Q1 2023 Baxter International Inc Earnings Call
Speaker 2: first quarter 2023 earnings conference call.
Speaker 2: Your lines will remain in a listen-only mode until the question-and-answer segment of today's call. At that time, if you have a question, you will need to press star 1 on your touchtone phone. If anyone should require assistance during this conference, please press star then 0 on your touchtone phone.
Speaker 2: As a reminder, this call is being recorded by Vaxter and is copyrighted material. It cannot be recorded or re-broadcast without Vaxter's permission. If you have any objections, please disconnect at this time. I would now like to turn the call over to Ms. Claire Trackman, Vice President and Investor Relations at Vaxter International. Ms. Trackman, you may begin.
Speaker 3: Good morning and welcome to our first quarter 2023 earnings conference call. Joining me today are Joel Mada Baxter's Chairman and Chief Executive Officer and Jay Sicaro, Baxter's Chief Financial Officer.
Speaker 3: On the call this morning, we will be discussing Baxter's first quarter of 2023 financial results, along with our financial outlook for the second quarter and full year 2023.
Speaker 3: With that, let me start our prepared remarks by reminding everyone that this presentation, including comments regarding our financial outlook for the second quarter and full year 2023, new product developments, the potential impact of our in-flight proposed strategic and pricing actions, and the potential impact of our financial outlook for the second quarter.
Speaker 3: business development, regulatory matters, and the macroeconomic environment, including commentary on anticipated customer capital spending, contains forward-looking statements that involve risk and uncertainties, and of course our actual results could differ materially from our current expectations.
Speaker 3: Please refer to today's press release and our SEC filings for more detail concerning factors that could cause actual results to differ materially.
Speaker 3: In addition, on today's call, non- GAAP financial measures will be used to help investors understand factors 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 issues this morning and available on our website.
Speaker 4: I appreciate you taking the time to join today's call. I will begin with an overview of our first quarter performance and trajectory. Jay will follow with a closer look at our financials as well as our outlook for Q2 and the remainder of 2023. After that, we will open up the lines for Q&A. First quarter sales declined 2%.
Speaker 4: year over here on a reporter basis in rows 2% at a constant currency exceeding our original outlook driven primarily by better than expected sales in Reno care pharmaceuticals in front line care. On the bottom line for squatter adjusted earnings per share of 59 cents also came in a block
Other non-operating income totaled $1 billion in the quarter compared to $16 million of income in the prior year period.
Results in the quarter reflect the benefit from the amortization of pension benefits as well as an equity gain which were offset by foreign exchange losses.
The adjusted tax rate in the quarter was 23% compared to 20.8% in the prior year period. This increase was driven primarily by a change in stock based compensation impacts.
And as previously mentioned adjusted earnings of 59% per share declined 37% versus the prior year period earnings in the quarter, reflecting the increased cost of raw materials frightened labor as well as the impact of higher interest rates on variable rate debt and foreign exchange headwinds.
Let me conclude my comments by discussing our outlook for the second quarter and full year 2023, including some key assumptions underpinning the guidance as.
As mentioned, we're pleased with the solid start to the year after the challenging macro economic environment, we experienced in 22, the challenges of which we continued to address.
Our business fundamentals are solid and we're seeing positive trends externally, we're cautiously optimistic and continue to work to position ourselves to see improved performance in the years ahead, and we remain steadfastly focused on execution.
Taking into account first quarter results I'll know walk through our guidance and expectations for.
For full year 2023, we expect global sales growth of 1% to 2% on a reported basis and approximately 1% growth on a constant currency basis.
We now expect full year adjusted operating margin to be between 15, and a half and 16%.
Interest expense is now expected to total approximately $500 million, we continue to anticipate and adjusted tax rate of approximately 22% in a diluted average share count 508 million shares.
Based on these dynamics, we expect 2023 adjusted earnings excluding special items of $2.85 to $3 per diluted share.
Specific to the second quarter of 2023, we expect global sales growth of approximately 1% to 2% on a reported basis, 2% to 3% on a constant currency basis.
And we expect adjusted earnings excluding special items of 59% to 61 cents.
Per diluted share.
With that we can now open the call up to Q&A.
Thank you we will now begin the question and answer session. If you have any question. Please press star one on your Touchtone phone, if you wish to remove yourself from the queue Press Star one again, if you're using a speaker phone. Please lift the handset to ask your questions.
So that we may be respectful of everyone's time. Please limit your comments to one question with one follow up question if necessary.
We appreciate everyone's patience and we'd like to provide as many of you as possible the opportunity to ask the question.
