Q4 2022 Baxter International Inc Earnings Call
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[music].
Good morning, ladies and gentlemen, and welcome to Baxter International's fourth quarter 2022 earnings Conference call.
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I would now like to turn the call over to MS. Clare Tacksman, Vice President Investor Relations at Baxter International.
Mr. Jackman you may begin.
Okay.
Good morning, and welcome to our fourth quarter 2022 earnings Conference call. Joining me today are Joe Almeida, Baxter's, Chairman and Chief Executive Officer, and Jason <unk>, Chief Financial Officer.
On the call. This morning, we will be discussing baxter's fourth quarter and full year 2022 financial results along with our financial outlook for 2023.
With that let me start our prepared remarks by reminding everyone that this presentation, including comments regarding our financial outlook for the first quarter and full year 2023, new product development the potential impact of recently announced strategic actions proposed pricing accident business development and regulatory.
Matter contained 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 for the fourth quarter and full year 2022.
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 you Claire and good morning, everyone. We appreciate you taking the time to join US I will begin with a brief overview of baxter's performance for the quarter and year and then provide some additional information on the strategic roadmap, we announced on January six these actions further outlined in there.
This morning's press release will help Baxter to emerge as a more agile innovative market responsive enterprise with expanded opportunities to create long term shareholder value Jay will follow with a deeper dive on our 2022 results and outlook for 2023, and we'll close with Q&A.
You're starting with our financial results sales for the fourth quarter 2022 were $3 $9 billion growing 11% on a reported basis, 17% at constant currency and 2% on an operational basis fourth quarter adjusted earnings per share were <unk> 88, <unk> came in below our.
<unk>, primarily driven by foreign exchange losses, and product mix in the quarter for the full year sales of $15 $1 billion advanced 18% on a reported basis, 23% at constant currency and 2% on an operational basis adjusted earnings per share for the year were.
At $3 50.
Jay will provide more granularity on the numbers, but some themes are clear demand across our portfolio remains solid and sales rose across the majority of our legacy Baxter Hill ROM businesses, offsetting modest or expected declines in others driven by sectors such as generic comp.
Edition or challenging year over year comparisons as we've discussed previously this topline growth was offset by a wave of macroeconomic and supply chain factors. There has continued to put pressure on the cost of doing business and.
And as I have stressed many times, we would never pursue a reduced cost in ways that could compromise our fundamental mission to save and sustain lives, but even factoring in these headwinds we did not perform at the level, we expected and demand of ourselves.
And our ability towards faster mission is ground at first and foremost in our capacity to deliver steady solid performance as a sustainable corporate enterprise. This is precisely why earlier this year, we announced plans to accelerate our transformation journey.
As we announced on January six.
Expanding on today.
As necessary as timely as I shared in January we spent the latter part of 2022 undertaken a comprehensive review of our operations focused keenly on the opportunities to improve our commercial responsiveness reinvigorate our innovation engine and streamline our.
Operations This work labs.
Last month's announcement of our intention to spin off a new kidney care companies explore options for our Biopharma solutions contract manufacturing business and implement a new operating model for our remaining Baxter businesses. These are three distinct initiatives with a single agenda in.
Creased stakeholder impact with improved long term shareholder value cutting across these actions our common goals enhanced and refine the strategic clarity increased accountability and line of sight enhanced agility and bringing our global businesses, even closer to the patients clinicians and customers they serve.
Today I will share the next level of detail on the battery business model. We expect to begin implementing next quarter. This work entails a fundamental reconfiguration of how we operate and deliver products to the customers and markets. We serve this new operating model is focused on four vertical.
Integrated global business units or Gpus grouped along general therapeutic areas encompassing multiple sites of care.
These gpus, which will become baxter's core operating and reporting segments. When implemented include medical products and therapies, comprising our current medication delivery edge advanced surgery, and clinical nutrition portfolios healthcare systems and technology.
<unk>, comprising our legacy Hill ROM businesses, including patient support systems Global surgical solutions in frontline care Pharmaceuticals, which will include our current pharma portfolio as well as our Biopharma solutions business until its potential separation.
And finally kidney care, comprising our current renal care and acute therapies businesses to reiterate our intention subject to satisfaction of customary conditions used to spin <unk> into an independent publicly traded company in the next 12 to 18 months until then.
<unk> will benefit from the strategic work, we are doing right now helping to home are well focused and streamlined entity in preparation of fleets anticipated launch as a standalone company.
This way, we can think of Baxter as having four GPO structure or perhaps a three plus one <unk> structure. Once the model is in place later this year.
Each new JV, you will have its own precedent reporting directly to me each will have full global P&L accountability, we will begin to realign our current three region global commercial structure. So the global commercial teams will report directly into each GPU the dedicated R&D.
Manufacturing and supply chain and functional support teams, we also be embedded by GPU to optimize visibility and oversight. This new structure is designed to generate more direct clear accountability across each business and promote more agile decision, making across sales marketing manufacturing.
Distribution and innovation.
