Baxter International Q2 2024 Earnings Call Transcript

Hi. Good morning, Rob, it's Joel. Thank you for the question. Yes, I think certainly, the new guidance is actually starts with the performance we had in Q2. We had a strong operational quarter, and obviously, that's part of what's carrying through to the rest of the year. What I would just say, in general, though is that our businesses continue to have strong momentum in them. And so I think when you think about this from a sales factor, it's the recovery continued recovery over the course of the year sequentially in HST. Again, we've raised guidance for MTT as well from a sales perspective as well as pharma. And so I think the -- and all those businesses, again, are continuing to improve from a sales perspective. So on the top line, that's probably the really key driver. From a margin perspective, we continue to expect a positive progress from a pricing standpoint -- from an ISV standpoint, I think our margin improvement programs and the continued work there are also a part of obviously what's driving ultimately the bottom line beat as well. The offset to some of that from an operating margin perspective, we do make -- we're making continued investments in our business from a sales and marketing standpoint, from an R&D perspective from a new product launch perspective. And so those things continue to impact the opposite direction as well as we've got an MSA in pharma that I think you're aware of was related to BPS sales. So that's an offset. And then finally, on the bottom line from a -- we do have a headwind from FX and a tax rate perspective. But again, punchline here, continued sales momentum, margin expansion with a couple of the offsets I talked about.

Hi, Robbie. Good morning. We feel that a great deal of the operational issues are being addressed and behind us. We still are addressing them and will be throughout the 2024 calendar year. Primarily one involved in one of our plants transfers is being addressed and is really, really good shape at the moment. I want to make sure that we also have -- our sales force is doing a fantastic job. We did a significant amount of revamp in there. So we see that going well. We also see a very positive trend in capital and the positive trend in capital allows us to have very strong, one of the strongest quarters we ever had in orders that was the second quarter. So we see that going extremely well. This is in the CCS business, which is our beds and nurse call systems. FLC completed a different dynamic. That has to do with the primary care market that has significant shift during 2024 with big players coming in and out. We believe our market share is still growing in debt slightly, but it's very high, and we feel that business is going to come back into normality towards the end of the year as well as government orders, which has been very, very low. And the most important factor was the comp versus last year. All in all, I think HST has during the quarter, we see some very interesting dynamics in the market with our product offering gaining ground and stable market share and possibly growing into Q3 and Q4.

So a couple of things on this. First of all, thanks for the question, Travis. From a timing perspective, again, look, we're continuing to make progress and continue to move forward and in a dual path to ensure that we're ready for both the -- from a sale and a spin process. And so we're obviously doing that in a way that's going to maximize our shareholder value for all of our stakeholders. And so -- we continue to make solid progress, what I would say. I think the timing difference again, I just look at it -- as we've continued to evolve the process, and moving forward. Again, I think we're in a good place from the perspective of both, but the timing has shifted little bit as we continue to move through the year. And so our plan is to still continue to get it done by the end of 2024, but it could move into the early part of 2025, which is why we put the guidance out that it did. From a goodwill perspective, the way I would take that is we've had now a process where we actually had bidders put a value into what goodwill is. And so as we assess that relative to, obviously, the value of the books, there's a negative impact there from goodwill perspective.

I would say this in the event that there was a sale moving forward. We would be recognizing a gain on that sale. So there's a little bit of a timing issue from that perspective. But it's just part of a normal process to reassess our goodwill. And now that again, we have an actual kind of what I call market value for that, so to speak, and that's where that came from.

Sure. Let me start by taking -- how some of the drivers of our margin perspective, and then I'll get to the second part of your question. Our margin drivers continue to be from a couple of different things. One is, again, our top-line -- obviously, our top-line growth and sort of the new product launches that are coming into play. That's both a short-term and something over the longer term, that's going to be a driver from a margin perspective. Pricing, we continue to see upside opportunities from a pricing perspective. In the current year, it's been primarily outside the US. We looked for some of that inside in the US next year is, again, some of the GPO contracts take hold, et cetera, et cetera, but we continue to take pricing.

