Q1 2020 Earnings Call

Good morning, ladies and gentlemen, and welcome to Baxter Internationals first quarter 2020 earnings conference call your lunch, where remain in listen only mode until the question and answers segment after.

Today's call.

So Tom if you have a question you would need to press. The Star then one key on your Touchtone telephone if anyone supercar operator assistance during the conference. Please press Star zero.

As a reminder, this call is being recorded by Bextra and is copyrighted material it cannot be recorded or rebroadcast without baxter's permission. If you have any objections. Please disconnect at this time.

I would now like to turn call over to Ms. Clare Trachtman, Vice President Investor Relations at Baxter International mistreatment you may begin.

Thanks, Catherine Good morning, welcome to our first quarter 2020, <unk> earnings Conference call. Joining me today, our Joel NATO, Baxter's, Chairman and Chief Executive Officer, and Jason Carl Baxter's Chief Financial Officer.

On the call. This morning, we will be discussing Baxter first quarter 2020 financial result.

Supplemental presentation to complement this morning's discussion can be accessed on our website and the investor section under events the news.

This presentation includes related non-GAAP reconciliation.

With that let me start our prepared remarks by reminding everyone that this presentation, including comments regarding our financial outlook, new product development business development and regulatory matter contain forward looking statements that involve risks and uncertainties and of course, our actual results could differ materially from current expectation.

Please refer to today's press release, and our I think these filings for more detail concerning factors that could cause actual results could differ materially.

In addition on today's call non-GAAP financial measures will be used to help investors understand Baxter ongoing business performance a reconciliation of the non-GAAP financial measures being discussed today to the comparable GAAP financial measures is included in our earnings release issued this morning and available on our website on the.

Call. This morning, we'll be discussing operational sales growth, which adjusts for the impact of foreign exchange and the acquisition of separate though which closed in February 14th of this year now I'd like to turn the call over to Joe Joe.

Thank you glare and welcome everyone joining us on the Gulf.

I sincerely hope that Youre your families and called [laughter] safe and well during this difficult God.

As we continue to deal with evolving impacts from the global cool did nine seems than damage.

Our Baxter teams to luge selfless health care providers in first responders, who are rising to the enormous challenges with bravery and concessions.

Their dedication fish buyers overall.

Gives his own charted to ring for to healthcare industry I'm, sorry, a large at the same time Baxter's yeah for work is clear.

It is defined by our emissions to say.

Just as he has been for nearly 93.

We're doing everything we can to supports patients the health care system, all employees and the communities we serve worldwide.

Baxter's medically essential portfolio places on the front lines of this endemic.

We are experiencing extraordinary demand for many products, including our British American reasonable flex continuous renal replacement therapy devices and associated consumables armine bags close drug delivery system.

Next on my Queuing fusion system sales force I'd be solutions for around throw nutrition therapies and injectable drugs used in the ice to you in across the hospital.

Our efforts are focused on maximizing production to increase supply as much as possible and get our pockets where they needed most as quickly as feasible.

That's starts with prioritizing the health and safety Oh, Baxter's employees, who are critical to our ability to successfully response to this pandemic.

We have implemented various employee protection measures such as enhanced infection control actions.

Remote working arrangements symptom screening and further use all personal protective equipment, including masks, it's all of our sorry.

Our manufacturing operations have also been modified to limit the employee interactions where possible.

We have added multiple shifts with all factories that manufactured products used in coals that 19 tier currently operating 24 hours a day seven days a week.

And as we've previously announced we're adding up to 2000 permanent and temporary position globally to support this exports.

Baxter is utilizing objective government and academic data sources to help inform our pandemic allocation protocol, which you strives to allocate additional products through the areas of greatest patient need globally.

We are supplementing our logistics infrastructure, including the newly established Everbridge flying between the U.S. in Europe to accelerate product availability.

We're also taking steps to bring clinicians the wind as possible array of options and this battle.

For example, we worked with the F D to secure emergency use authorization of outlooks fighters filter SEC supplementing the supply I'll blood filters were able to bring to the U.S. markets.

We want to send the F D, which collaboration as we continue to work on other potential authorizations. This is just a snapshot of what has been a truly all encompassing airports, which also includes our philanthropic response to the Baxter International Foundation.

Baxter's multiyear transformation has strengthened our ability to respond to cope with 19.

We are even more effective agile and we see leant organization plus our focus on portfolio innovation has broadened the range of products, we have available to address these situations.

We're also able to maintain our emphasis on the strategy and execution, even as we like many others step up to address an unprecedented public health.

Emergency.

This is reflected in our strong first quarter results with all six of our global business units and all three of our regional segments contributing to this positive perform.

And as it relates specifically to depend damage impact, particularly during the latter part of the quarter five of our businesses experienced heightened demand acute therapies renal care medication delivery pharmaceuticals.

