Q3 2020 Baxter International Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Q3 2020 Baxter International earnings Conference call.
I'm all participants are in listen only mode.
Speakers presentation, there will be a question and answer session.
Second during the session I need to press star one on your telephone if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today Clare Trachtman you may begin.
Thank you good morning, and welcome to our third quarter 2020 earnings Conference call. Joining me today are you all made up Baxter's, Chairman and Chief Executive Officer, and Jay Saccaro, Baxter's Chief Financial Officer.
On the call. This morning, we will be discussing baxter's third quarter 2020 financial results and full year 2020 financial outlook.
A supplemental presentation to complement this morning's discussion can be accessed on our website in the investors section under events in news.
This presentation includes related non-GAAP reconciliation.
With that let me start I prepared remarks by reminding everyone that this presentation, including comments regarding our financial outlook for full year 2020, new product development business development and regulatory matters contains forward looking statements that involve risks and uncertainties and of course, our actual results could differ.
Materially from our current expectations. Please refer to today's press release, and our I think the filing for more detail concerning factors that could cause actual results to differ materially any.
In addition on today's call non-GAAP financial measures will be used to help investors understand baxter's 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 will be discussing operational sales growth, which adjusts for the impact of foreign exchange and the acquisition of summer fill which closed on February 14th of this year.
Now I'd like to turn the call over to Joe Joe.
Thank you Glenn and thank you to everyone joining us on the call I hope that you and your families remain healthy and safe.
We'll begin with a brief review Baxter's third quarter performance, Jay will provide more detail on the financials then.
Then we will wrap up with your questions.
I want to start again by acknowledging all of their health care providers first responders researchers and personal care givers, who are rising to with enormous gentleman just everyday in the ongoing fight against scope at 19, and as always I want to express my deepest appreciation to.
Baxter's employees, who are navigating these unprecedented times in the unwavering spirit of our mission to save and sustain a life's.
Just ask over 19 continues to impact all of our daily lives.
Well <unk> percent year over year.
All three of our global regions contributed to positive performance for the quarter growth was led by Asia Pacific, which was up 7% at constant currency rates, reflecting the geographies global leading fires containment and recovery to date as well as our portfolio mix.
In the region.
Five of Baxters six global business units also delivered positive constant currency sales growth in Q3, among them acute therapy is grew 35% year over year adjusting for FX. This business continues to experience heightened.
Demand for east continuous renal replacement therapy or see our tea products in the midst of the pandemic.
In Q3 Baxter was granted us Sta emergency use authorization for our Regis that replacement solution select sets to help address increased demand for c. RG supply in treatment options. This quarter, we also announced a distribution.
The agreement with Biomerieux for the NAV for clear CCL 14 diagnostic test currently in development for use assessing the risk of developing persistent severe acute kidney injury.
Renal care delivered mid single digit growth at constant currency rates for the quarter driven by continued demand for our portfolio of compared to new dialysis products.
Demand new product introductions, and the impact of a competitive supply issue in the US last month, we announced FTA approval of new higher protein formulations of cleaner mix and Clinton mix E for parental nutrition.
These offerings further expand the diversity of our U S nutrition portfolio offering physicians, new options and flexibility to meet their patients needs advanced surgery grew 9% at a constant currency rates bolstered by our February.
Position upset for film adjusting for the acquisition as well as FX advanced surgery declined mid single digits operationally in line with the lower rate of surgical procedures as compared to the prior year period on a constant currency basis pharmacy.
Articles increased low single digits and medication delivery declined low single digits performance in both businesses reflect lower rates of emergency room utilization and associated hospital admissions for a range of acute and chronic conditions in medications.
Delivery, we remain optimistic about our novum IQ is smart infusion pump technology, we are making progress addressing the open questions from FDA under Novo Mike you five 10-K applications and remain on track to update the submissions within the next two to three months, we are working calabro.
Tivoli with the agents and currently expect to launch the bumps in the U S next year in Canada, and Nova Mike You large volume pump was recently approved and we hope to receive approval. We're just syringe pump in the fourth quarter.
And finally, we anticipate obtaining CE Mark Ford entire Novo My cube platform by the end of this year.
By now it goes without saying that we are operating in the largely unpredictable environment. We are experiencing an unfortunate resurgence of COVID-19, and many geography's, which resonates across the broader treatment landscape Baxter continues to respond was a so.
Stained focus on efficiency and effectiveness, which has become second nature across the enterprise our strategic emphasis on medically essential products and our broad geographic footprints reinforce the underlying stability of our business model. We remained focused on advancing in the face.
<unk> is a critical growth driver and are actively evaluating opportunities to augment this performance through strategic capital deployment, including business development and opportunistic share repurchases. Despite today's challenges and unknowns I remain confident.
