Q1 2022 Baxter International Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to Baxter International's first quarter 2022 earnings Conference call. Your lines will remain in a listen only mode until the question and answer segment of today's call at that time. If you have a question you will need to press the star one key on your Touchtone phone.
If anyone should require assistance during the conference. Please press star zero.
As a reminder, this call is being recorded by Baxter 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'd now like to turn the call over to MS. Clare Trackman, Vice President Investor Relations at Baxter International.
Mr. Eichmann you may begin.
Good morning, and welcome to our first quarter 2022 earnings Conference call. Joining me today are Joe Almeida, Baxter's, Chairman and Chief Executive Officer, Jason <unk>, Chief Financial Officer, the Cepheid coli Baxter's Chief operating officer.
Sir and gymboree.
Chief supply chain officer.
On the call. This morning, we will be discussing Baxter's first quarter 2022 financial results and full year financial outlook for 2022 on the call. This morning, we will be discussing baxter's first quarter 2022 financial results and full year financial outlook for 2022.
With that let me start our prepared remarks by reminding everyone that this presentation, including comments regarding our financial outlook for the second quarter and full year 2022, the recent acquisition of pillar on new product development.
Development and regulatory matters, including ones related to the 500 10-K review of the Novum IQ infusion platform 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 SEC filings for more detail concerning factors that could cause actual results to differ materially.
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 Hill ROM.
Before I turn the call over to Joe I wanted to let everyone know that the registration link for our 2022 Investor Conference, which is being held on Wednesday may 25th in Glenview, Illinois is now available on our website. Please visit the Investor Relations section of <unk> website to register for the event with that I'll now turn the call over to Joe.
Joe.
Thank you Claire and good morning, everyone and thank you for joining today's call I will get started with an overview of first quarter performance trajectory and a quick preview of what you can expect our upcoming Investor conference in May.
And we'll take a closer look at our financials as well as our outlook for the current quarter and balance of the year.
Then we'll close with request Josh as you know first quarter 2000, Twenty's jewelry represents our first full quarter since the close of Hill ROM acquisition I am pleased to report solid results for the combined company on both the top and bottom line, reflecting the ongoing momentum of legacy extra businesses as well as the early.
Promise and potential of our Hill ROM integration first quarter sales grew 26% on a reported basis and 29% at constant currency with legacy Hill ROM sales contributing $755 million to our total $3 7 billion in reported sales for the quarter.
<unk>, excluding the impact of Hill ROM and foreign exchange first quarter sales rose, 3% on an operational basis on the bottom line adjusted earnings per share up 93 increased 22% exceeding our guidance of 79 to 80, just SaaS performance in the quarter reflects the contribution.
Hey, Rob.
First quarter performance continued to reflect the ongoing erratic impact of the COVID-19, pandemic, which feel demand in some of our businesses, while dragging performance in others as average the diversity and durability of our portfolio in combination with our global footprint Act as buffers.
To help us weather the extremes and these factors are only bolstered with the added scope and opportunity created through the addition of Shiel, Rob we continue to see solid demand across both legacy Baxter and Hill ROM businesses, we are still experiencing <unk>.
That's back orders and backlogs due to the significant supply chain challenges that have made it increasingly difficult at times to access a range of raw materials and components, particularly electro mechanical components.
Literally we continued to experience increased inflationary pressures and rising freight costs, which have only intensified in the week of the war between Ukraine and Russia.
Our focus on efficiency and disciplined expense management has gone a long way to partially offset these challenges and I'm proud of our integrated supply chain team for its strategic removed in procurement and logistics, helping us meet the needs of patients.
<unk> initiatives, while helping to support sustained value and growth of our shareholders.
Taking a deeper dive by business performance was led by Biopharma solutions, which advanced 21% at constant rates.
It was driven by a favorable year over year comparison related to revenues from the manufacturer of multiple COVID-19 vaccines, our medication delivery business increased 10% at constant rates driven by growth in IV therapies. As you saw in this morning's release, we shared a status update on our <unk>.
Novum IQ large volume infusion pump with those ICU safety software, which has been under review by FDA. We received a letter from the agency last Friday with a request for additional information as a result of the <unk> review window has been placed on hold so that our team can address accordingly.
The team currently plans to respond to FDA within the calendar year, we remain on track to submit responses on the northern IQ syringe pump filings to FDA in the second quarter of 2022, I want to emphasize that while we can't speak for FDA or the eventual outcome of the review process. We are confident.
In our leading edge <unk> technology, we are committed to responding to fda's request and to bringing the benefits up novo Medicare to patients and clinicians in the U S and beyond.
Ben surgery performance was up 8% at constant rates driven by year over year improvement in the rate of surgical procedures. Following depressed rates due to the pandemic renal care rose, 1% at constant currency rates with a mid single digit growth in the U S, partially offset by a low single digit decline.
