Q2 2022 Baxter International Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to Baxter International's second quarter 2022 earnings Conference call.
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I would now like to turn the call over to MS. Claire Trackman, Vice President Investor Relations at Baxter International.
MS. Trackman you may begin your conference.
Good morning, and welcome to our second quarter 2022 earnings Conference call. Joining me today are Joe Almeida, Baxter's, Chairman and Chief Executive Officer, and Joseph Carl <unk>, Chief Financial Officer on.
On the call. This morning, we will be discussing Baxter's second quarter 2022 financial results and our 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 third quarter and full year 2022, and our 2022 to 2025 long range plan. The recent acquisition of Hill ROM new product developments the potential impact of proposed price.
Accent business development and regulatory matters contain 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 adjust for the impact of foreign exchange and the acquisition of Hill ROM now I'd like to turn the call over to Joe Joe. Thank.
Thank you Claire and good morning, everyone. We appreciate you joining today's call I will begin with an overview of the macroeconomic factors that have and will continue to impact our performance in 2022.
And provide some commentary on the second quarter, Jay will take a closer look at our financials and outlook after which we will open up your lines for your questions.
I want to start by thanking many of you for joining us at our 2022 Investor conference whether in person or virtually our goal was to share our strategies to drive leading edge of health care innovation create compelling value for patients clinicians employees and investors.
Was also a great opportunity to showcase hold the acquisition of Hill ROM is helping power. The next phase of our transformation journey by fueling connected care innovation, expanding the global reach of our combined portfolio and growing our presence across the continuum of care.
Our innovation Hall offered a firsthand look at how this momentum is already coming to life in tangible ways in hospitals homes and physicians offices worldwide.
With respect to our current environment overall demand remains strong across our combined portfolio at the same time, we're experienced significant back orders and backlogs where certain products due to ongoing supply chain challenges like those impacting industries globally. This is affecting excess towards variety of raw materials and components.
Including electromechanical components used in many of our products securing these necessary components has resulted in incremental spot purchases with costs that are meaningfully above and beyond what we had anticipated earlier. This year. In addition to delays in receiving Mandy.
These materials and or components have forced unplanned temporary shutdowns in our manufacturing facilities, which negatively impact our absorption rates taken together the negative impact of disease increased spot purchases and temporary shutdowns will primarily be realized.
In Baxter's results during the second half of the year. In addition, ongoing inflationary pressures coupled with increased freight expenses, primarily driven by the rapid rise in diesel and jet fuel prices has created incremental pressure.
On the cost of doing business for the company as the quarter progressed, we saw both diesel and jet fuel prices diverging from crude oil increase it at a much faster pace historically changes to both diesel and jet fuel prices have trended in line with the degree of change.
In crude oil prices and with our mission to statements sustained lives. We will never compromise on doing what is right to address the urgent needs of the patients and clinicians that depend on us. These means utilizing more expedited shipping channels than anticipated as we work.
Relentless lead to ensure products get to where they are most needed. It also means carrying higher levels of inventory than normal as many of our raw materials and finished goods are held up in transit given ongoing global supply chain challenges.
At our Investor Conference you heard some of the significant actions we have been implementing in response to unprecedented challenges our actions reflect the unrelenting commitment to operational excellence. There has been a signature of our multi year transformation.
This tenacity is helping us navigate and mitigate near term pressures to the degree possible as we stay focused on driving long term value and growth for our shareholders and other key stakeholders as always we remain committed to ensuring we have the optimal cost structure and to that end.
We are actively identifying opportunities to further optimize our expense base to enhance performance, including pulling forward certain hue ramp cost synergies given the significant increase in costs that we have absorbed and continued to incur in the production and delivery of our portfolio of <unk>.
Saving products, we are preparing to pass through a portion of this incremental cost to our customers in the second half of 2022 and beyond.
Shifting now to our second quarter financial performance, which is the second full quarter since the close of our Hill ROM acquisition sales for the quarter grew 21% on a reported basis and 26%.
Constant currency rates legacy Hill ROM sales contributed $715 million to our total $3 $7 billion in sales for the second quarter, excluding the impact of Hill ROM and foreign exchange second quarter sales increased 3%.
On an operational basis on the bottom line adjusted earnings per share of <unk> 87 were up 9% year over year growth on both the top and bottom line continues to be constrained by the macroeconomics factors shared previously.
That said performance across our businesses in the second quarter reflects our overall positive trajectory amid the broader state of the market demand. These include solid growth at constant currency rates in renal care medication delivery pharmaceuticals clinical nutrition and advanced.
Surgery.
With specific regard to pharmaceuticals, I'll want to flag that we are continuing to experience price erosion in the U S due to generic competition.
Well there is some pressure from supply constraints and a shift in demand for inhaled anesthesia as we noted at our Investor Conference. We are continuing to emphasize differentiated generic formulations and packaging as well as international opportunities to drive growth for this.
Business moving forward.
Im also pleased to share that a look sonic joined US a few weeks ago as our new president of Pharmaceuticals.