In Baxter's trajectory and potential we are reigniting a legacy of innovation building upon our leadership and corporate responsibility and implementing new racial justice efforts that are rooted in our long term emphasis on inclusion and diversity.
By executing across all dimensions, we will deliver enhanced value and make a meaningful impact for all stakeholders. We serve over the long term now passes to J for his comments on the quarter and our outlook for the remainder of the ear.
Thanks, Joe and good morning, everyone. Although COVID-19 continues to present unique challenges not only to our business, but the overall health care landscape or third quarter results demonstrated level of resilience during these unprecedented times.
As we move forward, we must continue to evolve our business strategies and identify new opportunities to deliver enhanced value for all of our stakeholders over the long term.
Turning to our third quarter of 2020 results global sales $3 billion advanced 4% on both the reported in constant currency basis, and 3% on an operational basis.
Rose among bachelors GV used with was led by acute therapies, reflecting the ongoing demand due to the COVID-19 pandemic as Joe mentioned sales in both medication delivery in pharmaceuticals continue to be affected by lower rates of emergency room utilization and hospitalizations in the wake of the pandemic.
Particularly in the United States, we estimate COVID-19 negatively impacted net revenues by over $65 million in the quarter.
On the bottom line adjusted earnings increased 12% to 83 per share, reflecting our topline performance reduced discretionary spending and the benefit of a lower tax rate now I'll walk through performance by our regional segments and global business units no for that this quarter constant currency Grove is equal to opera.
<unk> sales growth for all global businesses with the exception of our advanced surgery business for which we will provide both constant currency and operational growth adjusting for the acquisition of separate film.
Starting with our three regional segment sales in the Americas advanced 2% on a constant currency basis, and 1% on an operational basis sales in Europe, Middle East and Africa advanced 3% on both a constant currency and operational basis and sales and our APEC region advanced 7% on a constant currency basis and 5% operation.
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Moving on to performance by global business units global sales for real care, where $955 million advancing 4% on a constant currency basis performance in the quarter was driven by global growth in both our PD and hte businesses PD benefited from 6% patient growth in the us and Asia Pacific reach.
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Sales and medication delivery, a $680 million declined 3% on a constant currency basis in the quarter. We continue to see strong execution of our infusion pumps led by evil IQ placements internationally.
As Joe mentioned, although we saw a sequential improvement from the second quarter hospital admissions and surgical procedures remain below pre covid levels. We estimate these lower volumes negatively impacted medication delivery sales by approximately 40 million within.
Within the quarter.
Pharmaceutical sales were $540 million up 1% on a constant currency basis, increasing demand for our international pharmacy compounding business as well as a one time use government purchase of approximately $20 million contributed.
Contributed to the growth in the quarter. This was partially offset by the impact of reduced hospital utilization lower international demand for inhaled anesthesia products and enhance competition for transdermal scope in the U S.
We estimate a net negative impact of approximately $40 million related to COVID-19 in the quarter.
Moving to nutrition total sales were $237 million, increasing 5% on a constant currency basis strong performance in the quarter was driven by the benefit of recent new product launches increased demand for our automated nutrition compound a business and competitive shortages and amino acids, we estimate that growth in the quarter was partially offset by a <unk>.
Definitely $5 million related to COVID-19.
Sales and advanced surgery were $236 million advancing 9% on a constant currency basis, but declining 5% on an operational basis. The acquisition of separate film in February contributed approximately $30 million of sales in the quarter declines in surgical procedures drove an estimated negative impact of a <unk>.
<unk> $14 million for the advanced surgery portfolio.
Sales in our acute therapies business for $177 million representing growth of 35% on a constant currency basis, we estimate that heightened demand for covid related products contributed over $30 million to growth in the quarter.
Finally sales and our other category, which primarily includes our contracting manufacturing services, where $147 million in the quarter advancing 4% on a constant currency basis.
Moving through the rest of the P&L are adjusted gross margin of 42, 6% decline by 310 basis points over the prior year, driven by lower sales of higher margin products as well as approximately $60 million and increased operations and supply chain expenses related to our COVID-19 response.
Adjusted SG&A is $574 million declined 7% on a year over year basis, driven by continued financial discipline reduced discretionary spending, resulting from covid restrictions and lower bonus accruals under our annual employee incentive compensation plans.
Adjusted R&D spending in the quarter of $122 million declined 9% on a reported basis with reductions in non projects span being supplemented by our continued focus non operational excellence.
We continued to prioritize strategic investments to fuel our innovation pipeline adjusted operating margin in the quarter was 19.2% a decrease of 30 basis points versus prior year net interest expense was $39 million in the quarter, an increase of $26 million compared to the prior year driven by increased interest expense from.
Higher outstanding debt balances as well as decreased interest income due to lower interest rates other non operating expense totaled $16 million and a quarter compared to $9 million and the prior year period.
The adjusted tax rate in the quarter was 15.7%.