Internationally growth in the quarter was driven by global demand for our home peritoneal dialysis products, partially offset by lower sales of Dialyze internationally. As we have discussed previously BD patient demand has been constrained due to the pandemic through factors, including higher mortality rates for.
Kidney disease patients and the lower rate of new patient diagnosis, we remain confident of renewed uptake in PD therapy over the upcoming years as well as in the health and lifestyle factors that make home based therapy, a compelling choice for patients and clinicians clinical.
Nutrition also grew 1% at constant currency, reflecting improving demand for selected around throw nutrition products growth in the quarter was dampened by ongoing supply constraints for <unk> globally.
<unk> pharmaceuticals declined 2% at constant currency, reflecting continued increased competitive activity for certain U S generics as well as the impact of supply constraints that impacted production volumes during the quarter. We continued to focus on launching new molecules and complex formulations as well as embracing our international growth opportunities.
To help accelerate performance in the business moving forward finally, among our legacy business acute therapies declined 7% at constant currency, reflecting a challenging year over year comparison due to the last year's surging demand for continuous renal.
Our replacement therapy or CRT.
Products amid the pandemic.
Underlying performance in this product category continues to build momentum with the pandemic only further highlighting the vital role of CRT products in the ICU.
As I stated earlier, our newly acquired as Euro businesses contributed $755 million to sales in the quarter. Our global integration is proceeding on course, and we are starting to seize on key opportunities to expand global access to our growing portfolio as well.
Uniting our capabilities to expand our presence in connected care.
Looking ahead I want to note that our original outlook for 2022 did not anticipate the tragic outbreak of a war in Ukraine.
Conflict, especially disrupting our ability to serve patients locally although we are working hard to serve Ukrainian patients in refuges directly and through our humanitarian aid partners.
Also like many other companies assessing our profiling, Russia, although as a healthcare company. There are certain life sustaining products that we are continuing to make available to patients in line with current sanctions.
Conflict has also caused a ripple effect across the supply chain network globally, resulting rising oil prices, which we expect to negatively impact freight mature and utility costs. As this year. In addition, given the current timeline anticipated for Novum IQ, we have made the decision to remove any related sales contribution.
In 2022. These factors coupled with ongoing increased inflationary pressures have resulted in adjustments to our guidance for the balance of the year and as Jay will review in a moment. Our teams are working diligently to find potential offsets to these increased expenses and as we mentioned.
Last quarter, we have identified opportunities where it may be possible to best through some of these costs in select geographies wildly global macroeconomic landscape continues to presents unique challenges. We are nonetheless excited about our overall prospects <unk>.
And capacity to make a difference for our many stakeholders. We look forward to giving you a deeper insights on our trajectory next month at our 2022 investor confidence, we will share a broader look at our growth strategy fueled by advances in connected care as well as <unk>.
Our commitment to ongoing therapeutic innovation, we will also provide more detail on how expanded global access and uncompromising portfolio management should contribute to profitable growth.
In addition, we will highlight the rapid evolution of our integrated supply chain function as we work to address today's operational challenges head on and continue to evolve for the future you will see baxter's healthcare innovations firsthand at our interactive innovation.
Uh huh.
And as always we will be including planned tee off time for your questions and informal networking with our senior leadership team.
I look forward to seeing many of you in person in the event. We also be webcast for online viewing now ill pass it to Jay will take a closer look at our first quarter results and 2002 outlook.
Thanks, Joe and good morning, everyone as Joe mentioned, we're pleased with our first quarter performance, especially in light of the geopolitical unrest and macroeconomic headwinds, causing incremental supply chain challenges inflationary pressures and elevated freight costs. We're working through these headwinds with consistent focus.
On operational efficiency and disciplined expense management.
Turning to our financial performance first quarter 2022, global sales of $3 7 billion.
Advanced 26% on a reported basis, 29% on a constant currency basis, and 3% on an operational basis.
Sales came in at the high end of our guidance range this quarter with growth, reflecting recovery in hospital admission rates and elective surgeries to benefit from revenues associated with the manufacturing of Covid vaccines and strength in our medication delivery business, which benefited from growth of IV therapies as well.
Lower customer rebate costs during the quarter.
On the bottom line adjusted earnings increased 22% to <unk> 93 per share this compared favorably to our guidance of <unk> 79 to 82.
Per share driven by better than expected gross margins, which was driven by product mix as well as disciplined execution on cost synergies associated with the acquisition.
Now I'll walk through performance by our regional segments in key product categories note that constant currency growth is equal to operational sales growth for all global businesses and Baxter's three legacy geographic regions.