<unk> brings to Baxter more than 25 years of experience in the life Sciences industry. Most recently, serving as the U S CEO and global head of research and development and Biosimilars and we are excited to welcome a look to the team and look forward to realizing that.
Benefits of the experience he brings to this business.
Acute therapies and Biopharma solutions declined mid single digits year over year at constant currency rates, reflecting a challenging comparison to last year due to pandemic related sales for both of these products categories as compared to Q2 2021 win.
Our newly acquired Hill ROM business was a Standalone company its sales rose low single digits at constant currency rates. This demand reflects mid single digit growth in frontline care offset by softness in patient support systems and global surgical solutions sales in all three of the legacy Hill ROM business is.
Have been impacted by significantly higher than normal backlogs, reflecting challenges in accessing components as well as delays in certain product installs because of hospital staffing concerns and challenges on a positive note. Our integration process continues to proceed rapidly with key my.
<unk> is on track or ahead of expectations and as you saw at our Investor Conference. We are moving swiftly on our opportunities to expand access across our combined portfolio and embrace our heightened potential in connected care now looking ahead given the fat.
As I outlined earlier in my remarks external conditions expectations and the market's ability to project Trans continues to evolve rapidly both upstream and downstream even in the months between our Investor Conference and today and this is impacting our business as such we're adjusting our guidance.
For the balance of 2022 is indicating our press release, Jay will share additional commentary in his remarks at the same time, we continue to foresee long term established nation of conditions, given anticipated established Asian, and our updated 2020 to guidance I want to reiterate my.
Confidence in our long term outlook and prospects as provided in May.
Baxter has proven its resilience and again over the course of its 90 plus years, our durable portfolio focus on essential care, a vast global footprint remain the strategic core of our underlying strength and stability.
The acquisition of Hill ROM has expanded the scope of our essential portfolio and has also created additional opportunities in connected care. They are vital to accelerating our future impact as a healthcare leader and innovator.
Finally, I hope that you have had a chance to review <unk> annual corporate responsibility report issued in June you highlights our progress toward our 2030 corporate responsibility goals, which reflect our commitment to empower patients protect our planet and champion our Pea.
People and communities. If you have not yet had the opportunity you can find the report posted on our website.
<unk> Dot com now ill pass it to Jay to share more on our performance and outlook.
Thanks, Joe and good morning, everyone as Joe mentioned, we're continuing to navigate a dynamic and ever changing macro environment. This near term volatility has created certain challenges for our business and led us to lowering our full year outlook, but we're committed to working through these headwinds and delivering on our long term commitments office new.
Base, most importantly demand for our Baxter products remained strong and our integrated supply chain and commercial teams are working tirelessly to get products in the hands of our customers and patients to fulfill our mission.
Turning to our financial performance second quarter 2022, global sales of $3 7 billion advanced 21% on a reported basis, 26% constant currency and 3% operationally as the U S dollar strengthened over the quarter foreign exchange negatively impacted reported sales by approximately 500 basis.
And as Joe mentioned sales within the quarter were constrained due to lack of both raw materials and component availability, particularly as it relates to electromechanical components.
Second quarter sales were also impacted by a lack of hospital access which is needed to install select products, particularly in our patient support systems product category.
We estimate these constraints negatively impacted sales by over 300 basis points in the quarter.
Compared to the prior year period operational sales grew 3%, reflecting a gradual recovery in hospital admission rates and elective surgeries strengthen our medication delivery and nutrition businesses and solid growth in PD.
On the bottom line adjusted earnings increased 9% to <unk> 87 per share falling within our guidance range of 86 to 89 per share now.
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 operational segment sales in the Americas increased 2% on a constant currency basis sales in Europe Middle East and Africa grew 6% on a constant currency basis net sales in our APAC region increased 1% on a constant currency basis sales in our APAC region were negatively impacted in the quarter by the resurgence of coal.
<unk> cases in the region, particularly in China, which we estimate was an impact of approximately $15 million.
Moving on to performance by key product category global sales for renal care were $931 million, increasing 2% on a constant currency basis performance in the quarter was driven by solid growth in our PD business, where we observe both a sequential and year over year improvement in global patient volumes.
This growth was partially offset by lower in center HD sales, partially due to HD monitor supply challenges due to component availability.
Sales in medication delivery of $710 million increased 4% on a constant currency basis growth in this business reflects strong global demand for our products and our IV therapy portfolio. This was partially offset by lower sales in APAC driven by Covid related lockdowns in China, and the resulting impact on utilization this product.
Category was also impacted by lower sales of large volume pumps in the quarter due to constrained demand from the lack of component availability.
Pharmaceutical sales of $528 million grew 3% on a constant currency basis performance in the quarter was driven by increased sales internationally for inhaled anesthetics offsetting increased competition within our U S generic injectables portfolio as well as supply constraints for select molecules moving to clinical nutrition.
Total sales were $230 million, increasing 4% on a constant currency basis.
Performance in the quarter was driven by demand for our broad multi chamber product offering vitamins and automated compounding.