IFC continues to be an area where we expand our margins, again, both the margin improvement programs. Just the efficiencies we continue to gain from some of our investments in automation et cetera, et cetera. So that's where the kind of the really key drivers and why we feel continue with confidence in our ability to actually drive our margins going forward. I think from an ex-kidney perspective, there's a couple of things that I would just say. Number one, as we move to a vertical structure in this company. We've continued to refine the process of allocations. So some of this from an ex kidney perspective is impact, again, as we continue to refine our allocation methodology. And you see some of that again, impacting where the rent between kidney and some of the margins ex kidney. The other part to it, from just -- as I mentioned in some of my comments in the earlier question, we are continuing to are continuing to invest in R&D. We're continuing to invest in new product launches and things that ultimately are going to drive growth that are impacting operating margins in general. So that's the -- hope that answers your question.

Sure. Thanks for the question. Yes, the primary driver of some the movement there in terms of, I'll call it the speed map in the fourth quarter is really a product mix impacted. It starts with compounding and pharma. We've had some -- again, that's been a significant driver of some of the upside in addition out into the other parts of the business, and that actually starts to slow down in the second half of the year, but particularly in the fourth quarter. And so I would say that's really one of the key drivers of some of -- a little bit of the phasing from what you call it, third quarter perspective and, again, the squeeze math on the fourth quarter.

Good morning, David. How are you? Listen, just adding a bit to Joe's previous answer, is compounding. We had a customer in Australia, which had maintenance planned into their hospitals. And we took a great deal of their volume. So you see there for winning down in the third and fourth quarter which we knew about it. So we need to the squeeze method in the fourth quarter, you cover to you get, but primarily driven by that part of the business, having a specific event in the first and second quarter. Moving to the capital allocation. Our capital allocation now are putting kidney here on the site is driven by innovation. So what is the highest innovation drivers for the company is going to be in infusion technology. So we have more investment to do into new categories of pump more software. We have intelligent software coming out in 2025 with artificial intelligence, attaches to the pump. We also have 5 new product launches that we're planning in the next 12 months for HST, significant ones, really good ones. We need to put the money behind to close the gap in research and developing repairs as well as the commercial launch. So that is where we allocate money. And we have some molecules in pharmaceuticals.

So you're talking about InFusion systems, specifics into PSS and Care Communications. And what we call the injectable specialty drugs, primarily via flu style that we have coming out of one of our facilities. So all the capital allocation is going into products that have higher margin and higher contribution to the company, plus associated to that is the spending that goes along. So it's a good spending -- spending put for good use. We did work internally to understand the major drivers of shareholder value to be able to achieve that.

Sure. Thanks for the question. Let me just start with the -- again, a little bit of from a margin perspective. Again, our first quarter with kidney, you'll recall, was -- had some substantial one-time impact that drove that margin at what I'll call a disproportionately high-level. So I think as we've talked about Kidney in general, the think about that, I think, as a high single-digit sort of low-double-digit margin profile at this point. And again, that was somewhat inflated so particularly in Q1, will be the way I would answer that question. From a stranded cost perspective, look, this is an area we haven't specifically given that type of guidance yet on it. What I will tell you is that, that's one of the key initiatives that I'm driving personally in terms of our ability to, again, to reduce the diluted impact on that. And so I think that's something we're going to -- you'll hear more about as we go forward. But that's really -- we haven't come out yet and given that type of information. And we have plans which are now underway and again, we're starting the execution of that to get way ahead of it. Certainly, from a sale versus spin perspective, obviously, the overarching goal is to maximize shareholder value. And so we're going to do what is best in order to accomplish that.

And if I weigh the puts and takes on some of that kind of stuff obviously, all valuations being equal, so to speak, there are certain advantages of the sales from the perspective of more cash earlier from the perspective of valuation, certainly, et cetera. But obviously, there's, lots of parts to play in that. And then from a tax perspective, I guess, to answer your final question, I think I look at that as a part of the overall economics of what we're going to do. I think there's, been a lot of questions on tax leakage, et cetera, et cetera, cetera. But in the end, it really is about economics in terms of what we end up with from a net tax proceeds and then again it will maximize the shareholder value.

It's primarily that and some kidney. But I think the drug compounding is an part of it. We have talked about the fact that there are ex-kidney exit rates for the year, be in the 4% to 5% range. So, I think the -- but yes, it's primarily compounding and then some slowdown in kidney.