So what you see upon completion of this process is that each of the Gpus, we have more autonomy and agility that the current businesses do it today Gpus will be able to respond to market dynamics faster and more effectively accelerate commercial investments design and produce products and prioritize R&D.
Spending all to help meet critical market needs and accelerated business performance from a manufacturing perspective, Baxter will become more nimble with manufacturing sites map directly to each GPU, leading to an optimized manufacturing footprint in a more resilient supply chain.
Preparation for the new operating model is already surfacing the opportunities for streamlining and efficiency that are intended to further bolster bottom line performance the redesign being contemplated coupled with additional actions. The company has undertaken to enhance performance or expect to deliver more.
More than $300 million in total savings during 2023, and a workforce reduction of <unk>, 5% with.
We plan to begin implementing our new operating model early in the second quarter looking ahead to 2023 more broadly we expect to continue navigating a challenging operational environment hand in hand, with our transformation efforts, we have been taken a hard look at our forecasting.
Models and processes as we reflect on our performance last year and the lessons learned in an era of unprecedented macroeconomic challenges we have taken a stance of incorporating more potential downside risks into our financial outlook for 2023, Joe will provide additional details on our outlook.
And various assumptions included before I pass it off to Jay I want to close by reinforcing my confidence and optimism for the future and our commitment to continued demand. The important work. We do every day Baxter holds a fundamental place in global health care with a durable portfolio of essential.
So products market, leading position and fashion that employees, who bring our mission to life, we're setting out on a well considered plan to redefine our operation and potential in pursue of incremental long term value for the stakeholders and shareholders that rely on us 2023.
Now becomes a pivotal year, we are on our way to creating two leading healthcare companies with robust portfolios and strong market momentum, we look forward to sharing our progress and performance in the quarters to come with that I'll pass it over to Jay.
Thanks, Joe and good morning, everyone. Despite the alliance sales results our fourth quarter earnings performance came in below our expectations. This variance was primarily driven by foreign exchange losses and product mix in the quarter.
As Joe mentioned, we're not satisfied with our results and as such we're taking a number of actions to improve our performance. Some of these initiatives are already underway and will be further enhanced with the cost reduction program that we are in the process of finalizing in parallel with our operating model redesign. These.
These actions are necessary and are expected to accelerate future performance collectively these actions are expected to deliver more than $300 million in savings in 2023.
Turning to our financial performance fourth quarter 2022, global sales of $3 9 billion advanced 11% on a reported basis, 17% on a constant currency basis and 2% operationally.
Sales performance in the quarter continues to underscore the strength of our broad portfolio of core therapy and connected care offerings across the care continuum.
As we've discussed previously supplied for select products remains constrained and we estimate that these constraints impacted our revenues by approximately $50 million in the quarter or approximately 140 basis points.
These supply constraints are a mixture of electromechanical components and shortages from other third party suppliers on.
On the bottom line adjusted earnings decreased 15% to 88 per share outside our guidance range of 92% to <unk> 99 per share.
As mentioned earlier this was due to unfavorable product mix and an approximate <unk> <unk> headwind from foreign exchange losses on balance sheet positions, primarily due to the devaluation of the Russian ruble during the quarter.
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 as three legacy geographic regions, starting with sales by operating segment sales in the Americas were flat.
For the prior year on a constant currency basis.
In Europe , Middle East and Africa grew 5% on a constant currency basis and sales in our APAC region increased 2% constant currency.
<unk> sales in the region reflected strength and geographic segment sales offset by relatively flat growth in China due to the impact from various government based procurement initiatives being implemented in that market.
Moving on to performance by key product category global sales for renal were $981 million, increasing 3% on a constant currency basis performance in the quarter was driven by solid growth in our PD business, where we observed an increase in PD patients globally, particularly in the <unk>.
The us which saw a sequential improvement in growth of 100 basis points and ended the year with patient growth of approximately 4%.
Mid single digit PD growth in the quarter benefited from incremental revenues of nearly $20 million, resulting from a customer that was looking to build out a new business and did not meet its contractual minimum purchase requirements. This arrangement has been terminated and the related revenues will not recur in future.
Periods.
Performance in the quarter was partially offset by lower in center HD sales due to HD monitor and associated consumable component supply challenges.
Sales in medication delivery of $745 million declined 2% on a constant currency basis performance in the quarter was affected by a difficult comparison to the prior year, which benefited from higher levels of infusion pump placements.
<unk> remained strong for Baxter smart infusion pumps and as we have discussed is currently outpacing our ability to supply given continued challenges sourcing components.
Our IV therapy portfolio grew low single digits globally, driven by strong demand internationally during the quarter, we did not see pronounced impact from flu related cases, which although reported case numbers were high did not translate into increased hospital admissions.
Pharmaceutical sales of $552 million declined 1% on a constant currency basis performance in the quarter reflected the continued impact of generic competition in the U S, which was partially offset by increased demand for our drug compounding portfolio internationally.
Moving to clinical nutrition total sales were $243 million, increasing 6% on a constant currency basis.
<unk> in the quarter was driven by demand for our broad multi chamber bags and vitamin product portfolio.