Sales in advanced surgery were $263 million advancing 8% on a constant currency basis growth in the quarter reflects continued gradual recovery of elective procedures in the U S and Europe as well as strong demand for <unk> given competitive constraints recovery in our APAC region remains subdued with several countries experiencing somewhat.
Pressed levels of surgical volumes.
Sales in our acute therapies business were $173 million declining 4% on a constant currency basis, reflecting the difficult comparison to the prior year period, where we experienced elevated demand for TRT given the rise in Covid cases, Biopharma solutions in the quarter were $163 million declining 5%.
<unk> on a constant currency basis, and reflecting an expected step down in sales of Covid vaccines compared to the same period last year.
Covid vaccine sales for the quarter totaled approximately $35 million Hill ROM contributed $715 million in sales in the quarter, which included $364 million of sales in patient support systems $282 million of sales in frontline care and $69 million of sales in global surgical solutions Hill ROM grew 2% on a constant.
See basis as compared to Q2 2021, when the company was a standalone entity. Despite solid growth in the quarter sales came in below our expectations largely due to the supply constraints for electromechanical parts, primarily implant packaging frontline care as well as select delays in product installations in patient support systems and global surgical.
Solutions due to lack of hospital access.
As a result, we're experiencing unprecedented levels of product backlog throughout these businesses.
Demand remained strong, though and we'll continue to monitor the situation and work this backlog as rapidly as possible and while to date, we haven't yet seen an impact on the flow of capital orders. We are taking a more conservative approach for the second half given delays related to hospital staffing challenges as well as more cautious commentary from customers.
Regarding hospital Capex.
Moving through the rest of the P&L, our adjusted gross margin of 42, 5% decreased by 10 basis points over the prior year, reflecting the impact of increased expenses, primarily driven by inflation in freight adjusted SG&A of $839 million represented 22, four as a percent of sales an increase of.
150 basis points versus prior year, driven by the addition of Hill ROM as well as higher freight expenses, partially offset by lower bonus accruals under our annual employee incentive compensation plans adjusted R&D spending in the quarter of $148 million represents 4% as a percent of sales a decrease of 50 basis points versus prior year.
Adjusted operating margin in the quarter was 16, 2% a decrease of 100 basis points versus the prior year, primarily driven by incremental freight expenses in the quarter, resulting from fire higher fuel prices and inflation, partly offset by actions, we are taking to improve productivity and reduce spend adjusted net interest.
<unk> expense totaled $89 million in the quarter, an increase of $55 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 slightly higher than we had previously forecasted.
Adjusted other non operating income totaled $33 million in the quarter, an increase of $31 million compared to the prior year period, driven by foreign exchange and equity investment gains as well as the amortization of pension benefits. The adjusted tax rate in the quarter was 18, 8% as compared to 17, 8% in the prior period the year over year.
Increase was driven by the addition of Hill ROM as well as lower stock based compensation award deductions as compared to the prior year period and as previously mentioned adjusted earnings of 87 per diluted share advanced 9% versus the prior year period, Let me conclude my comments by discussing our outlook for the third quarter and full year 2020 to incur.
<unk> some key assumptions underpinning our revised guidance as discussed throughout the second quarter Baxter experienced increased inflationary pressure related to fuel commodity and labor prices. Our prior outlook did not assume the divergence we're experiencing between diesel and crude oil, but did assume an easing commodity pricing in line with external indices forecasts.
Our current outlook now assumes pricing for these key raw materials remains at current levels for the remainder of the year, we anticipate component availability remains challenging through the second half of 2022, which will continue to impact our overall production volumes and absorption rates.
We anticipate our order backlog will stay at elevated levels, resulting in a phasing impact topline sales primarily for infusion pumps in the frontline care business. Our teams are working tirelessly to secure key electronic components to lower our backlog to more normalized levels. In addition, we project a potential.
Slowdown in hospital capital spending in the second half of the year, which will impact our PSS and GSS businesses.
For the third quarter of 2022, we expect global sales growth of high teens on a reported basis mid twenties on a constant currency basis, and low single digits operationally and we expect adjusted earnings excluding special items of <unk> 79 to 83 per diluted share for full year 2022, we now expect global sales growth of high teens.
Our reported basis mid twenty's constant currency and 2% to 3% operationally as mentioned earlier operational growth for Baxter excludes the impact of foreign exchange and Hill ROM the reduction in our sales guidance reflects increased foreign exchange headwinds.
Lower sales outlook for our pharmaceuticals business and the legacy Hill ROM business.
Moving down the P&L, we expect full year adjusted operating margin to be between 17% to 17, 5%, reflecting the impact of all the various macroeconomic dynamics I've discussed today for the year. We now expect interest expense to total approximately $400 million.
Given rate increases and adjusted tax rate of approximately 19% and a diluted average share count of approximately 510 million shares. In addition, we expect the incremental FX topline headwinds will negatively impact earnings per share by approximately <unk> <unk> in the second half of the year.
Just on these factors, we now expect 2022 adjusted earnings excluding special items of $3 60 to $3 70 per.
Per diluted share.
With that we can now open the call up to Q&A.
Okay.
Okay.
Thank you we will now begin the question and answer session.