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As expected given to slow down in elective surgeries demand for our advanced surgery portfolio declined is expected to continue to decline throughout the second quarter.

Even as we respond Baxter continues to advance key strategic growth drivers such as research and development innovation in business development.

In quarter one.

We saw the close of our separate film acquisition enhancing our advanced surgery portfolio.

We also recently acquired two cents each technology company focused on developing sensors and software advancing our emphasis on leading edge patient monitoring.

And we signed a partnership with Meadow, where a specialist in clinical big data analytics machine learning and artificial intelligence.

Our new product pipeline slated for this year and beyond the has highlights spanning our businesses, including our next generation Ivy Smart pumps technology share source analytics, you specialized monitoring and additional differentiated Molly.

Yes. It's you know we have been looking forward to providing an update on our strategy trajectory in pipeline.

Regionally plans to hold our next Investor meeting. This September however, the unpredictable nature and the impact of coal that 19 has prompted us to delay. This meeting until next year, we expect to providing new date in the coming.

In close I want to recognize Baxter's 50000 employees I have never seen a team come together like this in the global exports to make a difference for patients and clinicians my wards and not adequate to express the level of commitment.

Witnessing daily nor can they conveyed the depth of my gratitude.

With that Jay will now share details on our first quarter performance as well as commentary regarding some factors, we expect to impact our performance in the second quarter and beyond then we will close with your questions.

Thanks, Joe and good morning, everyone as Joe mentioned, our first quarter performance reflects the value of our medically essential portfolio in the current environment.

As well as our commitment to meeting the needs of patients and providers globally.

Our ongoing business transformation efforts effective commercial execution and improved balance sheet flexibility position us to more effectively respond to the covert 19 pandemic with speed and agility to.

Turning to our first quarter 2020 results global sales of 2.8 billion increased 6% on a reported basis and 8% on both a constant currency and operational basis, reflecting the underlying strength of our business, coupled with increasing demand for select products, resulting from the pandemic. This heightened.

Man, notably accelerated during the last two weeks of the quarter, we estimate that the covert 19 related demand contributed approximately $45 million to sales in the quarter.

On the bottom line adjusted earnings increased 9% 82 cents per diluted share exceeding our guidance of 70 to 74 cents per share.

Growth was driven by solid operational performance, including a positive impact from covert 19.

This growth was partially offset by a significant decline in non operating pension related income as well as foreign exchange losses related to balance sheet positions.

Now I'll walk through performance by our regional segments in global business units note for that for this quarter constant currency growth is equal to operational sales growth for all global businesses, except for our advanced surgery business for which we will provide both constant currency and operational growth adjusting for the acquisition.

If separate film.

Starting with our three regional segment sales in Americas advance, 8% on a constant currency basis, and 7% on an operational basis.

Sales in Europe, Middle Eastern Africa advanced 10% on both the constant currency and operational basis and sales in our eight APAC region advanced 9% on a constant currency basis and 8% operationally.

Moving onto performance by global business units global sales for renal care will 870 million advancing 4% on a constant currency basis.

Performance in the quarter was driven by high single digit growth in PD therapies globally, given regional travel restrictions related to the covert pandemic in China, we estimate that the requirement to accelerate the delivery of monthly therapy supplies to PD patients contributed $5 million to $10 million in sales to the quarter.

Performance in the quarter was partially offset by lower incentive H.D. sales, reflecting the continuation of rather cleared dialyzers supply constraints.

Sales and medication delivery of 690 million advanced 10% on a constant currency basis within the quarter. We continue to benefit from strong execution on our spectrum might you and Eagle eye Q infusion pump placements globally.

Additionally, we estimate that increased demand for Ivy solutions in many back plus related to covert 19 contributed approximately $15 million to performance in the quarter.

Pharmaceutical sales were $527 million, increasing 6% on a constant currency basis strong growth in our generic injectables portfolio was enhanced by heightened demand for select pharmaceuticals that are used in the treatment of covert 19 patients.

Additionally, increased demand for U.S. cyclo and international Pharmacy compounding business also contributed to performance in the quarter.

This growth was partially offset by lower sales of any inhaled anesthesia products and trends terms scope.

We estimate that first quarter pharmaceutical sales benefited by more than $10 million from covert 19 related purchases.

Moving to nutrition total sales were $220 million, increasing 10% on a constant currency basis, we estimate that sales in the quarter benefited $5 million to $10 million given increased utilization for covert 19 patients in the intensive care unit.

Sales in advance surgery were $224 million advancing 14% on a constant currency basis, and 8% on an operational basis.

The acquisition of separate film in February contributed approximately $13 million of sales in the quarter.

In addition performance in the first two months of the quarter reflected increased demand for our hemostats in ceilings.

Strong commercial execution and they benefit for Rico throm related to competitive supply disruptions.