With respect to cash flow year to day, we generate a free cash flow of $686 million compared to $776 million and the prior year period as of the end of the third quarter. We had approximately four $4 billion of cash and cash equivalents on our balance sheet, along with six $5 billion of long term indebtedness subject to market condition.
<unk>, we regularly evaluate opportunities with respect to our capital structure.
We expect to recommence our share repurchase activity in the fourth quarter of 2020 generally consistent with our capital allocation philosophy Faxes Board recently also authorize an incremental $1.5 billion to our existing share repurchase program being bringing the total share repurchase authorization to too.
$4 billion of common stock generally consistent with prior authorization increases.
Let me conclude my comments by discussing our outlook for the remainder of the year for full year of 2020, we now expect low single digit sales growth on a reported constant currency and operational basis.
As we see resurgence of COVID-19 cases across many geography's, we anticipate a sustained impact on our business, particularly in medication delivery in pharmaceuticals in the U S. Nevertheless.
Nevertheless, we remain ready and committed to addressing patient and physician needs globally with our portfolio of life saving and sustaining products.
In line with our previous commentary, we expect to absorb approximately $150 million of incremental operations and supply chain expenses related to our COVID-19 response efforts in 2020.
These costs include measures, we are taking to protect employee safety bonuses paid to our frontline manufacturing in field service employees and increased freight related costs as we prioritize delivery of critical products.
We expect a year over year reductions in operating expenses, driven by continued financial discipline as well as lower travel and meeting expenses.
In line with previous commentary respect net interest expense to increased by over $60 million as compared to the prior year and for the full year. We also expect adjusted other non operating expense to be negatively impacted by approximately $50 million year over year due to the loss of pension related income from the queue for 2019 transfer of 2.4 billion.
And pension assets and related liabilities.
Given these factors an underlying assumptions, we now expect adjusted diluted earnings per share excluding special items between three O two and three O five for the full year 2020.
In closing the third quarter continue to demonstrate the durability of are medically necessary portfolio and the importance of our multiyear transformation journey the commitment of our employees and the speed at which the organization has responded to the pandemic has fueled our year to date topline performance 2020 has certainly brought <unk>.
Challenges and through it all we believe we remain well positioned for continued financial stability and long term success.
With that we can now open the call to Q&A.
At this time I'd like to remind everyone.
Ask a question please press star and the number one on your telephone keypad.
First question comes from the line.
Hobby market J P. Morgan your line is open.
Congrats hanukkah quarter.
Thanks Robby.
Not sure. If this is for for J, a child, but I was hoping maybe we could start with the guidance outlook here in a year.
The first company to point to worsening trends, we see the covid rates picking up and I was hoping you could walk us through with this fourthquarter your projection didn't improve as much as you originally thought or are you seeing worsening trends coming into fourthquarter here and if you could just.
Walk us through down the P&L, how the lower topline outlook effects.
And Ah down the EPS the different changes versus expectations.
Sure Robbie overall Q4 is a little bit below the previous expectations that we shared on the last call.
Both with respect to.
Sales and then also with respect to earnings while we didn't sort of have specific guidance on queue for we did have some internal assumptions and really I would say the largest driver relates to admissions in the U S.
Our prior expectation, you'll recall I said in the fourth quarter, we expected admissions to be down approximately 3%.
We are now modeling roughly in a.
11% decline in admissions in the fourth quarter.
If you think about it each point of admissions is worth a couple of million dollars per month. So in totality. This impact is roughly $50 million to the sales line. The second factor again, we believe this to be a temporary item as we did have some sales in the fourth quarter related to our Novum IQ platform.
And while Joe commented around this and our expectations about this being a long term driver for us and we did remove those sales from the fourth quarter, roughly $25 million $30 million, representing a couple of sense. So.
Missions as I said roughly $50 million approximately six.
Then you also have this pump factor of roughly $30 million a couple of sense as well. So those are the primary drivers from our perspective. The good news is.
He should correct over time, the patient that correction is the real question at hand.
Great and.
<unk>.
Up question, it's great to see the share repurchase program coming back online in the fourth quarter, you have authorization up to 2.4 billion over $4 billion in cash right now how should we think about the impact in fourth quarter, what's in guidance for share repurchase and with the share price at 78.
Is this something we could see a pretty aggressive move here over the next several months. Thanks.
Certainly we were pleased to announce the increase to stock buyback authorization and that the board approve that recently.
From our perspective, one of the things that we put on hold over the last six months was the share buyback program. We did that in large part because of uncertainty around the pandemic and its impact on our business I think now having reported a couple of quarters of solid results.
In the face of a pandemic.
We now have confidence to start to get back to share buyback as a vehicle for returning value to shareholders. It's something that we've done over the last five years.
As we as we think about amounts the way we assess it as we look at what we believed the shares are worth.