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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.
Okay.
Our first question comes from.
Robbie Marcus.
Great.
Good morning, and thanks for taking the questions.
Maybe to start Jay and Joe Theres, a lot of moving pieces and we just had the analyst day in May So I was hoping.
Maybe you can bucket for us the biggest changes from.
When you first gave guidance in January EPS is now about a 15% lower how should we think about the biggest impacts how many are transitory and how much of that is would you say more semi permanent are permanent.
Sure.
Ravi I'll start by answering this question in relation to the guidance that we shared in April and then I'll add some additional commentary as it relates to what changed since may because I think that's perhaps the easiest way to do it but if you think about Q2 from an earnings standpoint, largely came in line with our expectations in the <unk>.
Collection of that was a bit different but really the big driver of this relates to the second half of the year, where we're reducing the outlook by over 45.
And I think there are a few different component pieces to this first of all from a commercial sales standpoint.
Had serious constraints related to electromechanical components, along with other raw materials. The result of that is R. Hill ROM business is off over $100 million in sales in large part because of these constraints were also seeing some pharma pricing.
That's been challenging on the Baxter side. So in combination the commercial sales has impacted us roughly 15, SaaS, maybe a little bit more than that with the lion's share of that impact related to product shortage and component shortages now on the offset side to that we are offsetting.
With lower spending lower bonus accruals and so the work that we're doing in terms of P&L preservation is offsetting that Miss and it's all it's also offsetting a <unk> <unk> FX headwind in the second half of the year.
The major impact comes down two headwinds that we're experiencing in our integrated supply chain.
We have a roughly 45% impact in the second half of the year and it's across a number of factors higher fuel rates and freight rut.
Roughly 15 of impact some of this has to do with the decoupling that was described between diesel prices and the oil price of oil that we started to see and that has continued through the second quarter. Some of it has to do with the fact that because our supply chain is so strained we are forced to expedite.
Freight and use.
Our Hyatt, we are experiencing significantly higher outbound freight and inbound freight than we normally would experience.
From an inflation standpoint on materials, it's roughly <unk> and.
And other inflation related to labor and utilities and overhead is for.
We had been hoping for some improvement in these categories, but frankly, we've seen elevated levels in Q2 remain elevated.
As a result, we see a roughly <unk> <unk> impact in these inflationary categories and then the final piece and it's substantial relates to the productivity of our facilities were off roughly 20 cents of impact and what this what this comes down to is our supply chain really.
Lives on critical components from our suppliers in order for us to produce the products that we produce there have been many instances, where we are not able to secure electromechanical components other components necessary to our manufacturing products were critical raw materials and so the result.
<unk> of that is this is the first time in my career Ive seen numerous unplanned stoppages in our facilities as a result, and it's having a dramatic impact on a couple of things first on absorption levels in those facilities. That's obvious but in addition to that in terms of our ability to pursue plan.
Ips it seriously hampered and impacted by our ability to continually run those facilities.
Just to share a couple of examples.
We have a manufacturing facility in hedging in Germany, and that's a that's a that's a manufacturing facility that produces dialyze yours on a continuous basis. Its a continuous flow plan. So disrupting that is a real serious deal as you think about the operational efficiency of that we've been forced to shut that.
Plan for three days as a result of lack of power coming from the company that we deal with in Germany.
Our north Cove manufacturing facility, our flagship facility.
Recently had to close for a shift as a result of lack of critical components are our facility and skinny Atlas has been running sub optimally we had anticipated that that would improve it is not.
<unk>.
Our facility that manufactures pump Sigma spectrum, we have been running at very low levels if at all.
Because of lack of electromechanical devices. So Ravi.
It's an insurance interesting and very challenging confluence of events and it's an incredibly volatile dynamic that we're experiencing as we look at our supplier base, but in combination these headwinds have impacted us 45.
Now the good news is operationally, we see a path forward I commented that from a long range plan standpoint.
Assuming things stay at these levels, we have a pathway to the improvements that we outlined.
I am certainly hopeful that we see easing of electromechanical components, along with some of the prices that I've discussed along with the normalization of freight lanes and freight times and the impact so I'm optimistic that all of those things will occur but in the short term, we're not anticipating that.
And we've made we've made necessary adjustments to our cost structure to offset as much as possible. So really that's the story now as we think about what's changed since may.
In May every one of these categories on the supply chain that I've described and most prominently some of these disruptions that we're seeing.
Those are the things that have changed the most since may and so it's been widespread and a very difficult environment. I think we have I think we have put forth. The best forecast available. The most realistic conservatively realistic forecast available, reflecting what current prices are what our current understanding of plant.
<unk> downs will be but it's been a very dynamic environment that has led us to this place.
Thanks for that.
Color and maybe just as a follow up Jay at the Analyst day, you talked about.
And the new L. RFP that you think a floor of 75 basis points of margin expansion.
Would I guess would be the floor over the L. RFP.
Do you think that still holds given the new.
The new environment or or does there may be some changes to that comment.
We do Ravi we went through an analytic exercise based on the evolution of the environment.