Beginning in late March declines in elective surgeries drove an estimated negative impact of approximately.

$10 million for the advanced surgery portfolio.

We anticipate continued negative impact on growth for this business related to declines in elective surgeries globally.

Sales in our acute therapies business were $156 million representing growth of 23% on a constant currency basis as Joe mentioned within the quarter, we experienced a surge in demand for our continuous renal replacement therapies for treating acute kidney injury or AK <unk> and other condition.

And with early studies, suggesting that 15% to 30% of patients with severe forms of covert 19 are developing AK hi.

We estimate that the heightened coven related demand contributed approximately 10 percentage points of growth in the quarter finally.

Sales in our other category, which primarily includes our contract manufacturing services were $115 million in the quarter advancing 9% on a constant currency basis.

Moving through the rest of the personnel our adjusted gross margin of 44.3% increased 70 basis points over the prior year benefiting from positive topline performance as well as favorable manufacturing variations following our strong performance in the fourth quarter of 2019.

Adjusted EBITDA of $590 million was flat on a year over year basis, as we continue to prioritize disciplined expense management and realize the ongoing benefits from our business transformation efforts.

Adjusted R&D spending in the quarter of $123 million advanced 8% on a reported basis, reflecting our continued investments in driving growth through innovation.

Adjusted operating margin in the quarter was 18.8% and increased 180 basis points versus the prior year.

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<unk> expense was $21 million in the quarter, an increase of $3 million compared to the prior year driven by increased interesting <unk> interest expense from higher outstanding debt balances.

Other non operating expense totaled $10 million in the quarter compared to $21 million of income in the prior period driven by a decline in pension gains largely due to the Q4 2019 transfer of $2.4 billion in pension assets and related liabilities as well as foreign exchange losses on.

The balance sheet positions.

The adjusted tax rate in the quarter was 14.3% within the first quarter, we generated free cash flow of $102 million compared to an outflow of $59 million in the year ago period, the strength of our balance sheet positions us for sustained durability in an uncertain market environment.

While cash flow generation remains a critical priority, we anticipate that the current environment, we'll have some negative impact on our working capital efficiency as discussed in our fourth quarter earnings call. We continue to be incredibly focused on maintaining adequate liquidity.

And as of the end of the first quarter, we have approximately $4.1 billion of cash and cash equivalents on our balance sheet, which includes the proceeds from our $1.25 billion of long term debt issued in the first quarter as well as 200 million Euro and borrowings from our European revolver.

Our U.S. revolving credit facility provides us with access to a further $2 billion in credit while we have not drawn on this facility to date, we're currently able to do so if necessary.

We continue to prioritize investments in internal and external opportunities to drive our strategic growth initiatives forward and support our employee base.

Business development remains an important component of our capital allocation strategy as the situation and economic impact from Covidien 19 continues to evolve our investments will be focused on strategic opportunities that augment baxter's current portfolio and position the company for future success.

Yes.

Additionally, as of the first quarter, we tap temporarily suspended our share repurchase program to drive further financial flexibility in the current market.

We have approximately $900 million remaining available in our share repurchase authorization as of March 31st.

Within the quarter, we announced a quarterly dividend payment of 22 cents per share, reflecting our continued commitment to delivering value to our shareholders.

Let me conclude my comments by discussing some factors that will impact our ongoing results.

As stated in today's press release, given the high degree of uncertainty regarding potential impacts from cobot 19, we're not providing second quarter or full year 2020 guidance at this time.

We hope to provide further updates as we progressed through the second quarter for the second quarter, we do expect sales to advance compared to the prior year, albeit at a slower paced than in Q1, a significant declines in our advanced surgery portfolio will be offset by growth in our other businesses for the full year, we expect to incur.

Approximately $150 million any incremental expenses, resulting from our efforts to address the global Colvin 19 pandemic. These costs include the significant measures. We are taking to protect employee safety and compensate our frontline employees for their extraordinary efforts as well as our efforts to.

Bruce capacity in production to address the increased product demand we are experiencing.

In addition, as Joe mentioned, we expect to absorb increased freight related cost as we prioritize getting our products to where they are most critically needed.

Finally, we do expect to see an impact from lower sales of higher margin products, including our advanced surgery and inhaled anesthesia portfolios.

We do not expect material changes to our planned R&D investments in the year since driving meaningful innovation remains critical to our long term business health.

We expect an assay in a benefit from reduced travel in meeting expenses to be partially offset by increased technology expenses, along with our efforts to compensate select sales and marketing employees for the impacts of loss Commission based compensation where appropriate.

Additionally, as a result of higher interest expense from our March March bond offering and lower interest income due to the interest rate cuts. We currently expect our full year net interest expense to increase by approximately $60 million as compared to the prior year period.

In closing.