Evaluating that against an intrinsic value model, we keep here and depending on how shares trade relative to that intrinsic value model. That's when we end up making purchases we talk about it after the end of each quarter. So we didn't repurchase anything last quarter and so for the <unk>.
Fourth quarter, we'll talk about this on our when we report fourth quarter earnings in February So stay tuned for that and that's the standard program that we have in place again. It was a severe departure from our normal protocol, but we had that in light of the pandemic. We wanted to make clear what we're trying to optimize during this timeframe.
I appreciate it thanks.
Your next question comes down the line.
Deutsche Bank your line is open.
Questions just to follow on August question on your fourth quarter assumptions, specifically to publicly traded hospitals have been seeing improvement throughout the third quarter on emission trends. So the fourth quarter run rate should be higher than what it is solid during the third quarter are you seeing or hearing about things getting worse or are you sneaking us.
Function and also as you talk about emissions impacting volumes the patient days or what HCA tenant we're actually positive. So how should we think about the interplay between lowered missions versus longer length of stays in the impact on medication delivery.
This is a good morning, everyone bitter good morning, and good more I hope everybody's healthy and well.
Let's let's divide this is not you can just make one assumption.
We are a hospital company, but within their hospital several different drivers of our business. So if you look at.
No.
Procedures in general are largely stabilizing right. So they're coming up they are a little bit below.
Last years, but it's coming coming perhaps in the fourth quarter more to a.
Same level now we have a flare up in the pandemic right now so we're watching that very closely the hospital admissions has more to do with Medicare patients being admitted to hospitals and how hospitals are taking patients through the.
Ah dimensions emergency Department. So we don't see significant deterioration between Q3 and Q4, we have indicators they are very.
Reliable because we are in those accounts we are in this businesses.
So we don't see that as as a huge deterioration in the fourth quarter, but we've got to watch what is coming.
With this new wave of infections, and how <unk>, how that's going to be dealt with their hospital level, but being drivers for a hospital today that way we see it is is the O R.
Which is largely stabilizing and Dan the admissions a patient through the General Florida Hospital.
And that is what you see the biggest deficit in those patients that usually Medicare patients. So we are going to watch it closely and that we we form how we are.
Not only take about that fourth quarter as we're leaving through the fourth quarter, but 2021.
Okay, and then on the margin guidance again for fourth quarter. It looked like pretty substantial margin guidance that you're giving us on fourth quarter versus third we saw in the third quarter can you walk through what are any new costs being out in sequentially is it all just margin pressure coming for product mix or just help us understand.
And why the margin differences, so big on fourth quarter to start <unk>. Thanks, so much.
Sure. There is some there is some margin deterioration in the fourth quarter and really that relates to a few things first of all we are expecting to see flat or a slight decline in the U S business sequentially from Q3 to queue for.
Again, it's temporary it's going to be a temporary impact in nature, but it certainly is a decline. So the result of that when you are X U S business is growing faster than the U S. You tend to have a fairly substantial mixed impact on gross margin and then the second factor is because of some lower volumes.
We are now anticipating we are we are expecting some incremental manufacturing absorption impact again that flow through to the bottom line. So really those are the primary drivers of Q3 to queue for margin story.
Great. Thanks, so much.
Bob Hopkins Fan Bank of America. Your line is open.
Just.
First off.
Swimming, Joe if you wouldn't mind, giving us your sense for the progress that you're making on the filings for November my cue and the syringe pump just maybe espresso comfort you are in your timelines.
Date on the progress would be great.
Uh-huh Blop good morning, we are.
Working very diligently with with the FDA, we have meetings with the FDA scheduled.
And we we are still very confident in our platform I can't speak on behalf of the FDA and how long is going to take in the questions, but I think we have a very good idea what are the issues that the FTE had with our previous submission and we're addressing them very very.
Quickly and we hope we can address them to the satisfaction off the FDA as you as you know this is an important platform for for us because this the platform not only with two pumps coming up but also PCA pump coming later on as well as an ambulatory pump coming in 2022.
So we are very excited about that but also as a company very focused not only medication delivery, we have our company wide effort to make sure that we've got that most experts in place helping that group answer all the questions satisfactory to the FDA.
As a company don't think that those are answered multiple.
Questions and issues and we're working very hard and probably in the next two or three months, we refile and and go through the process. We hope to launch this product next year I think is going to be a great product for not only for Bachelor for also for the market.
Okay. So it sounds like us to a planet filing this year.
No change there.
And then my second question is.
Maybe for Joe for Jay.
For 2021, St models, 19% earnings growth over 2028 at in large part by much lower covid relating spend.
I assume you're not going to give guidance on this call, but any directional comments on where the street is for next year on just kind of year over year spend levels.
Bob It's it's really hard to comment on that at this point in time, we're still in the middle of our annual operating plan process.
