened last year, hospitals had difficulty implementing all their capital. We had hospitals with no problem buying significant amount of capital from us. There are some other hospitals that have issues with staffing and put a pause temporarily. We see that in our backlog. I believe the situation is still fluid because we crossed December into January. That is not a magic bullet.
Something will happen and change overnight. It doesn't. What it does is just tell us that we need to be able to work with the hospitals to offer better solutions, to be able to offset some of the issues that they have with nursing, to be able to implement things. We had no issue selling pumps. You know, if we had more chips, we sell more pumps to hospitals. We didn't see any issues. It's more capital like software and sometimes beds that we see a more of a either a pause or postponement of few months. We don't see in pumps. Not all capital is created the same. You've got to understand that. Some are doing very well.
For Baxter, if we had as many chips as we needed, we'd be selling as many pumps as we could make. Beds, we saw a little bit of the backlog come down, the orders come down the third quarter into the fourth. In Front Line Care, which is all the monitors, we're selling those as much as we can make, we can sell them.
When you talk to your hospital customers, have you sensed any change, good or bad, in their willingness to buy capital?
No, not lack of willingness. Depends upon the size of the institution, depends upon the type of the institution, how much reliance on their endowment funds and how they draw those funds is very, very varied. Small hospitals with less resources, those have issues implementing CapEx. Large hospitals, I'm not gonna tell the customer, but there's a large customer in Texas of ours had no problem taking a significant amount of beds. As a matter of fact, we had sold more in the period. It is depending upon hospitals. It's a very fluid situation. Large hospitals have more capacity, and they have the ability to do it. The smaller, mid-size to smaller hospitals are in a different situation.
Well, unfortunately, we're out of time, but I wanna thank all of you for joining.
Thank you.
Thanks for listening.
Thank you.
Thank you.