Sales in advanced surgery were $260 million advancing 8% on a constant currency basis growth in the quarter reflects an improvement of electric procedures globally surgical volume recovery was strong across all regions.
Sales in our acute therapies business were $182 million declined 3% on a constant currency basis, and reflecting a tough comparison to the prior year, where we had experienced elevated demand for CRT given the rise in Covid cases.
Pharma solution sales in the quarter were $153 million, increasing 12% on a constant currency basis demand for non COVID-19 services more than offset the decline in COVID-19 vaccine related revenue compared to the same period last year Covid vaccine sales for the quarter totaled $22 million.
Legacy Hill ROM contributed $734 million in sales in the quarter compared to $212 million in the prior year period. After the acquisition closed on December 13, 2021 Hill ROM sales included $360 million of sales in patient support systems $293 million of sales in frontline care.
And $81 million of sales in global surgical solutions Legacy Hill ROM sales grew mid single digits on a pro forma and FX neutral basis as compared to Q4 2021. This growth reflects demand for the physical assessment and cardiology portfolios within the frontline care business within the quarter, we were able to.
Secure some additional electromechanical components on the spot market, which enabled us to address portion of the backlog associated with the frontline care business.
Sales in patient support systems declined low single digits in the quarter, primarily driven by lower rental revenues in the quarter as the prior year period benefited for more than $10 million in sales due to COVID-19 related rentals.
Moving through the rest of the P&L adjusted gross margin of 41, 6% decreased 270 basis points versus the prior year, reflecting increased cost of goods sold primarily driven by the factors we've discussed around inflation freight and supply chain constraints adjusted SG&A of 790.
$7 million represented 25 as a percentage of sales an increase of 30 basis points versus prior year driven by the addition of hill ROM as well as higher freight expenses.
Adjusted R&D spending in the quarter of $157 million represented 4% of sales an increase of 10 basis points versus prior year, both SG&A and adjusted R&D reflected a benefit from lower bonus accruals under our annual employee incentive compensation plans, which are direct.
We tied to Baxter's performance.
These factors resulted in an adjusted operating margin in the quarter of 17, 1% a decrease of 310 basis points versus the prior year adjusted net interest expense totaled $117 million in the quarter, an increase of $73 million versus the prior year driven by higher outstanding debt.
Balances related to the acquisition of Hill ROM and the impact of interest rates on the variable rate debt.
Adjusted other non operating expense totaled $12 million in the quarter, a decrease of $9 million versus the prior year, driven primarily by amortization of pension benefits as I mentioned earlier nonoperating expenses were unfavorable to our expectations, primarily due to foreign exchange losses.
The adjusted tax rate in the quarter was 16, 1% compared to 18, 6% in the prior year period. The year over year decrease was primarily driven by statute expirations on certain tax positions, partially offset by an increase due to a change in geographic earnings mix. Following the Hill ROM acquisition.
<unk>.
And as previously mentioned adjusted earnings of 88 per share declined 15% versus the prior year period earnings in the quarter reflected the increase of cost of raw materials freight and labor as well as the impact of rising interest rates and foreign exchange headwinds.
Turning to full year 2022 sales of $15 1 billion.
Increased by 18% on a reported basis, 23% on a constant currency basis, and 2% operationally legacy Hill Rom's frontline care patient support systems and global search for solutions businesses contributed $2 9 billion to full year sales on a reported basis on a pro forma <unk>.
And after adjusting for foreign exchange full year legacy Hill ROM sales were flat as compared to the prior year period, primarily reflecting the impact of supply constraints for electromechanical components on the Bottomline Baxter's adjusted earnings decreased 3% to $3 50 per diluted share reflecting the impact.
We just highlighted on a full year basis, we generated operating cash flow from continuing operations of $1 2 billion and free cash flow of $532 million throughout 2022, we remain focused on debt repayment. Following our hill ROM acquisition with $900 million paid towards deleveraging.
We also returned approximately $600 million to shareholders through dividends and share repurchases.
As we execute on our strategic actions outlined in the beginning of 2023, we are first and foremost committed to meaningfully improving our cash flow generation our priorities for cash deployment are focused on accelerating debt repayment, maintaining our dividend and resuming share repurchases over time, we are also.
<unk> actively pursuing strategic alternatives for our Biopharma solutions business, while continuing to assess additional inorganic growth factors for products therapies and connected care platforms for our new streamlined operations as we progressed towards the proposed spin off of kidney care company, we will look to utilize proceeds.
From these actions to accelerate baxter's debt repayment schedule, we remain committed to an investment grade credit rating profile, including taking actions towards achieving our previously stated commitment to achieve 275 times net leverage although current business conditions might challenge our ability to satisfy that commitment by the <unk>.
End of 2024, we do expect to make significant progress towards achieving the target during 2023 and 2024.
Additionally, given the proposed spinoff and potential sale of bps, we expect to provide additional information regarding our forward looking outlook for both Baxter remain co and kidney go at a capital markets day prior to completion of the proposed spin off.
Let me conclude my comments by discussing our outlook for the first quarter and full year 2023, including some key assumptions underpinning our guidance on the top line 2023 is expected to benefit from underlying volume growth the pricing actions taken last year as well as new product launches across our Gpus.