Understanding market trends in the fourth quarter with respect to the pandemic is going to be a critical input two or 2021 guidance. The plan is to provide the guidance on the earnings calling on February 4th. The one thing I will tell you is we do anticipate some level of sustained impact from the pandemic on our business.
Potentially through the first half of 21.
It's really hard to assess at this point, it's really hard to assess what's going to happen to admissions, but we're watching that very carefully as it is a critical driver of our growth. So we're going to take all the time and we're actually spending a lot of energy and effort really trying to model out expectations around patient and.
Missions and procedures, because that's such an important driver for us as you know we've had about $150 million and covid related costs, but we've had a far bigger impact on the sales line over time, the covid related costs will dissipate. So as the pandemic ends we expect a call back the vast majority of those.
Spend items, but we're watching carefully the sales line and these two key drivers are the ones that I mentioned in missions and surgical procedures and it's it's early to say, but we do expect some impact in the first half of the year, but but we are working very hard modeling dish.
Have a modelers we have people working.
Relentlessly in creating a sustainable way of looking through a do spend AMIC and how it affects not only the U S. But also affects Latin America and effects Europe at the moment, we seem much less effect of the pandemic in Asia as everybody knows now we had a pretty hell.
<unk> growth in the third quarter in APEC business, but we are working 24, seven and getting this model complete and we we hope to have something for you guys. When we give guidance.
That we feel confident in standing behind it in January thank you.
Great. Thank you very much.
David Lewis Morgan.
Your line is open.
Maybe I'll just stay high level, because I don't think we're going to get much on 21, specifically, but Joe people insured and this year enthusiastic about the pump launch there are nova and other various drivers and as you know we didn't get the benefit of the analyst day I think the key question. We're getting commissioners what is the growth thesis for Baxter and a go forward basis maybe.
It may take help minutes and sort of as you see the intermediate term growth outlook for Baxter, what investors should be enthusiastic about as it relates to the growth portfolio. What are the things that are getting you excited and what should they be focused on.
David Good morning, we are still very excited about a Nova my Q. This is the first time Baxter has a global platform as we said in the in the prepared remarks. This is not a U S protocol, new we're expecting the syringe pump approve when the fourth quarter in Canada, we expect and at the end of the year.
We're going to have the platform approved and.
Europe see marked by the way we start already hiring people for the sales force to launch this product in Europe remember, we were not present in Europe for.
I don't know how many years, probably 2030 years.
We have enough. So the product just started about two years ago, selling our equal IQ bump that replace the old colleague bumps. They're so if this is something new with the European folks are super excited so I'm very excited about the pump because they think it is a transformation for Baxter and is going to be a transformation in the U S.
Market as well I'm also excited about the PD business in the U S. H I opened the door.
Four four digit business to grow we were growing at 5% to 6% we start to see the growth.
Heating now 789%, 10% is last quarter. So we think.
High single digits to about 10%. It is a great place for this business to be we meeting fast mints already for the short term capacity need we're gonna be looking at more investment if we need to we also looking at a new technology eventually to come into the cycle of business that will change our ability to service even.
Better our customers China P. D is a great business that is also growing 8% to 10% a year. We're number one there is a good business for us and it's a very profitable business for us. So this as a driver that excites me and they actually I have a call. This week looking at more capacity Ford to Reno business in Asia.
Also.
Do we have some molecules like mixed rattling that we're we're not able to roll out well being 2020, because the pandemic is you have no. This is a new way that the product is configured insulin premixed insulin.
We need to service the accounts and be able to promote that and we were not able to get into hospice for the longest.
And how will tell you that this is going to be almost like a relaunch in 2021.
And we're excited about that also the going back to normal I think.
The ability to be participants in the vaccine business is.
As a feel finish company that we are between our planting Bloomington, Indiana and Halle in Germany will be able to be a participant in this business. So we look at all of this as drivers for 2021, but beyond 2021, and we also have some notable launches.
That I'm excited about ambulatory bump in 2021 of few advanced surgery businesses up new products.
Roger new products coming out.
Some some pharmaceuticals as well so our.
Our innovation has not has not stopped we took a little a little break in our laps in the beginning of the pandemic, but we're backing on on our laps operations pretty intensively and we're getting things out there the employees of Baxter have been relentless and innovation, we're going to transform this company.
Vision pathway, Okay Super helpful. Joe and just made changes click on for you just not going to get you to comment on their novo with CMS will do your next week, but just in terms of kind of risk mitigating.
The outcome if it were to happen.
Given where you see the plant manufacturing today, what type of revenue ranges could we be expecting for for 2021. If you had if you had the approval.
And you begin to scale up from here. Thanks, so much.
David I would say that first of all if we're contemplating both scenarios the approval.
And being included or not into it. Okay. We have a good momentum going on outside the west with turnover. It's a matter of fact, there is a little bit of a goner for our colleagues outside the U S. Because the way. If this gets a proven you asked to rest is gonna take most of the volume of the world and they were getting pretty good momentum until we up there.