So, Vijay the kidney part is primarily driven by value-based procurement in that specific business. So, as we await the inclusion or not, we look at our forecast and we look -- that is the biggest impact that we're going to have in kidney is VBP. Of course, that associated with compounding have muted the good growth and results of the rest of the businesses of Baxter.

Let me start and begin -- from the end of your question. On VBP, VBP is a factor in kidney care. It is a very muted factor in the rest of Baxter because our presence in China is quite different. Kidney holds the vast majority of profitability in China for Baxter and the product offering as well. So, put that aside now, so VBP Baxter ex-kidney is a non-event at the moment. Moving to share. We had the first quarter for HST and that greatly was self-inflicted. We had execution issues, which are behind us. As you could see, we had really good performance in BSS [phonetic]. Our orders are significantly up, and we're back on the settle of that without any hesitation. I see us moving forward into Q3 and Q4 with possibility of share gains in that space due to our offering and our ability to bring Baxter together okay? We have a great offering that actually underscore our mission to save and sustain lives, and that is becoming more clear to hospital customers and IDNs when we present them and we've seen a movement towards Baxter what called the Baxter accounts. The other portion of the market share, which has been spoken as of lately in some of the other cost is on the pump. Baxter will continue to gain 1% plus the Novum can get up to 2% market share points on a yearly basis and hopefully more as we continue to see great opportunities. Baxter has converted some really large and important accounts from the competition with our Novum pump. So I want to make sure that we are a really strong company competing in the marketplace, and we're having some successes, as you can see by our guidance going into Q3 and Q4. And in Q4, just to close the loop on that is depressed primarily by Kidney Care going into negative growth territory for sales and the reduction into compounding sales.

Thank you, Danielle. Listen, one of the things I want to underscore has been Baxter's capability, bringing together a life-saving portfolio of products. And we have made significant progress in the last two years in our enterprise accounts and how Baxter connected products now are starting to show to our customers and how interested they are. So I feel that commercial execution, not by segment or division, only, but as a company has been very successful of late And we're starting to see that coming around. Second, thing is now moving down from the sales into the ISC. We have turned the corner. Our colleagues in supply chain and our presidents of the segments have worked very, very closely and have devised and are implemented and executing really good plans in terms of cost optimization. And we can see that in our margins start to turn the corner and we have made great changes to accomplish that. Going down one level, SG&A is all about what Joe spoke about, is our stranded costs associated with other efficiencies primarily in G&A. This is where the recipe is for the next 12 to 24 months is to optimize the Baxter shared services organization even further, and there's great opportunity there as well as contain and offset the stranded cost, so we can show progressively in the next year two, three, consistent improvement in operating income margins.

Thank you. As we had previously disclosed, we have negotiated two very large GPO agreements and conversations now have moved to the IDN level. As expected, customers are being thoughtful and thorough about evaluation evaluating their options. We believe now with the novel launch and our ability to provide product -- our supply chain resilience, by the way, is second to none. We have proven that over the years. And that resonates with our customers tremendously.The association of that and the ability to have a large volume parenteral pump as well as a syringe pump on a novel platform on the market, it makes a huge difference. So I feel optimistic that we're going to close those negotiations in the next four months and be able to move on 2025 with these things behind us. And by the way, pricing has been a contributor to Baxter in Q2 2024 was about 100 basis points and expect to be roughly 100 basis points for the full year.

Yes. And then I'll just take that from a capital perspective, you'd asked investments in capacity and then other types of things. I mean I think the way I think about this, obviously, is as we contemplate our world post separation, this certainly is an opportunity from -- to reevaluate the -- if I'll call our overall network. Yes, there's a lot of things that are intertwined, while kidney is part of our company and the ability to actually really reevaluate that once and the separation does happen is really going to be a key driver of how we think about our network, how we think about our manufacturing, how we think about our distribution network, et cetera. So again, as we think about our capital spend moving forward, and again, with now the ability to allocate capital, if you will, in a way that it's really focused on both companies to where both companies didn't really focus their capital on their highest priorities. Again, that's really how we're going to think about the way we evaluate our capital investments and our infrastructure moving forward.