Some of these new planned product introductions include more than five injectable drug launches a nextgen ICU bed exact mix pro nutrition compound or continued rollout of our novum IQ LBP and syringe pump in Canada and launch of the no home IQ syringe pump in the U S.
At this time, our 2023 guidance does not contemplate any U S revenues for the Novum IQ large volume infusion pump, we anticipate submission of our final responses to FDA within the quarter. We continued to be very excited about the prospect of this launch and the.
<unk> It offers our customers our objective remains to launch this pump in 2023.
Throughout 2022 demand for our products and therapies remain solid with supply chain challenges impacted our ability to fully supply. This demand we experienced record levels of back orders and backlog, particularly for the legacy Hill ROM business and while we observed positive development and supply availability.
In the fourth quarter of 2022, we currently anticipate component availability will remain challenging and we will continue to hamper top line sales in 2023, we are working relentlessly to secure components and address order backlog and our expectation is that supply for electromechanical components.
<unk> will improve in the second half of the year as Joe outlined we are implementing a series of changes across our organization that are designed to meaningfully simplified the operating model and manufacturing footprint drive strategic clarity improve operational efficiencies and accelerate future growth. In addition to.
Getting our operations into four vertically integrated global business units. We're also evaluating additional strategic actions, including potential product line and country exits to better position the company for more profitable growth over the mid to long term. These exits are expected to reduce sales by more than $100 million.
As compared to full year 'twenty two.
Lastly, as it relates to the top line 2022 results included approximately $140 million of sales that are not expected to repeat in 2023 as well as the benefit of approximately $50 million due to lower customer rebate costs. This includes lower COVID-19 vaccine revenue of approximately $100 million.
And two contractual payments, which benefited renal care sales by approximately $40 million in the second half of 2022.
Moving on to dynamics impacting the rest of the P&L first I want to point out a couple of factors that are impacting our 2023 performance as compared to 2022, such as higher annual incentive compensation payments for employees.
<unk> interest expense and a higher tax rate assumption. In addition, while we see some improvement in the external macro environment with select indices coming down from the peaks seen last year. Our cost base is still elevated relative to historic norms as such cost of goods sold is expected to be a headwind.
Paired to 2022. This is due to the rollout in the first half of 2023 of manufacturing related costs capitalized into inventory in the second half of 2022 as well as the challenging comparison to the first half of 2022 prior to the start of significant increases in inflation we.
The impact from these inflationary pressures to begin to ease in the second half of the year.
Also as mentioned earlier in response to the significant macro challenges. The company has experienced over the last two years, we will be implementing a cost reduction program in parallel with our operating model redesign that is expected to be finalized later this quarter. This initiative and additional actions the company has undertaken to enhance performance.
<unk> are expected to deliver more than $300 million in total savings. During 2023. These savings are expected to increase over the course of the year with a majority of the savings being realized in the second half of the year.
The lower cost of goods, coupled with the increased savings are expected to drive meaningful margin expansion and earnings growth in the second half of the year as compared to the first half. We also expect the impact from foreign exchange to lessen in the second half of the year.
Finally, as Joe mentioned with respect to our outlook for 2023, we bias our guidance towards capturing additional potential downside risks, we recognize that our performance last year disappointed investors and us alike. While we are confident the actions. We are undertaking will set us on course for improved performance longer term.
We recognize that 2023 will be a transition year on our path to achieving this objective.
All of these factors I'll now walk through our guidance and expectations.
For full year 2023, we expect global sales growth of 1% to 2% on a reported basis and flat to 1% growth on a constant currency basis, we expect full year adjusted operating margin to be between 15, and 16% interest expense is expected to total approximately $530 million, which.
<unk> past and potential future rate increases and adjusted tax rate of approximately 22% and a diluted average share count of 508 million shares based on these dynamics. We expect 2023 adjusted earnings excluding special items of $2 75 to $2 95 per diluted share.
Specific to the first quarter of 2023, we expect global sales to decline by approximately 3% on a reported basis and approximately 1% on a constant currency basis. When we expect adjusted earnings excluding special items of <unk> 46 to <unk> 50 per diluted.
Sure with that we can now open the call up for Q&A.
Thank you we will now begin the question and answer session. If you have a question. Please press the one key excuse me the star one key on your Touchtone phone.
To remove yourself from the queue Preston.
Star one again.
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.
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 of 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.
And we'll go to our first question from Peter Chickering at Deutsche Bank.
Hey, good morning, and thanks for taking my questions.
I guess the first one is going to be on all of the operating margin compression I guess details on what the split is between SG&A and cost of sales on R&D and can you point to the biggest pressure points on the gross margins is it diesel resin micro chips flavor I think investors understand the macro pressures. We're facing you guys has been challenging to understand how this is Mac.
ROE pressures flow through the P&L, so any color there would be great.
Sure.
And Europe is your question in reference to 'twenty, three or Q4, 'twenty two or what period are you referring to Oh apologies. This is all for it for 2023.
That 15%, 16% operating margin that you guys referenced.