We're doing whatever it takes to address critical patient needs. During this unprecedented crisis and we continue to be well positioned for his financial stability and long term operational success with that we can now open the call to QNX.

Thank you we will now begin the question and answer session. If you have a question. Please press star one on your Touchtone telephone if you wish to remove yourself from the Q press the pound Keith if you're using to speakerphone. Please list the handset to ask your questions.

So that we may be respectful of everyone's time. Please limit your comments to one question. What's one follow up question if necessary we.

We appreciate everyone's patience and would like to provide as many of you as possible the opportunity to ask a question.

We will pause for a moment wasn't list is being compiled.

I'd like to remind participants that this call is being recorded at additional replay will be available on Bextra International's website for 60 days at Www Dot Baxter Dot com.

And our first question comes from Vijay Kumar with Evercore ISI. Your line is open.

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Hey, guys congrats on a really solid quarter here I'm.

Yep impressive considering the environment I, just add back up in a.

Good on the comments on two to some helpful comments here without looking at what other companies are saying it seems like Twoq you as the bottom and we expect sequential improvement you know from Twoq you would that is that fair comment is that Africa Merkel Baxter.

Any comments on how we should think about on the trajectory here would be helpful.

VJ, yes to all start with some commentary and pass it over to Joe.

We do we do see a challenging Q2 arc or expectation is that will probably be the most difficult quarter of the year and then in Q3 in Q4, we anticipate in or one of our base case scenarios the level of rebound an acceleration the only thing to keep in.

And with respect to our Q4 is the very strong Q4 that we had last year and so you know look there's a lot of uncertainty with respect to how the the pandemic will evolve and hospital purchasing patterns towards the end of the year, but I think generally the way you've described it is the way that we think about it at least in.

Certain scenarios Joe.

I think you'll you had a good job Jay your comparable.

So.

And I was going to cover.

In just one not fall up maybe a this is for show.

I think in your prepared remarks, you mentioned it up ox Iris right and we've been hearing about cytokine storm for out the code patients how well you know how should we think about the revenue opportunity for this products for any comments on a either ALKS Iris aura in I'm sticking to we know.

Any updates on a catch I think out would be helpful. Thank you guys.

Hi, Good morning, VJ Deok Cyrus has a special filter we make them in Europe and he has a heparin coating to it which makes add ideal for the situation, where we're seeing now we don't have enough data on the gold bid or the Corona virus.

Or impact on the filter just in the very beginning to use in the U.S. seems to us that he's lasting longer than our carbon filter because it presents to crack relation that usually clogs. The C. R. T filters are little faster so.

We are working with the F.D. and we work internally and with our partners in the industry. So collected data to do investigation. The work. So we can propose a keeping the product kind of market once the crisis subsides and the agencies.

It was that a the product may not may not be up need anymore. So we'll do everything we can to a two registered a product in the U.S. a with the FDA.

It is a product that we see we've seen outside the U.S. I'm really good results. So we hope the week improved the point that this is a great therapy for sepsis treatment because the type of feel to it because the coding.

We also.

Going to the aka try.

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At home therapists is ideally.

Position for a crisis, where there's so much transmission a virus by airlines station in close contact so I think it cage eyes, no I cannot comment where.

The the rule is at the moment, but we think that that is the right move by the by the government.

And we think is going to end up going through a is just a matter enough time, but that has not stopped baxter from its investments we continue to invest as a matter of fact, yes. It just at a meeting on a phase two investment for this purpose remember that our our growth you home therapies is going up.

No we are in the U.S. alone BD.

Home therapies, a was about a.

13% no APC Tpd home therapies in the west was about 13% growth so because that kind of growth you need to have this kind of investments. So we were optimistic about that so even if the rule doesn't come as fast as as we were.

Wishing you had to come a work with our partners Davita and other partners in the U.S., we are advancing to their home therapies and rest assured we're going to continue to make the investments.

Thank you guys.

Thank you and our next question comes from Bob Hopkins with Bank of America Merrill Lynch. Your line is open.

Oh, yes, and good morning and.

Thanks for taking the questions.

I'm.

Just curious one other follow up on that.

Comment.

As little growth is you're expecting there is that due entirely to a lower benefit.

In Q2 relative to that $45 million that you saw in Q1 or are there other non cobot related issues that are changing in Q2 versus Q1. Thank you.

Yeah, and Bob I should caviar my commentary around our forecast before we get into before we talk specifically about Q2, we didn't give guidance for a real reason, which is there is a very significant level of volatility that we're seeing with respect.

The cobot virus and its impact.

On on or business in demand generally.

And in Q1 think about it we gave guidance with only a few weeks left in the quarter and we significantly beat the guidance on the top line, which is not a normal situation for Baxter, given the steady and durable nature of our portfolio. So I have to I have to comment and just say look this is unprecedented.