Over the last four to six weeks, we went through an analytic exercise and re looked at first of all the overall quantum of improvement over the <unk> to $3 50 to 400, the expected sales compounded growth rate of 4% to 5% along with the free cash flow conversion, we looked at all of that in addition, we looked at.
2023, and the statements that we made we validated all of those statements that those are intact relative to where things currently set so.
Based on these chat the challenging environment that we've experienced I was pleased that we're able to confirm that at this point.
Listen.
European gas gets shut shut off in the winter if that situation exacerbates and takes a further toll a further step down on the chart supply chain, who knows what will happen, but as we sit here today based on what we know and the current rates and the current expectations around chips and so on we feel good.
About the long range plan commitment, albeit starting off a lower base.
Great. Thanks for taking the questions.
Thank you.
Vijay Kumar.
<unk> of Evercore.
Is on the line with a question. Please state your question.
Hey, guys. Thanks for taking my question.
Jay just on off of those last comments you just made on.
Affirmation of <unk> plan I think the <unk> had 350 to 400 basis points of margin expansion I guess my question is.
Expansion or what baseline are we looking at.
2022, as the baseline I think the updated guide implies.
Op margins. So if you could just clarify that I think that'll be helpful.
Sure the updated <unk> off the lower base. So it wasn't a relative improvement from 2020 to Vijay.
BJ the factors that I listed the 45.
We expect that a number of them will be transitory, but as we've thought about the modelling. We really don't have enormous easing of some of these constraints that we've seen so let's see how that evolves over time, but for now what we're able to do is confirm the growth.
Against this lowered level.
Understood. That's helpful and then maybe one for Joe Joe.
These.
Component shortages et cetera.
Some of your peers are seeing some alleviation.
And I guess from a street perspective the Crs.
What we're seeing in <unk> is this a capex slowdown right I mean based on your comments. It feels like this is not a demand issue.
And.
There is a potential for a catch up based on your comments on backlog and order book, maybe talk about why this is not a demand issue why youre confident about the outlook for Hill ROM in the business.
Yes.
Vijay.
When we look at Baxter's, let me take this into <unk> and <unk> portions we have experienced a significant shortages of.
Semiconductors.
In the semiconductors and sometimes we all read in the news the semiconductor business and May alleviate as consumer goods will decline due to recession potentially obsession inflation and so forth.
As a company in many many people in the medical devices use chips that are not the same chips used in consumer goods and that varies by nanometers, you probably know this as well we use speaker chips chips that have embedded software our suppliers we have.
Half a dozen suppliers and one of the suppliers has been a real problem inquiries to definitely do supplier is one that supplies most of our front line care products. This is not an issue in our.
Mark pads as March surfaces, but more so into our frontline care and also affects our ability to make sigma spectrum pump.
As Jay mentioned, so we need to separate that so when it comes to two.
On capital, we have not seen it.
Wide spread change in demand what we saw in the second quarter or few accounts the move to implementation and the justification was more on staff shortages and the ability to really deployed them to get the products installed which requires.
Power and they were short in that in that area.
We look conservatively at this we look at our business in many dimensions, we have a very healthy backlog at the moment is very very healthy I can sit here today and say that if I had enough chips, we could produce.
A significant amount of revenue due to bumps monitors and other devices that we have one of the things the bite us twice in discount precision is not having the chips is the ability to program in play in your factories accordingly, because becomes a real ramp at the end of the quarter.
The supplier sends us a bunch of chips and then we assemble them when we get them out of the door as soon as possible. So it has been a real tricky situation.
Seems to do we see we see the light at the end of the tunnel as we start to make progress with some of our suppliers.
But we sitting here today I would say the demand is strong resistive headline second is the chip the semiconductor situation is very fluid.
Third is that we have.
The capability to put those products on the market and have the demand for them as soon as we've got the product.
The components shipped to us so want to make sure that those two things are separate capital was slowed down we havent seen that our backlog as I said has been has been.
All time high in both business. However, however, we had people postpone installations in the second quarter due to staff shortages as we worked out.
That's extremely helpful. Thank you guys.
Peter Chickering of Deutsche Bank.
Is on the line with a question. Please state your question.
Hey, Good morning, guys, it's David for taking my questions here the first one.
Capex side, you talked about seeing some.
Some delays in Europe .
Customers are pushing out orders on our Capex spending is this a.
Alright.
Coming from.
Areas like pumps at Ari.
A.
The replacement cycle here or are there areas within Hill ROM I guess any color you can give us on what parts of your business, you're seeing those delays of capex.
<unk>.
So sure.
A lot of this comes down to staffing availability I think thats been the primary driver that we've seen in terms of we've seen a bit of an extension in terms of installations on our care solution. So hospital beds care communications some of those items, it's taken more of the installation process has been taking longer as.
As a result of some of the staffing shortages that we've outlined in the prepared remarks, and then Joe again.
We don't see.
At this stage.
A substantive change to the appetite for capital at hospitals, but we're watching this very carefully and we're watching to ensure that the delays that we're seeing are related to staffing versus budget constraints or something like that we've tried to take a cautious forecast for the balance of the year.