Capacity to supply them, so our plan b as if it doesn't.
Gets reimburse you it doesn't mean that we're not going to sell it here, we're going to continue to sell we actually had the first say off Terra Nova.
Three weeks ago in the U S.
He will then press forward with outside the U S and desk sales growth is in the double digits was really good margins.
I will refrain now to give you a number for 2021 will be more precise about this number if if this product gets included in the in the in the <unk>.
Coming up earlier.
Early November we than become more clear about what that impact as in the us, but I want are investors to to know that despite effecting may or may not get <unk> approval in the U S.
Continue to sell it in the U S and we will expand and accelerate the sale of the products overseas. So in the in the at the end of the day.
The product is still a great product for our patients we believe in the product and.
And the clinical evidence is there as we were able to show to the government.
Okay very helpful. Thanks, so much guys.
Thank you.
C J Kumar from Evercore. Your line is open.
Hey, guys that thanks for taking my question I had about one quick on the quarter and a big picture question, maybe J for you on the queue itself.
When you talk about the higher manufacturing that variance is that signaling in a gross margin flattish sit down sequentially and a two four and when you look at the incremental expenses two days.
Incurred.
Hundred and 50 million incremental with below the line. Another 50, how much if that is going to lay our Margaret next year.
Yeah. So we do expect a sequential step down and gross margin from Q3 to queue for from a from a Q4 standpoint thinking.
Thinking for a second year over year, there's roughly 100 basis points of Covid cost impact. The fact that we've lost sales is about and some of those sales or higher margin in the U S. It is 130 basis points impact just some FX impact in the fourth quarter, maybe 70 basis points, we are seeing some incremental manufacturing.
Costs as well so there's a combination of items that you would take the gross margin down from Q3 to queue for even absent the covid impact, but like I said many of these items are short term items, which we do expect to recover now as it relates to win.
That really is the critical question for us and.
And so at this point in time, we do expect some continued impact certainly through the first half of next year. Both in terms of sales and in terms of incremental manufacturing costs. My hope is that in the second half of the year, we see a more normal environment, but I can't say that with certainty at this stage.
As I said before we.
We expect admissions to recover over time and we also expect the vast majority of those covid cost to go away over time, but it's hard to say is that Q1 Q2 Q for next year.
That's the question that we're working through right now and it's difficult to model, but we're spending a lot of time, obviously trying to model of Joe.
Add as well that we have a new head of manufacturing Jim Boise. It comes in with tremendous experience and already making a difference we're looking to significantly out or some of the ways, we do things.
In the in the engineering groups and parts of the company. So we will be looking for efficiency and productivity in operations.
Rule out the fourth quarter and next year so.
This will contribute when we think about back to normal gross gross margin. It has to do with mix. It has to do with Covid. It has to do with efficiencies because if you're producing lasting some of our factories. The cost is actually much higher because the lack of efficiency of running plants too.
24, seven as we adjusted already our capacity down without it effecting at all the customer at the end because we were holding inventory for any kind of a spike in demand due to the covid situation. We are relentless looking for productivity improvements and we have.
Put a tremendous Ah faith that Jim and the team and global supply chain will continue to look for those efficiencies throughout 2021, two offsets some of the losses until the situation come back to normal and then we'll continue to progress in our in our.
West for improving gross margin.
That's helpful in that Jay Chou, sorry for one.
Big picture for Ya, that's buyback versus emanated debate I'm curious on their thoughts change and and the reason I ask is that like your balance sheet, a stellar but I think in west her perception.
Has changed on Eminem unless you are willing to.
Look at a longer time horizon or are likely to be about lax I'm. Just curious on how you think about Eminem.
And a zero interest rate environment, when investors are willing to look at longer time horizon for returns.
Sure Vijay good question for US, we expect to do a mix of both buyback and M&A going forward as we've seen in the past and so from a capital deployment standpoint, we think Baxter can be a great acquire of a lot of different assets, especially ones that have some strategic.
Dziedzic relevancy to what the company does.
It's harder to stretch out into completely new areas, but what we're finding is we are able to generate adequate rois in those areas that have some strategic relevancy to the company, where the company becomes a logical buyer. So you never you never say.
You never know, what's going to happen with business development, but we're very active the pipeline is rich and while we have while rois an important.
Strategic and financial criteria for US we are seeing a rich pipeline today, Joe do you want to add.
I think you'll answer very well I'll I'll simply supplement the answer with the force pillars of transforming Baxter did like the last one is transformation of the portfolio to alter though are weighted average market market growth right now with a solid balance sheet with our cost struck.
Sure and SG&A in place with the innovation pathway set internally for organic you fast meant and talent and culture being one that we tackle first now our focus is undivided on how do we alter our portfolio in a way that we will continue to provide fair.