Environment that we're operating in and the other thing I will say is you know we talk about our expectations. We have one forecasts, but our planning team led by David Roman has developed I believe six different financial scenarios that could emerge that we need to be prepared for you know three lower case.

Cases in three shock or to shop cases, so we really are looking at Oprah a broad spectrum of things that could occur and in light of that Thats why we suspended guidance as it relates to Q2.

Yes, we believe that there was some incremental benefit in Q1, but then secondly.

Advanced surgery, we'll have a meaningful decline in the second quarter in large part because of postponing elective surgeries as we've all discussed in med Tech that's a real factor it did not impact this in Q1, but it will certainly impact us in Q2, and I think thats, probably the most volatile.

Hum and as we think about elements like recovery and how that's going to occur.

We're watching how elective surgeries will resume but clearly in April and May you know, that's a significant headwind that we're facing.

Okay.

Thank you for that and then just one other thing I'm curious about.

Uh huh.

A couple of weeks ago.

Capacity constraints.

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This is that you just.

Because of.

Capacity issues.

The more specifics about or just any.

Capacity in the quarter.

Bob Good morning, and we we are if you all remember about two years ago, we had a hurricane Maria that taught us quite a bit of or a lesson and we had modified our supply chain to a point that our fluids today don't have.

And it constraint with exception with exception of our immediate back plus but we made arrangements for extra shifts and we're putting out to reference amount and so we predicted that us most of our fluids with few exceptions will be all fellow protective.

Protect allocation in the next few weeks.

Part the area of our business there really has a capacity come scream based on the type of buyers. We have today is that you see our T. C. R. T is a is made in couple of different places in the world between the machines and filters and sat since fluids as well.

Now that's the one that we we are capacity constrained, we advised what Pfizer partners and the government agencies for debt that issue. We are seeing demand that is multiple times, what we can produce and we're working very diligently with sorry.

Customers to server our patients best for the future debt will be an area because the type of therapy adoption adoption of the therapy that is probably going it's going to.

Gross Oh, we're going to work in diversification of manufacturing sites and put more locations for fluids across the globe.

But that is the one that comes to mind at the moment, how so some of our drugs that being used as a backdrop for instance for proper fall. We don't make broke performing do you asked would make proposal for other parts of the world, but Ducs, Matt is used as a backdrop drug of course.

Station and what we finding what we're finding is though we are outstripping our capacity and I have had have all trip dark fast. So we're going to also be making more investments in our galaxy technology as we move forward.

Great. Thank you very much.

Thank you.

Thank you. Our next question comes from Robbie Marcus with J.P. Morgan Your line is open.

Great, Thanks, and nice Jay glad to I hear your sounded pretty well so glad you're a comfort okay. Thanks for the Tobin [laughter] I was hoping in you know we've seen some other companies this earning season give us a glimpse of what April looked like to give US you know abuse.

What may be the floor on performance could look like in second quarter. I was wondering if you could offer similar insights you're into what you're seeing in April across the different businesses.

Sure.

Look at April April is.

In line with some of our expectations, we predicted that some of the largest in bad with respect to the covert virus will occur in April and May and then you know start to see some rebound in June and then Q3 and then better in Q4 as I described earlier.

That is as it and I want to make sure Robbie that you walk away that is simply one scenario that we're looking at.

We are expecting the biggest declined to occur in advance surgery. In these months of April in May and I would say generally speaking that's progressed proceeding inline with the expectations our base case expectations that we've laid out.

And so you know nothing nothing wild in terms of incremental commentary I can share with you other than to say you know advanced surgery is an important one will want to see that starts rebound.

So far you know April was as expected with so many hospitals really close to elective procedures that impact came in inline with expectations.

Okay, Great and maybe just as a follow up here. It seems like you're taking a lot of I would say I would imagine well received the actions with your sales force. You know this is something I'm paying close attention to is I think companies that do the right thing for their employees can probably rebound a bit.

Faster coming out at this I was hoping that you could just walk through some of the positive programs you've put in place for your employees and do you feel like this puts you in a solid position as you come out to Cook at 19 with respect to your Salesforce in productivity.

Robbie Good morning, we we have.

Taking an action, whereas our sales force for uses in advance surgery.

Teaching them skills technically skills on other product lines that we have I haven't done call on on surgeons on catheter insertion were making sure that they are occupied we're having global webinars that they're being conducted by the team. This a significant amount of activity.

And we find that does we have a tremendous tremendous.

Sales force and we're going to keep them engaged we have as you is as you can see we having poisoned to frontline I'm not only the salesforce or have a service group. The services all just machines across the globe and they are every day in hospitals across the globe servicing them, we were treating them.

As well as our folks in manufacturing and global supply chain, we gave them an incremental incentive.

To recognize their effort in such a difficult time, Oh, we also have.

No our plants for the most BARDA operating 24 seven.