Starting with sales by operating segment sales in the Americas increased 5% on a constant currency basis sales in Europe Middle East and Africa grew 2% on a constant currency basis and sales in our APAC region were flat on a constant currency basis sales in our APAC region were negatively impacted in the quarter by the.
A resurgence of Covid cases in the region, particularly in China, we are continuing to monitor the situation in China and the potential impact on our operations from further lockdowns moves.
Moving on to performance by product category Global sales for renal care were $894 million, increasing 1% on a constant currency basis.
Performance in the quarter was driven by growth in our PD business as global patient volumes increased on a year over year debate basis. Despite persistent pressures from increased mortality rates in ESR D patients delays in new patient diagnoses and market wide staffing shortages. This growth is off.
Set by lower Dialyzer sales in our international in Center HD business.
Sales in medication delivery of $706 million increased 10% on a constant currency basis strong U S growth in this business reflects continued recovery in the pace of hospital admissions compared to pre COVID-19 levels as well as increased demand for IV administration sets and solutions.
Sales also benefited from lower customer rebates in the quarter for the quarter, we estimate that U S Hospital admissions were down low single digits compared to pre COVID-19 levels.
Pharmaceutical sales were $521 million declined 2% on a constant currency basis performance in the quarter was negatively impacted by increased competition for select molecules in our U S generic injectables portfolio lower sales of inhaled anesthetics.
<unk> related supply constraints, driven in part by labor shortages in certain of our manufacturing facilities.
Moving to clinical nutrition total sales were $227 million, increasing 1% on a constant currency basis performance in the quarter was driven by the benefit of new product launches within our broad multi chamber product offering.
Sales in advanced surgery were $228 million advanced 8% on a constant currency basis growth in the quarter reflected electric procedure recovery in the U S and Europe , we've seen recovery stall in our Asia Pacific Region, Australia, Korea, Japan, and Taiwan experiencing somewhat depressed levels of surgical volumes.
In the U S and saw surgical procedures come under pressure in January as a result of the OMA <unk>, but the income the impact on volumes with short list with procedural volumes improving into February and March our current assumption is for U S. Surgical procedures in the U S to remain above pre COVID-19 levels.
For the remainder of the year.
Sales in our acute therapies business were $188 million declined 7% on a constant currency basis, and reflecting a difficult comparison to the first quarter of 2021, when we experienced heightened demand for CRT given the rise in Covid cases.
Biopharma solutions sales in the quarter were $156 million representing growth of 21% on a constant currency basis, reflecting incremental sales related to the manufacturing of Covid vaccines, which sold approximately $45 million in the quarter for the remainder of the year vaccine sales are forecasted to be approximately 60.
Lower than prior year sales.
Hill ROM contributed $755 million in sales to the quarter, which included $383 million of sales and patient support services $294 million of sales in frontline care and $78 million of sales in global surgical solutions.
On a constant currency basis as compared to Q1 2021, when hill ROM as a standalone company. Its sales were flat year over year, reflecting the challenging comparison as sales in the first quarter of 2021 benefited from Covid related sales of approximately $40 million.
Moving through the rest of the P&L, our adjusted gross margin of 45% increased by 300 basis points over the prior year, reflecting the contribution of hill ROM within the quarter and lower rebate costs.
Adjusted SG&A of $855 million, representing $23, one as a percentage of sales an increase of 240 basis points versus prior year driven by the addition of hill ROM as well as higher freight expenses adjust.
Adjusted R&D spending in the quarter of $149 million represented 4% as a percentage of sale decrease of 30 basis points versus prior year.
Increased levels of SG&A and R&D spend reflects the contribution from Hill ROM, we're on track with our cost synergy target for the year and we're able to pull forward certain initiatives, resulting in a benefit to operating expenses in the first quarter adjusted operating margin in the first quarter was 18% an increase of 100 basis points versus.
As the prior year, reflecting the various factors I just discussed adjusted net interest expense totaled $85 million in the quarter, an increase of $51 million versus the prior year driven by higher outstanding debt balances related to the acquisition of Hill ROM given the current interest rate environment, We now expect net.
Interest expense to be higher than we had previously forecasted.
Other nonoperating income totaled $16 million in the quarter, an increase of $21 million compared to the prior year period, driven by foreign exchange gains and amortization of pension benefits. The adjusted tax rate in the quarter was 28% as compared to 16% in the prior period.
The year over year increase was driven by the addition of Hill ROM as well as the prior year tax rate reflected a discreet benefit the tax rate in the quarter was unfavorable to our expectations due to the mix of earnings within the quarter and as previously mentioned adjusted earnings of <unk> 93 per diluted share advanced 22% versus the prior year period.
<unk>.
Let me conclude my comments by discussing our outlook for the second quarter and full year 2022, including certain key assumptions around phasing for the year as Joe mentioned earlier, we have made the decision to remove any novum IQ infusion system sales in 2022, which is reflected in our updated sales outlook.