Which which protects us in the event that there is some further shortage impacts, but that's where we sit now as far as pumps. We don't really we're not selling an enormous number of pumps in large part because of the constraints on electromechanical components. So that's that's a huge challenge that we're faced with.
Until we resolve that at some point here in the future. It's a matter of fact, we have significant demand for pumps, we just cannot take the orders and this we cannot make the products because we don't have the semiconductors going in.
But I wanted to also to underscore what Jay said when it comes to.
Capital capital is not the same for every hospital system. There are hospital systems are large they have the capacity to move forward. So we are observing very very rapidly what is happening so.
This postponement of capital, we assure supply or our Stephanie right now the information that we have is a staffing issue and those are in smaller accounts that we saw in the second quarter. We have large installations come into the third and fourth quarter will be a tailing point, how does go through in the third and fourth quarter.
Alright, Great and then my second question is on the margins looking at the implied margin growth from <unk> to <unk> can you walk us through how you get that margin improvement sequentially is this I'm getting.
The chips back online again leveraged from that or is it from will be pressured margins <unk> from diesel fuel costs any color there would be great.
Yes looking at that.
I think there's a few things in play.
First of all the fourth quarter of the year is typically our highest margin quarter as a result of incremental sales and so if we look at the.
The cadence between the third and fourth quarter of the year, we add well over $100 million in sales and given that there is a fairly substantial fixed cost base at a company like ours that those sales tend to flow through at a much higher margin than the corporate average. So if you look at the last few years the fourth.
Quarter is normally higher and thats not always the case, but generally speaking it is.
Normally higher than the third quarter as a result of these incremental sales the second thing is.
Listen we take the preservation of the P&L very seriously and so while we werent able to offset the extreme challenges that we've seen we have offset a portion of those through some cost actions that we're taking and many of those cost actions the benefit of those.
Crews more to the fourth quarter than the third quarter. So I think perhaps those are the two primary drivers that lead to the fourth quarter accelerated versus the third.
And then the final thing I would say is.
We are ramping on the hill ROM synergy side throughout the year, that's been an area, that's been going quite well, but each quarter that rolls on were adding synergy. So thats. Another factor that comes to bear on the fourth quarter in excess of the third on our way to achieving the long term goal that we outlined at the Investor day.
Thanks, so much thank you.
Travis Steed.
Both of Securities is on the line with a question. Please state your question.
Hi, Good morning can you hear me okay.
Great.
So Jay obviously, a lot of macro pressures right now, but maybe talk a little bit about some of the offsets that are in your control you mentioned pricing a little more visibly as other companies have as well maybe talk a little bit about how much of the inflationary pressures can you actually offset with price and how long does it take to roll through the P&L given given contracts.
Travis.
Historically, we have realized.
This increase is in the U S. As part of our contracting process. This is normal price increases we.
We have taken pricing actions.
Date, and they are reflected in our 2022 they are not.
They cannot Ken offset 100% of our incremental cost.
Therefore, we additionally, right now are preparing the.
The implementation of a second wave of actions in response to the.
The significant price increases that we have received from our suppliers and our cost increase Jay offline in the beginning of the call in terms of the labor cost and other internal costs fuel costs and energy costs and everything so we are putting on additional cost increase.
At the moment, we're planning to start rolling out the second wave in two customers on a global basis by the way not only U S. In most of our businesses in the coming weeks.
Actions there were intending.
Right now are to help offset a portion of the significant cost increase that we have a portion and doesn't cover everything but we are determined to go through a second wave of price increases price actions I would say that a better define the price actions.
Through throughout the company because the incremental unprecedented.
The cost increase that we're receiving right now.
Helpful. Joe Thank you and Jay on the earlier question I think the Ravi you Youre still committed to the 75 basis point floor per year. Just curious when you think about on earnings that's still translate into low double digits or is 23 is probably more likely to be at more of a transition year with less than double digit earnings growth for that one year any comments.
On there and then also where divestitures might fit in their RFP. If you got to wait till somebody is more macro pressures ease before you would move into divestitures or you can do that more near term.
So as it relates to the cadence of earnings.
We're committed to the floor of 75 basis points of margin improvement in any given year and also as you pointed out we're looking at double digit earnings growth compounded over over the period of the plan.
2023, there is two factors in play right now the operating margin expansion of borrowing.
Meaningful improvements in some of these exogenous factors will be towards the lower end versus the average rate that we expect to see over the over the term of the plan, but above the 75 basis points. The second thing that impacts too.
2023 in the short term is given given some of the rate hikes that were seeing from the fed you do have that interest expense impacting the 2023 numbers as we rapidly look to deleverage over the next few years. So that's another factor that comes to bear So I would say that the 2023 earnings.
We will be a bit below the compounded growth for the overall plan period.
And then does that suggest.
Divestitures.
Listen when we think about our portfolio management is something very actively in our minds somewhat usually executed and others. We have a plan. We have a couple a couple of areas. We're working very diligently on one of them is a much faster process. The other one is a little longer and we're looking at.
Feasibility for the second of which is a little longer at the moment.