Almost all of our 50 plants with very few exceptions. So we're making sure that there were when we're having their safety first he mind is our number one priority as employee safety and the second priority use with them being safe they can make product for our patients.

So we are we're well known in uncharted waters here, but I think having our employees.

Well being first in mind hasn't been front again go what test stake in us to the point that we are today and they all have in their minds, there that mission of saving a sustained lives is what drives so.

We we are we're very very very grateful to all the 50000.

Folks who work for Baxter work and in in this battle with us.

Thanks, a lot.

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Thank you and our next question comes from David Lewis with Morgan Stanley. Your line is open.

Well, good morning, and craps and I'm very durable corner I just a couple quick questions from me, Joe maybe I'll start with you you pump dynamics, Joe I'm, assuming your pipeline was very strong heading into 2020 and I don't think your prior guidance imply any update our upside from your competitors recall, but just sort of curious you know what you're seeing competitively Ah and how the.

Balances sort of new pumps looks relative to replacement and how you think that changes across the year than I had a quick follow up.

David Good morning, we think.

Is that you will have a bolus of demand that is really difficult to discern between what is just we and our and we know the competitive accounts there were going forward to competitive accounts, we think we're going to win.

And now you have just bolus of demand coming in with more need for pumps as the patients are requiring a multitude of bumps more off more bumps that they would otherwise in situations in the I see you. So we're trying to kind of separate them and understand we ramped up our production.

Of our seeking more spectrum into your west tremendously, we put extra extra shifts more people. We're procuring raw materials were expedited raw materials were being sometimes freeman to get raw materials faster and so we are producing as much as we can.

Well incidentally. This week, we just got approved Canada for our new pump platform to Novum I Q.

We also have our international platform called a useful Q.

Being approved in multiple in the multitude of countries in a lot of orders in Australia, and though we are getting approvals in Brazil, and we have approval in Colombia. So we started to see that award and also in the UK with NHS. So we've seen a lot a movement on pump business of Baxter, we have a as you know.

We have filed for five 10-K, where our no from Hite your platform into U.S.. We also filed for E away here, because we think we can make weak. We can we can bring more bumps beginning in July no from my acute to supplement the demand for our current equalized.

So we're doing everything we can turns off of competitiveness is stuff to see at the moment, how things are going people were so focused David in the current situation nobody is thinking about us something two months from today, you know I think two hospitals, our script for resources and he will not have a conversion.

At this moment in time, what you have is demand today has spiked up quite a bit, but but our folks are really.

I really planning for the future I think our pump platform is shaping up to be a great platform and the addition of some monitoring capabilities will make us a strong as you can you feel you heard just more than you read. This morning, we had made a couple investments in in a outward.

Technology and artificial intelligence technology.

Technology.

Okay very helpful joined the maybe just a question for Jay or for Joe You know one of the things that we're hearing in light of code is sort of hospital administrators are waking up in asking questions around how much inventory. They should have been keeping for critical care products in light of obviously in light of cobot. Some kind of curious what you guys are seeing from an inventory perspective, and how you think you and customers are.

Going to manage inventory in light of Kobe heading into the hurricane season, and frankly heading into next flu season. Thanks, so much.

Yes, that's a it's a good question, David and I think that the whole integrity of the supply chain is a critical focus for companies like us with medically necessary product and for hospitals and distributors that serve them I mean, so the MBS.

Answer is it's hard to say at this point, but for US we want to ensure that we have available supply to meet patient needs under a whole variety of scenarios and by the way you raised a really good point, which is going into hurricane season. There is talk of a challenging hurricane season this year and.

So ensuring that we have adequate supply means at least for this year at least until the pandemic situation has stabilized and we get through the hurricane season, we will be carrying extra inventory of critical products now that did not show up in our Q1 results because of the sales surge that.

Occurred in the last couple of weeks in March or days inventory on hand was actually below our expectations, but.

What will happen as we approach the latter parts of the year is we will build in those areas that are most sensitive and critical to the current environment and I think frankly, the same will be true of hospitals as well I think hospitals will evaluate what levels of inventory that they need to carry going into these kinds of price.

Yes, it's clear that certain of them did some inventory build in March.

And a lot of that has been consumed already but I think each hospital will have to evaluate this on their own married maybe Joe you could add some further color commentary here.

Sure.

So Dave and what do.

You also we'll see.

Is it stockpiling.

No from disappointing on when one that when the demand surge uses up a little bit I think hospitals I don't know, we still have the capacity.

Stockpile of significant volumes of products, there will some probably but I think you're gonna see governments thinking differently about how they face a calamity such as does this virus. So I think stitching a lot of lessons or to the whole the whole supply chain government private.

A lot of BP abuse.

But private partnerships, you're gonna see happening in terms of preparedness. So we'll we'll we'll see a lot of that probably in the third and fourth quarter. As this is off through the summer and how how entities across the spectrum will react.