At this time, we are not able to offset the expected no in sales with spectrum as we are supply constrained on certain electromechanical parts for the spectrum pump. In addition to global macro disruptions emerging from new Covid outbreaks in China, The war between Russia, and Ukraine and continued supply chain.
Constrains across our network have created challenges to our ongoing operations, while we continue to evaluate opportunities to drive better efficiency in our integrated supply chain as well as pass through some of these costs to our customers. These factors have resulted in increased expenses, which are expected to negatively impact our results throughout the remainder.
Of the year.
These incremental branch expenses, which are primarily related to higher oil prices and increased inflationary pressures are reflected in our updated financial outlook for the second quarter of 2022, we expect global sales growth of approximately 26% on a reported basis, 29% to 30% on a comp.
Currency basis, and approximately 4% operationally and we expect adjusted earnings excluding special items of <unk> 86 to 89 per diluted share for full year 2022, and we now expect global sales growth of 23% to 24% on a reported basis 'twenty.
5% to 26% on a constant currency basis, and approximately 3% on an operational basis as.
As mentioned earlier operational growth for Baxter excludes the impact of foreign exchange and Hill ROM moving down the P&L, we expect full year adjusted operating margin to be similar to the prior year period for the full year. We now expect interest expense to total approximately $375 million and adjusted tax rate of <unk>.
19% to 19, 5% and a diluted average share count of 508 to 510 million shares.
Based on these factors, we now expect 2022 adjusted earnings excluding special items of $4 12 to $4 20.
<unk> per diluted share with that we can now open the call up to Q&A.
Thank you we will now begin the question and answer session. If you have a question. Please press the star one key on your Touchtone phone, if you wish to remove yourself from the queue press the star one key again.
We are using a speaker phone please lift the handset to ask your question.
So that we may be respectful of everyone's time. Please limit your comments to one question with one follow up question if necessary. 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, while the list is being compiled I would like to remind participants that this call is being recorded and a digital replay will be available on the Baxter International website for 60 days at Www Dot Baxter Dot com.
Our first question comes from Travis Steed with Bank of America Securities.
Hi, good morning, everybody.
Jay I'd love just to get a bit more of a bridge on the guidance changes here for the full year, both on the top line and the bottom line. It looks like a one point reduction in the revenue guidance Im just curious how much that's knowing my Q how much of its supply shortages and the same thing on the bottom line as well.
It looks like 25 cents difference if you account for the Q1 beat.
Sure.
From a revenue standpoint, really the entirety of the reduction relates to novum, we've taken out roughly $100 million in sales previous guidance was roughly 4% operational now were approximately 3% of course, there's always puts and takes as we put together our forecast, but we thought it was pre.
Under the circumstances to remove <unk> from the guidance and so youll see that reduction.
As far as as far as the forecast period goes we did make some more significant adjustments to the bottom line in light of the circumstances. We are currently faced with.
Oil is one primary driver Thats roughly an <unk> 11 impact we have freight headwinds excluding the impact of oil of roughly 11 and what this really comes down to is it's an incredibly tumultuous supply chain environment today and as the company looks to fulfill our mission to save and <unk>.
<unk> lives moving product around the world is increasingly complicated at the moment and so the result of that as roughly <unk> <unk> of incremental headwind from Q2 to Q4 outside of the oil impact that I. Just described and then finally securing parts and securing raw materials is also very very <unk>.
<unk> and roughly we're experiencing roughly <unk> of material inflation, you add to that the novum impact and you offset that by certain pricing actions were taken along with manufacturing optimization and improvements and that really what is what describes the change in guidance to the back portion of the year.
<unk>.
Okay.
That's great I'd love to hear a little bit more color on some of the pricing actions that you're taking that you just mentioned and kind of where in the portfolio youre doing that and.
The more shipping and freight cost that you are charging customers our actual price increases.
We have taken pricing actions.
Two customers in different geographies, where we can.
And while we don't Orient to specifics, where we did how much NOI customer, but we have taken pricing actions.
Okay.
Thanks Travis.
We'll move next to Robbie Marcus with Jpmorgan.
Hi, Thanks for taking the questions.
Maybe just start Jay to follow up on that I think.
Joe.
For you as well.
A lot of investors are trying to sift through the moving parts. There is a lot going on both on the topline and the bottom line.
The same time, there is a big integration going on so maybe you could just step back and walk us through.
You know how.
How you feel about let's call it that the underlying market fundamentals versus transitory headwinds and <unk>.
All while doing the integration how do you feel basically about the health of the markets and how Baxter is performing relative to them.
So Robbie thanks for the question overall, we feel very good about the durability of the business the long term potential to outgrow our markets. If you think about the first quarter performance that really is a classic illustration of how we performed.