Sure sure. So overall, we are seeing increased pressure on.
On operating margin in the first quarter and throughout 2023, and a lot of that relates to supply chain cost that we've incurred in the second half of the year that start to roll out into 2023, and as we think about the timing of those pressures really it's most prominent in the first quarter of the year.
So we will have a trough margin in the first quarter of the year and then it starts to accelerate from there moving forward as we think about where the impacts are it is it is as I say largely related to gross margin, although because of freight costs, we do see some incremental SG&A costs at <unk>.
Go up throughout the year.
And like I say it starts to much more normalized by the fourth quarter of next year.
Okay and then what.
Do you have your talks to your customers about increased pricing I guess any color on how those are going and what is your overall pricing view in 2023 versus <unk> 22, and then if you break out gross margins from pharma, specifically do they have any outsized movement in your pricing.
23.
Peter I'll take the price question overall, Jay can give a little bit more detail.
We are able to put price through where we can.
And we see price being neutral to a slight positive in 2023.
For the company, obviously, we have long term contracts as contracts become a.
Available for negotiation, we will have a different viewpoint and how are we going to put an escalation for inflationary pressure. The way. We just saw them in 'twenty, one and 'twenty tools. So in terms of.
How that more specific about your question, Jason So sure overall.
Pricing is a net positive as we look at the year. So there is some benefit that we've reflected based on all the work that we've conducted over the last year along with some existing contracts will arrangements. There is some negative pricing pressure in pharma that offsets a higher number excluding the impact of the pharma business.
Great. Thanks, so much.
We will take our next question from Robbie Marcus of JP Morgan.
Great Good morning, and thanks for taking the questions.
<unk>.
Jay maybe to start I think it would be helpful for everyone to try and get a sense of what's conservatism in the guide with some of the.
The new philosophy, you talked about what.
And what's actually being contemplated there is $300 million in cost savings, but margin is down.
You just talked about so.
Really just help us understand.
What are some of the negative assumptions in there that you are putting into to help add more cushion on the bottom after the 2022.
Cadence.
Sure.
And as I as I mentioned in my prepared remarks Robbie.
We're disappointed with performance in 2022 clearly.
And frankly, as we reflect back it with a highly volatile and dramatic environment.
We were faced with and that we were operating through over the course of the year as we put together guidance for this year I would say a couple of things we've taken levels in terms of indices as they currently sit today.
Reflected continued supply constraints and things like electromechanical components.
And then in addition to that we've added margin of safety.
Terms of contingency to offset which is why you see a much wider range than we would than we've had previously I would add to that we've also done things like taken out the LDP pump, we're really optimistic about the large volume pump getting approved this year, we're working very closely with FDA.
Achieving that goal, but from a guidance standpoint, we've removed $100 million related to sales for that product.
So.
Im hopeful that these assumptions prove conservative and that by the end of the year, we're looking at a very different world.
Terms of indices electromechanical component.
Availability and it really sets the stage up for a nice second half and a nice 2024, but we will continue to watch this very carefully.
Part of the issue as we look at the 2022 to 2023 is the rollout of the very significant manufacturing costs that we've incurred this year and so we have a big headwind that we're faced there offsetting that is $300 million worth of savings now that's not all incremental based on.
The new model, what I would tell you is approximately 200 of that or so relates to previously discussed or identified initiatives.
<unk> told Rob synergies, there's roughly $100 million related to the new program that we put in place that will be reflected in our numbers. So really that's the overall story.
We've tried to take all the learnings as we look at volatility in those items.
Reflected as we put it together.
Great.
And how should we think about cash flow going through the year here and how it how it will play out in 'twenty three relative to 'twenty two.
Will these cost savings actually cost money in 2003 to achieve or do you think you could see cash flow improve despite.
The lower margins.
Sure Bobby we have an intense focus on cash flow and I will tell you that the financial performance in 2022 was challenging.
Certainly the free cash flow performance reflected those challenges as.
As we move to next year my expectation is that free cash flow will more than double relative to the 2022 level.
And a lot of that has to do with improvements in working capital balances. If you look at the working capital balances as they currently set the days inventory on hand has expanded over the course of the year in large part due to missing components and having our plants run sub optimally.
Longer lead times for products, leading to disruptions of our supply chain longer shipping lanes all of those things have led to a higher days inventory on hand. Additionally from a receivable standpoint, because of the cadence of sales. We actually had very strong sales in December leading to a higher receivables balance.
Then we would normally have relative to prior years and finally due to timing of some vendor payments our payables balance came in low so our clear expectation is each of these categories will improve.
And along with careful Capex management, our expectation is more than doubling free cash flow because like I said at the end of the day, that's an important valuation metric for US. In addition to that it's an important incentive compensation metric for us.
I appreciate it thanks a lot.
Okay.
We will go next to Vijay Kumar of Evercore ISI.
Hey, guys. Thanks for taking my question.
My first one Joe and Jay for you guys on revenues, if I go back to that.
The third quarter commentary about 4% organic growth assumptions for fiscal 'twenty three.
The updated guidance here is.