Great. Thanks, so much great color.

Thank you. Our next question comes from Larry Biegelsen with Wells Fargo. Your line is open.

Thanks, guys. Good morning, Thanks for taking the questions and Jane Claire I'm glad you're both the feeling better.

So first I just had one on China and what on the P. It out so first on China could you talk a little bit about Asia Pacific was obviously quite strong in Q1 could you talk about what you're seeing there the pace of recovery and how much of a read through do you think that is to the rest of the world for your business and I had one follow up.

Larry.

We were seeing the.

Some normalcy coming back into Asia, but I want to.

Give you some color on.

On Baxter's business being slightly different in China, primarily in parts of Asia. They that that is in Europe and Americas.

We are a heavy b D Barrington your dialysis companies in China.

So that's a chronic disease, we saw a stockpiling going on first quarter, there and Dan being consumed but that business is consistent and constant.

We are starting to see some hospitals in China going back to normal normalcy in terms of surgery, not 100%, but we probably will see it through the second quarter their return to normalcy for for a great deal of businesses in Asia with.

Perhaps an exception to Japan, I think Japan steel.

Has not figured out.

Locked down and and I think that is gonna be a little slower than than the rest of Asia, Australia is already thinking about a possible second wave and they're working on on on preparedness for that as as far as we can see so that is the the.

Reason why Asia was a strong for us into first quarter, but we see that normalcy coming in but don't don't forget our business in Asia, primarily in China is is.

Mostly home care Barrington, your dialysis chronic business.

Thanks for that show in Jay.

Thanks for that helpful color on the Pinedale and nice quarter a of the margins could you maybe help tie it together for us a little bit other seems to be some puts and takes it can the operating margin to be up year over year, given that incremental spending, but but the trade off with lower travel and the two below the line.

So I don't think you touched on where the other income and tax or how should we think about that thanks for taking the questions guys.

Yeah, Larry we're talking about severe impact in terms of incremental spending that will drag down the margin and so while I'm not prepared to comment on year over year margin growth I'm prepared to say that we really can't offset the 150 million in incremental expense from an operator.

The margin through M&A savings and so on that's not likely going that's not going to happen.

So that's you know and again, we view those costs as absolutely essential to the long term success of our business because for US we have to be there right now for our customers and our employees ensuring that we have the right amount of pp any that werent compensating employees, who need to be at.

Work in challenging situations all of those factors, our first and foremost on our mine and you know like I say that will be a drag on on operating margin year over year.

As it relates to as it relates to in the quarter.

Tax rate business mix was was sort of favorable from a tax rate standpoint, so we saw a little bit of benefit relative to our expectations relative to year over year.

As a with a downside in large part because of some Fas 123, our excess benefits that we will that we experienced on in Q1 of last year and then as it relates to other income we did the two factors the largest one being we had weve off loaded the pension.

Plan as part of an important initiative that our treasury team undertook throughout last year in culminated in a December transfer of assets. So as a result of that we're no longer seeing pension income.

Below the line and then secondly, when we did have a loss. We had there was a balance sheet position that we held I believe it was your along in a movement caused the loss in that particular item, which contributed to the year over year decline in other income.

Thanks, so much Jay.

Thank you. Our next question comes from Peto Tigrean with Deutsche Bank. Your line is open.

Good morning, guys. Thank for taking my questions. If you for a few questions for you on PD, how much cobot impact or was there for new starts.

For patients both in the U.S. and that's how the U.S. and how's it running today and <unk>.

I will talk to Dallas Dallas is providers, how much pent up demand are you hearing prepaid just want to move into the home that Buffalo.

Good morning.

We saw a healthy.

Level BD starts.

But nothing different than what we had planned I think what you're going to seize the little bit of a reduction in denim pick up to work towards the middle lumpy or because PD is dependent upon.

Catheter insertion this despite affect the us the ER.

American Nephrology side of the for all the just had recommended and had said that this is not in the an elective procedure and put the procedure as necessary. Some hospitals are doing data talking to a colleague of mine in the northeast <unk> Chief of surgical hospital, he said that that day.

We're doing one of the fuel surcharges are doing was catheter insertion, okay, but not everybody had a luxury somewhat their hot spots I'm sure that other than to PDL assertions that were done for instance in several hospice in New York City, because we sold a significant amount of therapy into New York to alleviate.

The pressure on C. R T for patients in the I see your what's called an acute P D.

We will see probably as well as mall.

A slow slowdown I'll be D. And then we'll pick up through the rest of the the demand is there the home therapy. This is the way to go for for the right patients and I think the momentum is not going to be into long term altered is just now you'll have to describe she is works the insertion becomes more off up.

All of a one issue you had a second part to your question what was that.

So.

The second part was how much did you supply impact from.