We delivered solid sales growth 3%.
We're able to deliver ahead of our expectations on the bottom line, which was great.
All the while continuing to pursue the integration, which as Joe described and we can while I'm sure. We'll get into later is going quite well very happy with the acquisition of Hill ROM very happy with the opportunities that it opens up to us in terms of synergies and some of the end markets that it exposes us to.
So all of that is really a nice story.
We are faced with one of the most complicated supply chain environments I have personally seen.
The war in Ukraine, coupled with an already fraught supply chain creates very significant short term factors impacting our performance do I think we'll be talking about supply chain in two years I certainly hope not nor do I expect that that will be the case, but at least for the next nine.
<unk> as we see it there will be continued pressure on the supply chain and if you think about our mission.
That's our that's our primary focus, but it's more costly to do that in the short term I think over time, we will see oil prices ease I think over time, the complexity of moving product around the world will decrease and all of those things will accrue to the benefit of the long term story for Baxter right now.
It's some choppy waters that we're navigating and I think all of the teams, including in particular, our supply chain team are doing a tremendous drop in working through all of that Joe I don't know if you want to add anything to that would add.
We see our demand.
Our topline back quarter, our backlog very healthy backlog very healthy.
Our back order is all time high.
Even though we have strong demand we are sometimes are struggling to fulfill all the demand because the shortage of chips.
And microprocessors and the other electronics as a matter of fact.
Consume our top executives great deal of their time, either by speaking to a company Ceos in this area, we're trying to get product.
Ship more often to our factories. So this is not a unique problem to Baxter, but it shows that the top line when I see that level of demand you see is that our business is it resilience that Jay just outlined so I don't see a problem with the market dynamics I see underlying issues that Jay.
Outlined.
Somehow.
No short term debt will be with us throughout this year and I said that in the previous call. It this will take.
Quarters, two to be fixed and we think towards the end of the year. We may see some progress in that area. We also are redesigning some of our boards, where we're getting secondary raw material suppliers in place. So there is a significant amount of work.
The company not only for the short term, but also for the long term and create a resilience.
It will be with us for a long time.
Great.
Maybe one more to follow up on pricing. This is.
Your business has a lot of different products that go through a lot of different channels in contracts. Some are capital item summer our drug some are.
More supplies historically this has been a very difficult market to take pricing in.
But given.
The inflation shipping et cetera, what's the ability by each of the different businesses you participate into to put through pricing and is there any do you foresee any change in the go forward pricing environment.
Due to this.
But clearly the inflationary pressures on Baxter are very clear displayed here and we have taken pricing actions in selective markets why do I say selective markets because.
Some markets we have contracts that are long term you've got to take price section, sometimes you have to break the contracts and we evaluate case by case. This is not a blanket weird medical's tumor company that we are selling staple products.
<unk> direct to consumer so we can't just blanket raise prices everywhere. What we do is we raise prices, where we think is just and fair and we try to do it in a way that is that is.
Our social theater to the customer.
Legally possible. So there's all those will see durations that we've put in place.
It is a tough market at the moment and is a tough market for everyone. So we do what we can and were taking pricing where it is possible.
Great. Thanks, guys. Thanks.
Thanks Robby.
Larry <unk> with Wells Fargo has our next question. Please go ahead.
Good morning, Thanks for taking the question.
Just one on the margins this year and one on <unk>.
Turning to the upcoming analyst meeting.
Jay on the margins.
It's still it looks like the guidance implies second quarter margins down sequentially and then.
Get to the full year guidance it implies kind of a ramp in the second half so what drives that ramp.
Thinking about the cadence correctly and I had one follow up.
Larry you are thinking about the cadence of margins correctly.
Do you think about Baxter overall, historically, we see first half margins lower than second half margins looking at 2021. The margin went from 17% first half to 20% second half despite some significant issues with respect to inflation.
It impacted the second half of last year and a lot of that comes down to significant incremental revenue that we see in the second half of the year. So as we fast forward to 2022, you are right. We will see several hundred basis points step up from first half to second half and there's really a few contributing factors.
One the revenue step up that we anticipate seeing in the second half second incremental <unk>.
Synergy capture that accrues to the benefit of the second half and then finally, our manufacturing team is hard at work accelerating the pace of what we call VIP programs, but what are really about is <unk>.
Increasing the efficiency of our manufacturing facilities and really we will see some of those benefit more the second half than the first half. So you add those three factors together and the cadence of margin as you correctly pointed out will be similar to what it's been in past years.
That's helpful and then on the upcoming analyst meeting.
My question is one.
It is a volatile environment. So how are you going to factor that in and what when you did the hill ROM deal you guided to back to stand alone sales CAGR of 4% to 5% 300 basis point margin expansion and obviously, we know the hill ROM synergies you've assumed.