We will pause for a moment and one of the list is being compiled we would like to remind participants that this call is being recorded in a digital replay will be available on the Baxter International website for 60 days at Www Dot Baxter Dot com.
Sure first question comes from the line of Vijay Kumar with Evercore ISI. Please go ahead.
Hey, guys. Congratulations on a good start here, maybe my first question here.
Joey.
<unk>, you mentioned utilization trends moving in the right direction.
Supply chain constraints easing.
So when I look at you a Q1 performance in Europe <unk>.
The annual guide implies back half of your person constant currency grill. So maybe just walk us through <unk> <unk> <unk> <unk>, what are there any timing elements or what's being assume for the back half.
Yes, BJ thanks for the question.
Comment so far so good in terms of sales performance in the first quarter of the year and to your point I think importantly, we've seen a fairly cooperative environment. Both on the top of the line and also very importantly from a general Macworld context, those were some really important underpinning.
<unk> of the guidance that we originally shared we needed to see that and we did so we really really good start to the year as it relates to sail cadence first half versus second half.
Really there are a couple of specific drivers that lead to a slightly slower.
Both in the second half and it's really not on land or.
Or is it consistent with our expectations essentially our renal business has nearly $100 million of one time headwinds items for your specific payments that occurred exiting of distribution agreements last year or exiting are exiting lower margin arrangements and so all of those things.
Take renal from positive growth in the first half to negative growth in the second half so very discreet item. There, we expect that to sort of normalize and see growth more consistent with patients going into the future and then as we look at our <unk>, our pharmaceuticals business and we.
Really had outstanding performance in the first quarter.
Packaging some continued growth there, but we do see a little bit of a deceleration most notably in compounding the second half of the year. So that has an impact on the overall sales case I think the most important thing from my perspective was shedding macroenvironment and utilization location treadmill, we saw that in the first quarter, we're happy to carry that.
Lord.
That's helpful that yet and perhaps one follow up on <unk> I think the prior guidance was self a four person concert currency.
That change.
At all and perhaps sure if you can comment on on.
You know he'll run was two per cent declines, mostly driven by PSS I think most of your peers.
They're talking about easing supply chains electronic components backlog at in <unk> <unk> <unk> <unk>.
<unk> confirm that this is not sure lost I think he made some comments on backlog in order. So maybe she could side effects for us.
Vijay good morning.
Just just the preface on whole he ROM were very <unk>.
Happy with the performance of most of the businesses under <unk>, how we've been integrating the business into Baxter.
We had a very strong <unk> quarter.
Frontline care has done a great job and discussing proof because supply of products. So we see low to single meat.
Single low to single <unk> single digits.
3% versus 4% suppliers are really supply is really getting better and this is affecting AFL C. Not only the performance of F. L. C is doing better but also our backlog is increasing.
Further than we thought was going to increase who has some really good momentum we see.
<unk>.
With a reduction in sales in the first quarter I wanted to remind you that we had a reduction of 20% in rentals does is from the peak of Covid and a lot of <unk> going on in 21 and two in order twenty-two we sorts a significant reduction also some postponement of.
Capital spending, but we're very excited about the launch of progressive plus any improvement in our sins trella pad. So those are coming in this quarter will be great launches for us we haven't launch in your platform of like Progressive plus in almost 10 years. So this is a really good staying we are number one in the <unk>.
<unk> will be able to continue to capitalize not on the backstroke comscore hopefully into new accounts competitive accounts I would say that it is important to to note that capital postponement has a specifically being focus in this category.
Area of spending we have not seen that at all and the other Baxter categories is such a smash and F. L. C has strong very strong growth alright infusion therapy as bizarre bumps business and now has shown very strong growth and strong forecast growth for the rest of the year. So it is a phenomenon spicier.
Typically four four baths, but as I said with the launch of new products. We're really excited to come in and have this this situation reversed as we plan to have it.
Reverse indymedia rates in the second half of 2023.
Fantastic Thanks, guys.
Thank you.
Your next question comes from the line there <unk> with Deutsche Bank. Please go ahead.
Good morning, Thanks for taking my questions. The first one is so similar to sort of be did question, but relative to your guidance. They leave updated today Sir.
We are the biggest source of upside downside in the first quarter as it relates to both revenues and inflationary pressures.
Sure I think I think there were a few areas, where we saw a solid performance in the first quarter.
Our pharma business, we added a new leader to this area last year on that team is really doing an excellent job with respect to new products and accelerating commercialization of some of these products. So we thought we had a really nice performance in the first quarter now some of that did.
Really was a nice element for the performance shake in the first quarter, but importantly, I think some of the some of the assumptions that we had were confirmed and that really gives us some solid confidence as we move to the second half of the year, but admittedly there is a big step up first half to second half.