<unk> is all about making sure the Baxter is set up for the future.
Portfolio actions that we're going to take and are currently examining our long lasting <unk>.
<unk> to make sure the Baxter is aligned.
Allocating capital to the businesses that will be connected to our.
Our strategy in our infusion in terms of.
The digital work.
Work that we're doing in healthcare with our ability to deploy.
Our technology across the Globe and Ryan now Baxter has some businesses that fall.
Not fall outside our main area of vision. So we're looking at dose I don't have any news about the name of this businesses, we're probably going to have.
One action later this year the second one we're still analyzing because the complexity.
Alright, great. Thanks for the color.
Thanks Peter.
Joanne Wuensch of Citi is on the line with a question. Please state your question.
Good morning, and thank you for taking the question.
Two parts one can you quantify the backlog that you're building associated with all these factors and then second piece of it is headwinds that are going to roll into 2023 on the revenue side and thank you for your color on the EPS and operating margin side of it.
Let me talk about the backlog and Jay will supplement.
My answer and go to the second part of your question Joanne and good morning, our backlog has been growing primarily in frontline care. So let me define what we think how we defined backlog because we have two things going on one is backlogged and one is back quarter. Our best quarter is all time high and what is bad quarter is when we take an order.
And we cannot fulfill 100% of that order the order stupid and into system as soon as we get inventory in our warehouses. It gets shipped to that customer. So that is all time high at the moment.
Most probably seven forward what normally we would see back.
Backlog is something new apps, there because if we don't have.
To assemble bumps dose pumps don't get into a backlog system back to never use that system of backlog comes with Hill ROM and is very very appropriate for them to look at their business such as these which is future orders put in the system for delivery in the future. We have been accumulating a significant backlog in our frontline care right now we have.
Significant demand primarily now without with the graduation of Med School.
Students and students going back is one point that we do with that part of abusing the Welch Allyn business. There are other parts of our business monitors as well that we feel if we had those chips, who would have significant revenue increase in the future. So we are planning as we received those chips as situations actually normalize the backlog will come back to.
Normal levels I would say that our backlog to date multiple times what was used to be.
Called normal for few wrong.
And we have also a healthy backlog in our in our <unk>.
That system the traditional hue.
So I want to make sure that you all know the backlog is something new for US we are going to be talking every call above that and we're telling you right now the backlog is multiple times what is considered normal for four of Hill ROM and El Baxter.
Great and as it relates to items for next year, but before I answer that I do have to apologize to Travis Travis <unk> I was looking at my sheet and had the wrong name so apologies for that.
Looking to 2023, as we think about 2023 sales Theres a couple of factors headwinds and tailwind that are in play here one headwind for next year is COVID-19 vaccines and that that could be a doubt that we expect that to be a reduction to next year. So thats, one factor and that really hasnt changed since our Investor day.
In addition to that we don't expect that the chip shortage will be fully alleviated.
So we think that will continue to depressed demand to some extent as we move through next year now I'm hopeful that this will provide an upside for us but at this point I don't necessarily see that alleviating.
And then finally, we do hope to have a large volume pump available for the marketplace. In 2023, we're extremely excited about all of the work that's going into that and what that means for the future of our company. So we're hopeful that we will have that to bring to bear in 2023, which would be an upside as it.
Relates to margin going into 2023, I guess, the big thing I would say is we are assuming many of the factors that we're experiencing today remain at essentially current levels and so we don't we are not anticipating a major alleviation in these product categories.
That's going to be a continued factor I'm hopeful that this resolves over time as well, but we've tried we're trying to be very.
Not pessimistic per se, but ultra realistic as we're looking at the situation and then in addition to that we will have the continued benefit of Hill ROM synergies rolling through to next year's results as a tailwind. So that's a little bit of color as we're seeing things shake out to 2023, but we continue to watch this very carefully.
Our just add is yes. We are also excited about the syringe pump to me may come faster in terms of approval.
Large volume parental pump, which is the LTP.
So the update is that we are under active review with the FDA.
<unk> syringe infusion pump and the large volume infusion pump is spending our response to the FDA additional information request, which we are expecting to respond within this calendar year and hopefully both both pumps will satisfy the fda's.
Questions and hopefully we can get them approved but we are excited about the launch of <unk>.
The one comment I would add is that we don't anticipate having the same chip issue with no off that we are currently experiencing with factor. So we do have some notebook constant inventory, yes, we have about probably close to 20000 local pumps large volume pumps in inventory have more be made.
So for the hopeful launch this year for the hopeful launch this year.
And for next year.
Our sales. So we are working very close to our suppliers, but this is very different. This is a next generation chips and new generation chip versus what is in Sigma.
Sure.
Thank you very much.
Yes.
Yes.
Larry <unk> of Wells Fargo is on the line with a question. Please state your question.
Hey, good morning, Thanks for taking the question Jay.
For you just on first simple on interest expense based on the $400 million this year.
Is the run rate right now about four $440 million is that how we should think about it for 2023 or.
Maybe just some color on what youre, assuming for rate increases and debt pay down and then I just had one follow up.