Electing a 350 basis points change.
Now I understand product exits in our pumps are incremental rate. That's maybe 100 150 basis points impact, but can you help us bridge what change from that for the 50 basis points, because I feel like vaccine headwinds. These are known as a fifth third quarter call last year are you contemplating some incremental <unk>.
Chain headwind here on revenue source.
From that to 4%.
Sure Vijay let me, let me walk through that specifically to your point, we have a reduction from 4%, which we've talked about on the earnings call to flat to 1% and Theres really a few primary drivers of that and interestingly a lot of those impacts will be confined to.
2023 of which I think is really good news as we look at setting the stage for 2024. It begins with the large volume pump and this in my view. This is really about conservatism on the sales guide, we've taken out $100 million relative to our prior expectations of roughly 70 basis.
<unk>.
Of growth relative to that 4% the second item relates to the weighted average market growth. If you reflect back on our January six call, we talked about a slight lowering of the <unk> of our markets on a compounded basis, but interestingly a lot of that impact.
<unk> is most prominent and in fact in some cases confined to 2023, what I mean by that is are the renal mortality issue that we face with that we've been faced with.
Really collided into 2023 in addition to that the acute.
The challenge really is a 2023 impact and then some of the capital assumptions that we've made which again is another area. We hope to prove conservative is really focused on 2023, and so as we approach year end and refreshed our view of patient census of expectations into two.
2023, we did lower the <unk> for 2023 by approximately 100 basis points, which is included in the commentary that we made on January six in.
In addition to that.
Looking very carefully at profitability by product line at the end of the day, we're ensuring that every dollar and every market is a profitable one and a cash flowing one for Baxter and so we have made the decision to exit approximately 100 million or 70 basis points worth of sales and then we did.
Half roughly $50 million shift from 2023 to 2022 and I did make some commentary on this in the call and so listen we obviously don't like to lower expectations on the sales line, but what I take part in is the fact that.
Many of these impacts are not sustainable impacts, but are rather discrete to 2023, and we will expect to see acceleration from there in the case of the pumps, let's watch carefully how that evolves over the course of the year.
And so that's helpful and then one on margins here.
I think the prior commentary was.
75 basis points of margin expansion in the current guidance is a decline of 150 basis points at the midpoint. So that's 225 basis points change.
Maybe Kenny bridge as to what's changed versus your prior expectations, where the impact is coming from.
<unk>.
Is this current guidance, including any dis synergies from spin or is that an incremental headwind.
Fiscal 'twenty four.
Sure sure. So overall with respect to operating margins, we do now anticipate a reduction as you pointed out.
And I would say that there are a few drivers of that first the lower sales outlook.
When you think about things like absorption some of the some of the higher margin areas. The lower sales outlook does have an impact of 40 to 50.
In earnings with an attendant operating margin impact.
Secondly, I would point to supply chain headwinds that impact the first half of the year most prominently.
And these are incremental to what we previously said as we went through the fourth quarter, we were still purchasing electronic components at much higher levels than we anticipated the spot market was very challenging so things like that led to incremental costs that roll out into the first half of the year.
And then we do have some benefits related to the incremental savings program.
FX is a modest headwind overall as we look at operating margin, it's basically flat, maybe a little bit of maybe it's basically flat as we look at the bottom line and so those are the factors that impact the operating margin, but Vijay I do want to make a really important point as we think about.
The cadence of the story that occurs over the course of the year first half of the year will be a challenging operating margin story as I've discussed, but as we start to benefit from indices that currently sit at today's levels in the product that we sell in the second half of.
The year as we start to benefit from more electronic component availability and we only reflected modest very cautious improvements in this area in the second half and as we add incremental sales to the second half as we always do the second half margin starts to look a lot nicer and a lot more.
System with the trajectory that we expect to see as far as dis synergies and incremental cost and so on from a cash flow standpoint, we've included roughly $100 million.
And our cash flow statement, there is maybe <unk> or so of non adjusted impact in the P&L for things that are sub optimized is as it relates to the spend so a modest impact in that regard we've reflected that of its bigger impact from a free cash flow standpoint, I've discussed this with a number of you already.
And so I think we've got that correctly model and like I say I think the operating.
Margin story really does start to look a lot better as we approach Q3.
Understood. Thanks, guys.
We will go next to Matt.
Mike I apologize Matthew <unk> with Keybanc.
Thank you for taking the question.
How are you guys looking at R&D into into 2023 do you have the flexibility to kind of speed up some projects.
Especially in the transition year like this that they set you up for better growth in 2024 and 2025.
We have earmarked some R&D dollars in particular for some of the Hill ROM portfolio and some of the connected areas there in frontline care in particular.
I will say that as we as.
We look at the opportunities presented by the Hill ROM acquisition, it's a it's a really tremendous one long term and we're talking once we've resolved the supply constraints last year growth was essentially flat.
Seeing we're expecting mid single growth mid single digit growth in the Hill ROM portfolio of this year in the face of continued supply constraints and part of that comes from new products will launch a new ICU bed as I referenced in my prepared remarks, but to your point that there are some really interesting opportunities that will.