To our patients customers, but also create a good return for our investors and we always look at Roy C and the and the IRR and NPV on this deals were very stringent some time ago.
Not that we changed how we look at them, but we were in a position in the very beginning when they started here five years ago with with a very low free cash flow and very low cash reserves now we feel that we have a solid balance sheet and that actually help us.
Understand landscape better open the opportunities. So it doesn't mean that we're doing something I'm not indicating that I'm, just saying that we are relentless looking for those opportunities.
That's helpful. Thanks, guys.
Thanks for your <unk>.
Larry <unk> from Wells Fargo. Your line is open.
Good morning, guys. Thanks for taking the question one on the queue for guide one on.
Joe on your vaccine comments minute to go to J on the queue for guide I've gotten a couple of inbound emails are we thinking about the implied queue for operational growth negative 2% to plus 6% is that the right way to think about it and what kind of get you to the high end versus the low end.
There is a there is a fairly wide range, but we are expecting some some level of decline low single digits.
In the fourth quarter and really what that comes down to is the admissions gap versus prior year, but then also a very challenging comp as we look at last year's sales growth, you'll recall I believe the fourth quarter operation and was in the range of 9% growth and so tough comp. We always knew that was going to be a challenge for us, but then we have the added.
Fact that we are now assuming admissions down double digits year over year, roughly 11%. So that's kind of the the high end of the guide range reflects some low single digit sales decline and Larry also.
We were planning to launch Novo my queue in the fourth quarter and that carries a higher margin as well as we all carry the sales. So the combination of two are the ones that created a little bit of headwind in the fourth quarter that we that we will see using off throughout next year.
Thanks, that's helpful that Joe.
I've heard you talk about.
The vaccine opportunity to a couple of times recently.
Are you talking about covid vaccines or is that the flu vaccines.
And my understanding is you've generally operated a capacity there.
With the flu vaccines and and Baxter farmer solutions.
Are you thinking do you see this covid vaccine opportunity and do you have to add capacity of any color there would be appreciated. Thank you.
So we have the ability to to do that as a matter of fact, we have two different plants, one in Germany with a little bit more capacity in Bloomington, and we have the ability to help.
The country and the manufacturers of the vaccine developers in this in this process.
We are part of this network of companies to feel finished vaccines, we have that ability and and we.
We cannot comment on on who and what and why but we are no part of this this effort and we hope to be part of this effort continuously throughout the spent AMIC I'm talking about Corona virus COVID-19, I'm nice speaking about floor.
Thank you.
Daniel at the family from S V be Leary your line is open.
Good morning, everyone. Thank you so much for for taking our questions.
Question on the renal business N N P D I think he diagnostics.
P D patient gross number that's very strong and I'm just curious how to think about where that he can cross number can go as the egg rolls out and how we should be thinking about the trajectory of that business.
As the a K H I made it into implementation.
Hi, Danielle.
It's rather spend AMIC earlier on early on and depend damaged I think the.
The insertion catatonic assertion for P. D was deemed emergency surgery. So.
Our fear was if you in the very beginning people don't have an opportunity to have the catheter.
There was traded negotiating into hemo dialysis and and that's it.
We we see 6% even throughout the spend AMIC as a as a very good number if you think about the achy Jai and she was just do the math grew.
Growth would go between eight and 10% now.
That's where we should be looking at for the future. So represents a really really good opportunity for for the patients to take advantage of this therapy and also for Baxter, which has been four three.
Three or four decades behind his therapy finally, as being more understood and refused in the U S.
Got it and then just one followed up.
An allergy perspective, and where we are with that.
Sort of a complaint as care.
Alice.
<unk>.
And how how that to change the adoption trajectory here list.
Listen the point of care was a project that we actually proven that that works we have the technology to make it work we are focusing right now in developing new technology for cyclists as well as we have some investments minority investments in companies.
Your whereabouts space. So Baxter is explaining all the space is not only point of care, but also in technology is still will make it more affordable dissect with the issue that I think we have with the cycle or is not one that affects much the U S. As much as affects the penetration of a P.
Across the globe is a very expensive cyclic which you don't see adoption in most countries. They are in development today, so to give access to health care and access to that technology. Our teams are developing very interesting technologist. It eventually will will be global in nature and used.
Also I think wearable technology offers a promising future and we have minority investment and that kind of technology. We also are very focused on point of care in terms of technology that can be used with some of those that are being developed in conjunction not as itself.
Be launched but being added to other technologies, who was currently developing we have a pretty healthy spending in our Reno care business and we don't plan to is off on that and continue to develop those products.
Thank you.
Thanks Danielle.
Matt mix it from credit Suisse. Your line is open.
Thanks, so much so I just had one follow up just to clarify something that we talked about a little earlier in the call and this is the difference I think Joe you answered the question around different types of admissions J in your prepared remarks, you'd mentioned a couple of times, so important to ER visits or the fall off of ER visits could you just as.