Question is kind of what.
What has changed Jay or Joe that you can share with us today to just help us calibrate going into that meeting and how are you going to going to approach kind of the long term outlook given the volatile environment that we're in thanks for taking the questions.
Sure I can.
Start Jay.
You can please.
Please come in.
We have a long range plan and a company that is drawn and takes into account several different factors, including the short term disruption affecting 2022.
In terms of supply chain, we have a forecast that we're going to tell you what our assumptions are going into their meeting we're going to Dell business, while we assuming things are happening. So while we present to you has a house.
All the numbers, we will have a footing on what are the assumptions that we're making.
<unk> world today in terms of supply demand.
<unk> seen in August things, including commodities and other things. So we will be prepared to disclose that at the time of the meeting.
No that's exactly exactly right, Joe and I think we're going to try to put forth conservative assumptions, but what we see today is an incredibly volatile world and to that effect will want to share. Some details around what are we assuming around the price of oil over the years and we're going to try to have the best intelligence around that is.
Assumption as possible as.
As far as what's changed really the integrity of the businesses that we have acquired.
Is fully intact and we feel very good about the long term potential of both platforms and I should say the combined platform. We look to feature of that and we're very excited to share our perspective on that when we sit down.
In the short term we've seen massive this supply chain disruption that really is the most significant factor that is different from September to today things like oil price things like freight and logistics challenges the global supply chain really those are the issues that we're contending with at this point.
And we will try to have a point of view on that as well. So really that's the approach that we're going to take Larry and we look forward to seeing you in Chicago in a month.
Thanks for taking the question.
We will go next to Peter Chickering with Deutsche Bank.
Hey, good morning, guys. Thanks for taking my questions.
Just going back to the question on the impact from oil.
Quantified.
Of oil lenses of freight eight tenths of material pressures just can you sort of give some more color on sort of the cadence of the timing throughout the year and these ceilings updated guidance in your release serve in the back half of the euro versus the prices were seeing today.
Yes.
We really have not forecasted relief this year, we've taken roughly a $100 barrel of oil and are looking at that through the rest of the year and we're also anticipating some level of complexity with respect to the supply chain along with challenges procuring.
Components and raw materials for the balance of the year the way, we see it there could be some easing of oil prices over time, but we think probably that benefits more 2023 and 2022. The other fact that you have to keep in mind is there is there is a law.
Lag between <unk>.
Alleviation of oil price and when we see that in the P&L said another way our Q1 benefit our Q1 was not that negatively impacted by the movement in oil price that occurred during Q1 that really impacts the period from Q2 to Q4. So I think the way we see it Peter we're going to see.
We're going to assume challenging levels for the balance of the year and then we're optimistic that this sorts itself out towards the end of 'twenty, two and into 'twenty, three but we're cautious about that.
Okay, and then for a follow up like you talked about backlogs for sourcing micro chips and in others. In other products can you sort of size up the size of that backlog has it gotten bigger in April and what do you assume in guidance in terms of working down that backlog and then and then any color you can give us on China on both revenues and manufacturing in China.
With all the kind of the lockdowns occurring there. Thanks, so much.
Sure, we don't really get into backlog by specific product area, what I can tell you and nor do we get into <unk>.
Product line availability and components impacting specific product lines, what I will tell you is.
Were very tight in terms of spectrum parts as I commented within my prepared remarks, and as a result of that we're not able to see some of the offsets that will perhaps we've seen in the past with respect to novum delay. So that's one factor.
In the first quarter, we did have some backlog with respect to the Hill ROM products, we expect those things to sort out over the course of the coming months, but again with availability of product, we're always careful and cautious about watching this closely as it relates.
To China.
The big the Lockdowns that we've seen there we expect roughly a 15% to $20 million impact to sales, obviously, our hearts go out to them.
All of our employees in China, who are really doing yeoman's work on trying to ensure that we get product out of the manufacturing facilities and we have folks that are staying in plans overnight.
So that they can secure product and get product out, but from a demand standpoint, and a supply impact we're seeing roughly 15, perhaps $20 million impact as it relates to those measures.
Expect those some of that occurred in Q1, we expect some more of that to impact Q2, and then we are expecting that to alleviate later in the year, that's really the story on China.
Great. Thanks, so much thanks.
Thanks Peter.
We'll move next to Daniela and TLC and SDB Leerink.
Hey, good morning, everyone. Thank you so much for taking the question.
Just one question on the Nova platform I'm, just curious Joe if you.
Delay here if that changes your view of the potential longer term or even in the mid term one the platform does launch in the market share gains that Baxter should be able to get and then I have one follow up.
Good morning.
We have risk.