Protect investment for as we go forward and I think that should start to accrue to the benefit of frankly both companies.
2024, and beyond yes, I just want to complement that we were planning for double digit R&D, increasing 2023 versus 2022, and we're going to do probably this cadence year over year, we found some.
Yes.
<unk> portfolio of primarily Boston, Connecticut in connected care.
We will receive a significant portion of our increase in research and development. This is one of the things that we've discussed in the thesis of the separation, but good nickel was the ability to allocate capital to the right places. So you should look forward to batch there will be significant investment in <unk>.
The devices.
As well as smart devices. So you look at continuation once we get through it.
Large volume parental pump approval is the next generation of integration of the pump is 50 software and Youll see us in Q3 launch and the progressive plus so.
Really making solid.
Our position in terms of market leader in beds, so there's quite a bit of.
Change in how we've seen R&D, we think innovation is a path forward for Baxter and <unk>.
We need to do it is accurate.
What we're doing in 'twenty, three and allocating.
On the double digit growth to deadlines.
Okay.
And then if I heard you right I think you said, a 22% tax rate for 2023.
What's changing there and then is that the go forward tax rate.
Core Baxter moving forward.
Sure. We did have some one time and planning benefits accrue to 2022, and then as we as we looked at 2023, we included things like sort of modified assumptions related to Fas 123, our benefits among other things.
And so it's hard to say what the go forward is beyond 2023, I think we've got it correctly pegged.
The tax team is hard at work and I know many of them listening to this call looking at planning ideas for 2022.
But as we look as we look beyond that so much of this will depend on the setup of the two new companies that it's very challenging for me to comment specifically in this forum.
Round the tax rates for the two companies, but up 22% is a good number for this year.
Alright, thank you.
Okay.
We'll take our next question from Matt <unk> of Barclays.
Alright, thanks, so much for fitting me in so.
I wanted to just follow up on on where things stand with the.
Integration and sort of synergies for Hill ROM.
Maybe Jay if you could talk a little bit about.
How some of the inflationary pressures energy costs et cetera has weighed on that business and whether this sort of change in componentry and supply chain is something that we expect to kind of be able to sustain here in the first half.
Still sort of choppy and then I had one follow up.
Sure.
So from an integration standpoint, I would say overall, the integrator going very well, we had the disruption last year and that disruption has continued all.
All the way through.
Today in terms of electro mechanic component availability the ability to procure at reasonable prices all of those things has been very disruptive to the initial stages of the Hill ROM acquisition, but having said that we're very pleased with where we currently sit and the path forward.
Sure I commented moments ago flat growth last year, largely driven by supply constraints X supply constraints, we would have seen nice mid single digit growth, we start to see some of that normalize, but we do see residual impacts from supply chain into 2023, but despite that we're talking about mid single digit growth this year.
Sure.
From a from a cost synergy standpoint, we're ahead of our expectations.
In the numbers that we've reported there is a clear benefit included for Hill ROM integration and then as we look forward I think we have a lot of optimism about the portfolio the interaction with Baxter products and where we can take this going forward and maybe I'll turn it over to Joe to talk a little bit about some of the things that we've seen there yes, we have.
Pretty rich pipeline of products, starting with progressive floods as I said, it's going to really put.
Baxter.
<unk> continued the progression of very solid leadership position in the best markets.
Our centrella bed and who has done a great job Prada.
Product that continues to sell well when we look at from a frontline care.
That business could have grown double digits easily in 2022 as well as in 2023, we're planning for fuel wrong as a whole to grow around 4% could be north of that if you components become more available we are starting to see the thawing of their market primarily for like garrison to see more components coming we just look at that in the month of January .
To see some of that coming through.
And also the innovation pipeline coming out of those two businesses look really good on the connected devices.
Care Communications, we see put backlog coming into nurse call systems as well as new solution of both we see in the first half of the year, a little bit depression in that Aspen nursing shortages.
To to apply pressure to the hospitals and also the macroeconomic indexes.
Hospitals will be more cautious, but we see that.
<unk> proven in the second half. So you look at the market for capital improve in the second half can look at product launches that we have coming up and the pipeline of innovation coming out of Hill ROM.
It's very exciting further to that we're putting more money into research and development in 2023 disproportionately into hill ROM to accelerate the growth of that.
That business.
Okay. That's super helpful and if I could just maybe at a high level.
Joe you touched on some of these things it just now but I think most folks are looking at the guide.
More conservative.
And folks were expecting.
I think we get that.
So we'll be able to sketch out the script for today, they might have recommended something like that.
The struggles that.
Company in the sector really has had an energy policy interesting last year.
So maybe with that in mind. If this is kind of sort of re basing and taking all of these things into account what are some of the things.
Things that you're that you think could kind of.
Potentially present, some bright spots and upside as we kind of get into the year, given just kind of a turning point in the business turning point in some of the inflation.
Terry pressures that Youre seeing.
What are some of the things that you would say could could possibly go well or better this year.
Listen when I look at 2023 coming from 2022, we saw an incredible pressure in our hour.