Oh, right, a clear impact a the real business right now and what the supply constraint because you're converting manufacturing over into two or another.

Well.

It is around $5 million, okay around $5 million to answer on there on the rapidly or what were finding is our plants producing rubber clear producing a record level right now both wanting to you asked when in Germany.

And as we prepare towards the end of the year to convert some of our production lines into a turnover. Okay. So as it turned over application to the north from its going through the FDA and we have we're preparing for launch we're going to start converting our production lines. So we need to start doing that in Germany.

So youre going to see that swap, but it was about $5 million.

I think some thanks so much.

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[laughter] and our next question comes from Danielle Antalffy with SVB Leerink. Your line is open.

Hey, good morning, I think some nice for taking the question on and congrats on a on a really good corridor and thanks for all you're doing in this crazy environment in helping patients get better I guess I had a quick question a follow up on PDL noncash bit related question and just curious.

Online any progress you're hearing being made on then they kidney initiative and how it you know how were thinking now you are making significant investments had a potentially that initiative going into play to to build for to build for higher number a PD patients.

Where are we with that how soon can we know and how does that change the PD outlook long term.

Good morning.

We we don't see.

The long term impact on <unk>, you see a pause because I think the administration is quite you're right now with other matters.

But speaking to handle fees showed the other day, Dennis steel front front and center for for the White house or they want to move forward with this and I think a will be will be just a matter of time.

We will you have done a significant amount of simulations and monta Carlos and all kinds of work in understanding capacity demand and we are ready in July to speak to our board again on the face to face one is already being put in place. Okay. So capacity is being augmented we're going to start CE Mark.

Best coming in next year, but Dan the thing is <unk>.

Project in two or three years down the road, we're going to need to make that investment. So that investment is already planned we know where it is going to be made for the most part we have some decisions to make but we were down depth that fast. So what you see with that with with this I'm fortunate coolfit 19th it is a slow.

Now in decision, making which we think is just a matter rough time.

Got it thank you I'll leave it there thanks so much.

Hi, Catherine this is clear we have time for one more question and then following that I'm going to turn it back over to jail.

Okay.

We were all our next question comes from Matt Miksic with Credit Suisse. Your line is open.

Hi, Thanks for squeezing me in so I'll just keep it to one just one other thing is that.

Lot of other companies have talked about during the as we approach and go through the early parts of earning season here is just the drops in the second quarter.

Driven obviously by implants in the likes to surgeries and things like that and.

I'm wondering if you could talk a little bit about obviously you know.

Much of the exposure there that you had at Baxter is not necessarily in things like implants.

In sort of advanced surgical supplies that are used in the or and maybe talk a little bit about.

Some of the stocking flows and I think Joe you touched on this earlier in terms of some of these key elements of supply being stacked or stockpiled into the back half for next year is governments think differently.

These products, but maybe just a JV or Joe if you could help us understand some of the flows that would have maybe not impacted Q1, so much and maybe you're going to impact Q2, and how that plays out for the rest of the year sure.

So so Q2, well, let let's put it this way Q1, the $45 million there were certainly some pre buy in that number in the sense that hospitals were anticipating.

Hey, Colby crisis coming to the U.S. and so we did see some advanced purchases in buyouts of critical solutions and supplies.

Now as we how much of that has been consumed we believe the vast majority has been consumed.

And we will see continued sales attendant with the crisis, that's ongoing in up into large component of our portfolio, but we have about 15% of our sales between our advanced surgery business along with a few other areas. Unlike some of our inhaled anesthetics, which are very much dependent.

On elective procedures, taking place in hospitals and to the extent that those procedures are delayed or curtailed we will see a negative impact we expect the biggest most prominent impact to occur in second quarter, but again, how does this second wave of all how does.

How long is wave one.

How severe how do hospitals react there's so many variables that are input into our demand signals and so many scenarios that we have developed that's why we've kind of put guidance on on the side for the time being we'll watch to see how things evolve. This year, we'll try to understand better what is a potential wave.

Two in a wave two impacts and how how does that materialized and at that point I think we'll be in a better position to comment on financial performance and in particular financial performance in some of these most impacted segments, Joe mentioned, something which was quite a good point, which is stockpiling they might occur at a national level.

No for various countries looking to shore up supply of life saving in sustaining product. We will we'll watch that very carefully and look to support them to the extent that weekend.

So with that maybe I'll turn it over to Joe for some closing comments.

Thank you all forthcoming to two calling in today and this into a two hour earnings call.

We are best are very proud what we're doing today and we have done.

Everything we can to attend to patients across the globe, a we wish you all to be safe and well and a and hopefully we can return to normalcy.

For our next earnings.

Earnings call. So to all of your thank you very much and have a good rest of your week.

Ladies and gentlemen, this concludes today's conference call with Baxter International. Thank you for participating you may now disconnect everyone have a great day.

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