Sure Larry I'll take that one we do expect interest rates to come down a little bit next year, because we continue to pay off some of our debt balances. So interest rate will come down it will be elevated.
Next year, but it won't be at the same level in 2023 as it was this year given some of our debt paydown.
Got it so the math I did there <unk>, probably not the right way to think about it.
In the second half of the term loan that there.
There should be some pay down now Larry wildcard what does the fed do with rate increases, but as we currently see it.
Okay. That's helpful Jay.
We're everyone's asked on this call about the macro headwinds.
What happens if diesel prices come down what happens if some of these headwinds ease do we get some of this back what's the right way to think about it if actually some of these prices come down. Thanks, Thanks for taking the questions.
So Larry.
The answer is yes.
We get benefit so we have been severely impacted by a lot of a lot of factors. So the worldwide stress on the supply chain the inability of our suppliers to supply and that shows up all over the operations of our company.
If we do get the alleviation of of diesel rates, if we get alleviation of the global supply chain Crunch, which would allow us to use less expedited freight.
We're able to see some improvement material inflation, and finally and perhaps most importantly, if we can run our plants consistently with the products and inputs that they need then yes, the situation will be significantly better than it is today.
Now the way we've modeled this as we look to the second half of the year. We are assuming some level of shutdown. We're assuming elevated rates continued use of expedited freight. So we've got all of that embedded in that is embedded in much of our thinking for 2023.
We should get this back at some point.
So I'm optimistic that this will turn I, just don't know when and we're not prepared to call that at this stage.
I just underscore the fact that.
We will have benefits.
So a diesel cuts known goes down 2025% this directly impacts our ability to ship products to ship less money affects our renal business.
Profitability.
As well as surcharges that were currently getting from our suppliers on every invoice that we pay for shipment of products. So that is a potential tailwind. If the situation turns were watching that very closely what Jay said, we want to make sure that you have a picture.
All of the future as we see today as we also understand the trends on the market.
And to add to that Larry.
If we have normalized back order backlog levels, that's another tailwind.
And we're not there yet we're not anticipating that we get there in the near term, but to the extent that we secure the critical components that we have then we will be able to see some sales uplift as well.
Thanks for taking the question.
Yes.
Joshua Jennings of Cowen is on the line with a question. Please state your question.
Hi, good morning, Thanks for taking the questions can you hear me, Okay. We can perfect. Thanks Jay.
I wanted to ask you know, it's only been a couple of months since the Investor day, but just on the Hill ROM sales synergy.
Side of it.
Forecast Hello, Pete.
I know theres a lot of muddling.
With the supply constraints in the current environment, but just any.
Any.
Data points, you can share just in the <unk> in terms of how your outlook for <unk>.
Hill ROM sales synergies are advancing.
It's evolving and then second Jan I think you called you.
Guidance.
Guidance updates conservatively realistic and that makes sense.
Okay.
I wanted to assuming that the environment stays Steve.
In system I think as you have you baked into the guidance update I mean, where do you see areas of conservatism in this update I think investors probably concerned about the potential for another revision clearly if the environment gets worse impact the entire group of large cap med tech players, but it seems like the capital spend.
Slowdown that youre, assuming by hospitals in the back half, particularly on the PSS and PSS businesses Theres. Some conservatism there but are there any other areas of conservatism you called out in this guidance revision. Thanks a lot.
Okay. Thanks, Thanks for the question and I think by the way we will conclude with this question. So I appreciate everybody joining us today, here's the interesting thing while the short term has been extremely volatile as we look at the acquisition of Hill ROM. We are very excited about the long.
Term prospects so much of the issue that we're seeing relates to shortfalls and components at this point.
But as we as we've laid out the strategy for this business over the long term from a revenue standpoint from an integration standpoint, all of those elements are in place and continue to excel our synergies are doing better than expected.
Reflected that in this in the financials that we've shared with you for this year.
Longer term tremendous opportunity in terms of product combinations. We are really excited about the innovation potential. So what I would say is a lot has changed since.
May and nobody appreciates that more than me, but what has not changed is our real excitement about the acquisition and where we can take it over the long term. So we didn't really have revenue synergies meaningfully in the second quarter, but didn't expect that but as we move forward. The plan in terms of the revenue synergies that we outlined this.
Much intact now as we think about conservatism and things of that nature.
I guess, what I would say is we've taken our perspective on the worldwide situation that we're currently facing and reflected that in the forecast that we shared.
And so where I think there might be some opportunity is to larry's question if diesel improves.
All of the work that we're doing to secure electronic components.
His successful those kinds of things that are the things that would drive us above this forecast. It's I think that's an accurate portrayal of kind of where we sit I'm just hopeful that this this situation that we're in well I know that over time it will resolve I just can't answer at this.
Point, how quickly that will occur.
So with that I think we appreciate everybody joining us today and we will conclude the call and are obviously available as always for follow ups. Thank you all very much for joining us.
Yes.
Ladies and gentlemen, this concludes today's conference call with Baxter International Thank you for participating.
Please wait the conference will begin shortly.
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