Manufacturing base, if you think about us we're disproportionately affected by the significant.
Second increase in energy cost transportation remember Baxter's transportation as a percentage of sales is it high single digits and it was.
Go into some of our markets is even higher than that for some of the renal products. So what what I'm, what I think is remarkable.
We were able to get very quickly once we start seeing those things coming up so fast we went on the other hand, we have created significant programs to offset the offset is not what transform what transforms Baxter is the amount of automation that we're putting into our manufacturing operations. The amount of plants, we're going to be able to consol.
Because of that and this is all will take place in 12 to 24 months. We also looking at a disproportionate allocation of capital into businesses that are connected and the possibility for growth. The market is very anxiously waiting for our pump we feel optimistic.
What we are with a bump to that we don't speak on behalf of the FDA, neither were making a prediction about that but we're seeing that we're enthusiastic because we know the products doing very well in Canada, we just closed another.
Fuel pumps deal one of the processes. So we are excited about the portfolio.
So when I looked at all in 'twenty three is the year that they have.
Two different stories, the first half with a story of pain for somewhat incremental cost significant cost that we have in 'twenty two coming through.
The inventory is selling off the inventory that was there was produced with that incremental cost I see the second half of the year, becoming more and.
More.
Our focus on what they actually used to be which you're starting to see leverage off the bottom line and bringing back the things they used to be part of Baxter, but this crisis brought to surface a lot of weaknesses in some of our supply chain operations and while we took the opportunity was to regroup and understand how to model.
<unk> permanently and take away some of this variability from our future.
Going to get out of being in the routing based business no, but we're going to make sure. There are plants are in the right place our planes, our ultimate it and we have the ability to get really iffy.
<unk> C auto bar system. So the cost reductions that we're putting for instance into into 2023 are over $300 million. So that efficiency will pan out in 'twenty four with another $300 million in 'twenty forthcoming to our supply chain. So all of those things that we're doing is a transition year for <unk>.
We set we regroup look at our portfolio restructure our capital structure with the selling of bps getting debt to help us take the debt down but also feel future inorganic tuck in opportunities. So this is the year. The backstreet we executed in its final stage.
<unk> of the transition that we started seven years ago.
Super helpful. Thank you.
We will take our final question from Lawrence Nicholson at Wells Fargo.
Good morning, Thanks for taking the question.
Jay maybe it'd be helpful to give us an update on the stand up.
Cost in the stranded cost is the right assumption about 1%.
With respect to <unk>.
<unk> sales in the onetime disentangled cost of 3% to 4% of total company sales, what's the timing on that it will some of that impact non-GAAP earnings and <unk>.
Any J I mean, you know it's early but people are looking at 'twenty four for valuation any any framework on <unk>.
Margins get back to 2022 levels.
Sure.
Sure No no commentary yet on 2024.
Are incredibly focused on delivering 2023 period.
And we do believe that there are some discrete headwinds that we're facing in 2023 that abate in 2024 or go completely away. So as Joe commented just moments ago, We're really excited about where this thing goes into the future as evident.
By what happens in the second half of the year as we look at the operating margin of the company. So we're very optimistic but at this point I have to stand down in terms of giving multi year guidance.
As it relates to standup costs in and dis synergy or onetime costs standup cost for newco, we sat around 1% to 2% no real adjustments at this point from a onetime costs. We've commented previously on the higher end of the 3% to 4% precedence that we've seen but youre seeing some of that in the numbers that we shared.
Today, specifically, we have roughly $100 million in cash related cost.
Costs that impact cash flow.
But much of that is either capex or <unk>.
non-GAAP, so to speak and so in our non-GAAP results, we have roughly <unk> of impact cost related to this program in the numbers that we shared today. So that's really how we're looking at it in 2023 of the cash is a very real cost and to my comments earlier in relation to Robbie Marcus his question.
US cash flow is a crucial and important area of focus for us in 2023. So those are very real cost, but as it relates to what's impacting the P&L. It's a couple of two three.
Hey, Jay that's helpful. Just one quick one here the backlog in back orders can you quantify those and do you expect to get those back over time, we have seen some companies report Q4 results where we've seen.
Some some benefit from those coming through it thanks for taking the questions guys.
Sure I won't get into too much specifics on this we do have some benefit from improvement in backlog, where we have clear line of sight.
So we have reflected a little bit of that in our numbers, but what I will tell you is in the plan that we've reflected here today.
Continues to be.
Supply constraints on what we could otherwise sell.
So once we have line of sight to freeing up of electronic components among other key inputs.
We'll hopefully modify that assumption to the better but at this point in time, there is still some backlog that exists over the course of the year and we did comment in the prepared remarks on continued impacts in the fourth quarter.
Yes, I would add that I would add to backlog.
We're starting to see some movement positive movement in semiconductors, primarily frontline care, we're starting to see that.
And that is very encouraging to us, but I think.
It is early to take a victory lap here I think our supply chain folks have done a lot of work.
However, we're starting to see this progress coming through hopefully continues on and we can actually in the next quarters speak more about the positive.
When the decade plus thank you.
Thank you.
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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