We've the ladder, we understand what needs to be addressed.
We plan to address towards the end of the year languages.
In our prepared remarks.
Addressing.
Sure.
The request.
Does not change the faith they have in the product line.
We have this product currently work in Canada.
And as from my perspective, a great product, we have tremendous respect for what the agency says don't speak on behalf of the FDA. So we're working very closely to make sure that we.
Ken.
Yes.
Outstanding.
The issue as soon as we can in that stores at the end of the year.
I have faith and platform, we designed it from scratch.
Product electromechanical product designs by Baxter from scratch, we've put the resources in place and we still are very optimistic about what it can do in the marketplace. So it's a great technology and business my opinion and I hope that we can get this clear.
Towards the end of the year.
Okay got it that's good to hear and then just one Hill ROM I was wondering if you could touch a little bit more I know, it's early days still but.
How it then.
From a sales synergy side or maybe how you guys are seeing any changes in the sales process with Hill ROM.
As part of the product portfolio today, just broadly speaking thanks, so much.
Great Danielle Thanks for the question.
We're really pleased with how things are going with respect to Hill ROM I think what we're finding is a company, whose culture aligns very well with Baxter.
As we explore the products more and we're increasingly excited about the product line and portfolio that they have some of the innovation that they are undertaking as we think about our ability to commercialize their products and drive things like synergies. We're also really excited about those kinds of opportunities and then five.
Finally from a cost synergy standpoint, things are going as well or better than we originally anticipated. So from our standpoint, all signs are up with respect to hill ROM and we feel very excited about the deal that we put in place.
As far as revenue synergies go I think we will outline when we see you in May a few categories that we're increasingly excited about.
Things like geographic expansion things like product synergies some of the promotional opportunities that we see.
Some of the new products that we can develop there's a number of categories that we'll outline for all of you at our Investor day, but it's safe to say that.
There is real opportunity and I. Just recently spent some time with some of our international teams talking about the distribution opportunities that exist and the reality is they are there we have a global footprint, we sell products around the world in over 100 countries with direct presence in most of those countries.
Hill ROM doesn't have that level of footprint in place and there are select products that can really benefit from that kind of promotional effort. So we're excited about it.
Hope to see you in.
Again, we'll talk about all of these categories in more detail, but I think it's a really nice long term story that we're putting together here.
Thanks, Paul.
Thanks Danielle.
Joanne Wuensch with Citi has our next question. Please go ahead.
Good morning, and thank you for taking the question.
Q.
Curious about your thoughts on the pathway for the renal recovery. It sounds like you do expect it to come but overtime and I'd love to know how you plan to get there.
Dania.
Joanne how are you.
Al.
We are experiencing a moment of <unk>.
Reduction.
In the patients in renal due to the two years of Covid.
Fact that the number of patients who died or at risk.
And.
Yes, sorry, deep patients or potential patients. So we're starting to see the pickup of the patients in PD at the moment.
We see that continue on primarily in the U S and Americas.
Do we need to see that coming in through Europe .
Each of these patients, we see that more and more.
As more lingering effects of the pandemic, so BD separating BD from HD or peritoneal dialysis from hemodialysis, we CPD recovery throughout this year and peaking up full momentum probably in 2023.
Thank you and as a follow up I'm curious, what youre thinking about hospital volumes for the remainder of the year.
And we see a recovery coming in and Theres going to be a rebound.
So we project to see a rebound.
In surgical volumes their hospital volumes in.
Most places that we do business today ex Asia, I think I think in China, we need to watch what's happening in terms of their lockdown and how we're able to react to that as well as in.
In Japan.
But ex those two large markets, we see other markets picking up momentum and the demand. There was there was suppressed coming back up.
With volumes above.
Last year end.
Probably at or above.
Pre COVID-19 .
Times.
Thank you very much.
Thank you.
We'll move next to Joe Raineri at Morgan Stanley .
Hi, Joe and Jay Thanks for taking the question just to go back on Hill ROM for a second.
If you adjust out for the Covid benefit, it's 5% growth even in the patient support systems business. It looks like it was closer to 7% growth.
So kind of better than expected, but within PSS can you maybe go into some detail about what youre seeing from the hospital component and the connected care component as well.
Kind of given the light that some hospitals might be pulling back on capital expenditures just kind of curious what youre seeing in this quarter and kind of what you're expecting for the remainder of the year in those franchises. Thank you.
We're going to have just that but to answer that.
Yes, so I think bringing constant DSS.
Yes.
Continuous and strong.
<unk>.
On the care communications side.
Telecommunication is mainly strong platform with unique unique.
Unique features.
From a nurse call system.
So over there we see.
A strong demand.
This demand is difficult to implement has been difficult to implement due to the COVID-19 .
In fact, so our access to the hospital.