Rick, good morning. We found, as a matter of fact, we have sales of Novum in the second quarter, which we did not expect to have, but we're a little faster in having the product ready for market. What we've seen is great interest, it plays well for our ability to compete. As you know, in fact it's a great product, but it does not have a syringe pump and having a syringe pump makes a huge difference. So we're very happy with the momentum that we've gained in the Novum. We've been showing that to very large hospital systems and small as well. Our team is very hard at work and we feel confident in the technology. So we have the ability to take market share. I think that is an important thing. This is about providing our patients and our customers with the best technology on the market, not a reengineered technology from many, many years ago.

Welcome. So Rick, let me break up a little bit, breakdown FLC for our frontline care to all listening to the call. Primary care is one segment, one division of that business. We have other divisions such as cardiology and monitoring. Those are going very well. We have no issues in the acute care space. So let's focus on specific, the patient -- the primary care physician office, we believe this market has two dimensions. One is the amount of backlog we had in 2023 that we're able to catch up and ship and sell and fulfill orders that were outstanding. The second one is the slowdown in churn that we've seen due to several of these large primary care of its exiting the market and moving. The demand is still there. Primary care demand is still there. We're number one shareholder, gaining a slight share with 80-plus percent market share already. So we see that coming back because the demand is not going anywhere. The demand is high. So is the churn due to the changes on the market as well as what we saw last year were catching up with backlog. Government orders is a completely different thing altogether. So eventually, the government will need to buy the products that are needed for the government. And when that happens, we'll see the orders come in. We are a very large supplier of the government, and I feel comfortable that those problems that we've seen in 2024 with the decline in primary care -- this year will turn the corner in 2025. The business has solid folding good technology. On the other side of Frontline Care, we have technology that will be launched in early -- in mid-2025 to competing to monitoring, and we are very happy with new launches that will happen in the med-surg monitoring products that we have coming out in mid-2025. So technology launches will fuel FLC in 2025 as well as the comp between 2024 and 2025 in a reemerging of the primary care and probably resuming orders with the government.

Pito, can you repeat the last part of the question on the pricing, please?

Yes. So this is Joel. Let me take that. I think the way I would think about that is we talked about some pricing of maybe 100 basis points this year as part of the game that was, again, mostly outside the U.S. across our portfolio. We think about that same pricing bump from next year as we think as we move into the GPO contracts come through and again, that's primarily US pricing. So I think that's the way I would interpret that. I don't know that I'd call it accelerating necessarily, but I would call it consistent with what our expectations were for this year heading into next year.

And Peter, answering your question on the infusion pump. First of all, we are market share gainers and have been for a long time, just about 100 basis points a year. This will accelerate and is accelerating with Novum, we're going to see Q3, Q4 into 2025. So we find that we have great interest in our pump. I think there is a churn -- a natural churn of the market in terms of number of pumps that need to be replaced. And our objective is to be in every competitive account with our new technology.

Can you just repeat that? So your phone is going in and out during that question. I apologize. Do you mind repeating that one more time, please?

Yes. I mean look, I the main thing here is really we're going to continue to see, again, improvements in HST. So that's where I'm going to start with. In other words, we have seen that over the course of this year as that HST has continued to accelerate. Again, we think there will be a strong rate for that business, and that will continue to accelerate into -- into 2025. I think as we talked about from a pharma perspective, again, compounding is going to be a portion of that that's going to drag. I don't know that we've specifically guided the actual compounding business. But that is something that is going to be continued -- it's slowing, as Joe talked about, for various customers of that -- that's happened. From an MPT perspective, and again, we continue to believe we've got some really solid momentum going into 2025, certainly coming out of 2024. And then obviously -- so just to kind of summarize all of that, I think the -- while there is a bit of a squeeze map from the -- we talked about the kidney and the compounding. The reality of it is, is that we have a 4% to 5% growth of ex kidney that we're heading into -- exiting the year with and heading into next year. So that momentum is really strong in ex-kidney, and that's the part that we feel really excited about as we ahead into 2025.

Peter, just reinforcing and underscoring. Our exit rate is 4% to 5%. We feel comfortable with that. That's what Baxter's taking into 2025 and we tend to think that our business and innovation can drive even further going into 2026 and 2027.