That sort of the difference.
Fewer people coming in through to the emergency.
Service and and other types of admissions that we've seen in the press kind of not really being what drives your.
This is just one clarification on that and then I have one follow up.
Well the admissions in hospitals are come from from few places one of them is the Edie and the other one is is procedures is <unk> people, who have your schedule or.
Schedule procedures.
There is scheduled procedures through uhm.
Nope normal route or or a knee replacement or a gastric bypass or or.
Colin procedure oncology.
That part the procedure levels are coming back to normal levels and I think will normalize. It. So you can see now even with the pandemic researching so many places hospitals are more reluctant now to stop the procedures altogether see few doing that more of them are saying that they will be able to ah.
Common date, covid patients as well with procedures and the other side of the hospital.
That is unaffected and we see healthy.
Pick up and going into the fourth quarter not perhaps at the same level as we saw pre covid, but close to a dose levels. What we see as as as issue is the E. D has 20 to 25, 30% reduction in visits those visits are the ones that generate.
Admissions into hospitals as well for the general floor, So and we see primarily Medicare patients who are more reluctant because the age to go to a E. D visit even to be admitted so they're presenting themselves later.
With more severe issues. So that is how we look at this we also look a surge of centers and we look at a at a alternate sites for procedures and dose actually are doing well.
Super helpful color, Joe. Thank you and then just some additional question made on on the pace and change that we're seeing in Europe for time some of these European Geography's markets, where we're moving in the right direction over the summer now obviously.
We're very focused in the U S. But there's also these.
Changes in policy there I guess anything that you are seeing their tanker into Q4.
Any comments or color would be helpful.
Yeah, you know we saw pretty good recovery in Europe, if you remember our second quarter numbers.
We're effect and then now the third quarter, even even with the issues is not.
Is not is still showing growth.
The concern that we have is the two largest markets that you have in Europe right now.
Is one of them, France to other one Germany. Those are the two largest markets in Europe, followed followed by Spaniel K in Italy, So you'll see a resurgent they locked down for 30 days just announced by Ungula Marco.
See that.
That may affect the way people are treated.
In Europe in in the in the health system remember.
Uninsured.
And non insured patients is not an issue in Europe. So you don't see the reluctance to go to the E D. But you see a concern in people having procedures as hospitals continued to fill out.
To fill up would be for us to watch very closely when we do modeling here, we don't do modeling only for the U S were doing modeling for you as in Europe in a very deep level.
Even with variations of vaccine approvals.
And sentiment of the population in terms of going to the.
The hospital as I said the numbers that people are seeing right now is Medicare patients are more reluctant to go to the hospital today for a chest pain and and other ailments and telemedicine has helped some of this alleviation because you can do that remote in Europe.
We see that coming up.
As a trend as well.
Well, we're keeping our eyes very close in Europe, but that is part of our analysis as well.
Thank you so much Jo.
Our last question comes from the line have Matt Taylor fan E B S.
Then.
Hi, Thank you for taking the question. So I just wanted to follow up on two key points that you've been talking about in this call.
I'd say the first one is the $150 million and costs.
You said that we.
We could be under these kind of covid conditions for awhile. If that does occur can you talk about what proportion of the costs you could still work.
<unk> off and how long would it take post sort of normalization to get rid of the remainder call back the remainder of those costs.
Well post normalization I would say within one to two quarters, we should be back to.
We should have been able to alleviate.
Alleviate the vast majority of these costs, so or mitigate I should say so post normalization. It's it's something that we'll see go away over time. The vast majority there will be some that remain because for example, all of our employees in facilities today now use PPE in the past.
That was not the case, so that has a a daily costs attendant with it on that will live with but like I say post normalization of vast majority of costs will be mitigated as it relates to next year and how much we can do in the interim to mitigate some of this $150 million impact. That's an open question, we're working through and we believe there is some opportunity.
But it's hard for me to quantify that at this stage.
Thanks within just a follow up by the a lot of people are surprised by the emissions comment and I guess I was wondering is that reflective of what you've seen.
Quarter to date or are you assuming any deterioration as we move forward given the cases rising if you could give us any color that would be helpful.
Sure last quarter from an admission standpoint, I would estimate roughly at 12% decline Q3, that's Q3 Q for our assumption is roughly 11%.
In October to date, that's kind of what we're seeing.
The wildcard is what happens to escalating cases around the U S and in Europe, but look we think we have a sufficient range that we've shared that encompasses a wide wide.
Wide swath of potential outcomes. So we think we've got it correctly call with the range that we've shared but we're looking we're not expecting deterioration from our high case, we're not anticipating deterioration from the current level of roughly 11% decline.
Okay, great. Thanks, a lot.
Thank you I know.
This concludes our call. Thank you very much.
[music].
Uhm.