Talking about the cost of what we see is a very healthy backlog when it comes to care communication.
To the.
The overall PSS system.
Okay. Thank you.
Thanks drew.
We'll move next to Matt <unk> at Credit Suisse.
Great. Good morning. Thanks, so much for taking the questions. Just a couple of follow ups, if I could Jay or Joe on how Youre thinking about some of these factors in your guidance one is China.
I had a couple of times that if maybe you could give.
Give us a sense of how your what assumptions you're baking into the sort of easing of the lockdowns there as it happened in the second quarter or is that sort of.
And in the back half by your estimation and guidance and then the other is FX we've seen.
Significant moves in FX.
That did some some folks in our universe more than others and just would love to get a sense you have some other major moving parts that you describe Jay that makeup the guide change but.
But maybe talk a little bit about how you're managing through or what the impact of changing FX has been thanks.
Sure.
As it relates to China, our expectation is that the situation improves not in the second quarter, but into the third and fourth quarters. Obviously, it's a complicated situation that they're dealing with and we do expect some improvement occurring later in the year just for your for your benefit.
The impact of the Lockdown in Q2, we expect roughly around $10 million and similar impact level in Q1. So we don't have any improvement baked in until.
He'll later in the year.
As it relates to foreign exchange.
We are expecting relative to prior year, we're talking about roughly five six.
Sense of impact, maybe a little bit more than that and relative to our previous expectations, which we shared with you in February we're off several cents from that now this is a very.
Highly volatile situation and even as of yesterday, we were seeing substantial movements in the Euro we'll watch this very closely but right. At this point, we have several cents of impact relative to the prior forecast we will continue to monitor this.
Thanks, so much.
And we will take our final question from Vijay Kumar with Evercore ISI.
Mr. Kumar. Your line is open you may be muted.
Hey, guys. Thanks for their <unk>.
Again, I hate to part maybe.
Maybe I'll ask both of them.
One when I look at the guidance here.
First half is $2 five operational at the annual implies.
And a half in the back half.
Given that the utilization is improving in the back half life, two and a half the right number and I understand normally put out if we didn't have no my queue in first half. So maybe talk about first half versus second half cadence.
<unk>.
On the supply chain costs is there a simplistic way JF thinking about when I look at.
All of the accumulated costs that Baxter is incurred.
Over the course of the pandemic is there a way to quantify the costs versus pre pandemic levels. What are the different buckets that they went into raw materials versus any manufacturing investments versus transportation. Thank you.
Yes.
Great. Thanks for the question Vijay.
As it relates to the second half versus first half sales guidance.
I will tell you is that the primary drivers are a reduction in vaccine sales as anticipated along with the removal of Nov.
With no offset because if you think about last year, we had very strong spectrum sales in Q3 and Q4 of last year.
And we don't have we don't have that available that lever available to us as we look at the second half of this year, which is why Joes comments around our intense focus to get <unk> approved.
Really a core focus of our organization and our R&D team. So those are really the drivers as far as changing of cadence. Most other factors I would say are kind of moving along similarly, although we did see some heightened level of medication delivery sales in the first quarter of this year that was a bit anomalous.
And we do expect that to.
Lower as we approach the back portion of the year. So really that's the story on the on the sales line.
As it relates to supply chain cost that we're experiencing inflationary pressures that we're experiencing over the last several years from from 2019 or 20 through to today now we're talking about half a billion dollars of incremental cost that were experienced.
And really it's things like increased labor cost increased material cost and freight cost that is driving this substantial uptick.
What's interesting is despite that very significant number we've been able to offset an enormous amount of that through manufacturing Vips as I described earlier through operational performance some of the pricing mechanisms that.
<unk> described earlier. So this is Vijay this is a really significant number that we're faced with.
Frankly, what I am.
Somewhat optimistic and even excited about is as those pressures alleviate you'll get to see the momentum with respect to all of the operational efficiencies and enhancements that we are undertaking without that offset.
That's what we're working towards as Joe and I mentioned I don't think I think we're going to contend with some of these pressures for the rest of the year, but I am hopeful that we start to see some benefit as we move to next year.
So thank you very much for the question.
That's extremely helpful. Jay Thank you.
There are no further questions at this time, ladies and gentlemen. This concludes today's conference call with Baxter International Thank you for participating.
Please wait the conference will begin shortly.
Okay.
Okay.
Yes.
Okay.
Yes.
Okay.
Sure.
Okay.
[music].
Okay.
Sure.
[music].
Sure.
Okay.
Okay.
Yes.
Yes.
Yes.
Sure.
Yes.
Okay.
Okay.
Okay.
Yes.
Thanks.
[music].
Yes.
No.
Yes.
Yes.
Okay.
Yes.
Okay.
Sure.
Okay.
Yes.