And I would say that there are really three drivers of the operating margin improvement that we expect to see the first relates to generally in the second half of the year, we have more sales than the first half of the year. So in the second half of this year year, we expect north of 400 approaching $500 million in more.
Sales in the second half versus the first half that's not a dynamic that is unique to this year. If you look at any of the last couple of years, you would see that normal sales step up first half to second hand.
And that has margin benefit that also has a significant EPS benefits. So you'll see about 30, plus sense of EPS from those incremental sales dropping through the.
The second thing is integrated supply chain we.
Cost that we're experiencing today are cost that we realize our experienced in.
In Q3 Q4 of last year, when there were very elevated prices as those indices have eased and the last few months, we have line of sight to improvements and supply chain.
That yield roughly 15 cents approximately of improvement first half the second half now I should say, it's not just indices that are cooperating. It is also the hard work that goes into what we call value improvement programs, which are essentially efficiency initiatives and plants, but that's.
<unk> incentive improvement, that's a very real impact from our supply chain team and then the final thing is listen we've talked previously about some of the cost on efforts that were undertaken.
And those benefit more of the second half than the first half and we.
Largely concluded those programs there are in place and so, but but because a lot of those activities occurred in the first and second quarters. The benefit of only realized in the third and fourth quarters and natural roughly 15 cents. So if I were to say why are we going to go from point a to point b.
With a very substantial improvement and margin it really comes down to those three specific factors.
Oh, that's super helpful. Thank you J and I'll I'll follow up question on them in my queue.
When does that assume when they when it gets approved does that so we think about that it's like $100 in full your revenue 200 million margins are those above below corporate average and when you think about the potential for sure sure games and then do you think you'll be on the market before your other competitor, but how do you think about the opportunity for share gains there.
We were not going to comment along the approval voted pump because it's not dependent upon us is with the FDA at the moment.
We are optimistic about the performance of the pump.
When it gets approved.
But we're not commenting India.
And anything that the Fda's doing I would say to you that there is an opportunity there are significant amount of bumps on recall at the moment, including brand new bumps wood, which just launched recall collapsed one the other day.
So we are currently capitalizing on that with our Sigma spectrum. We are we upward forecasts significantly under on Sigma spectrum. We are now more optimistic composite components. We also doing some redesign off of components to make sure there is more durability and.
And then when novum gifts to the market is going to be for us to make the decision how to face dead in customer.
Customer comps may want to stay with their current model of Sigma spectrum, because they have a fleet of it and we have significant opportunities to gain market share once novum is approved so.
We're very excited about the platform that we have in front of us and we are going to be putting more money in research and development and ask you to develop other categories of pumps with with an Baxter. So I will tell you that we're not giving you what's the forecast for northern and once approved as soon as we get news about about and all of them from the.
F D a.
We will let you know what that means in terms of numbers, but at the moment I tell you that the demand for pumps his highs primarily because sigma spectrum.
A good pump perform extremely well and in the know you're facing competitors, who have consent decree and recalls in many different categories.
Great Thanks, Joe and congrats on it a quarter.
Sure.
Robbie Marcus with J P. Morgan is on the line. Please go ahead with your question.
Oh, great. Thanks for taking the questions maybe I'd start with let's get your thoughts on pricing what it was in the quarter and your ability to take price going forward, we cpr's, taking it in the capital components and we hear some of your peers talk about it and some of the the hospital supply area.
'cause, we would love to get your thoughts and the potential for for Baxter moving forward.
Sure I'm not going to get into specific amounts in the first quarter, but pricing.
Pricing was a contributor.
And an important one and I think for us what as we went through last year, we had sinks significant incremental costs across the portfolio and basically every single product line that we sell.
And at the end of the day, sometimes you don't have the ability to address price in the short term.
Given quarter or given year and in some instances you actually have to wait a couple of years before you actually addressed price because of long term agreements that you have in place.
What's really important for our team is that we capture our fair share of the economic value that we provide to our customers and so this year. We are working very carefully there was positive pricing in Reno, there will be positive pricing from a hospital capital standpoint, and all of the areas that we operate we are expecting.
To see decent price. The one exception of course is farm aware, that's that's been more stable, particularly in the first quarter, but that's still an area of <unk>.
More price competition, but I think I think Robbie from from our standpoint. This is going to be an important driver for us not only this year, but I think in future years as well.
Great. Thanks, maybe one more we saw some news reports on a potential sale up the Bioprocessing unit.
Just the latest update on your.
You know your thoughts on that business set and how it will proceed and if sale does go through his debt repayment the primary use of cash thanks.
Robbie Good morning, we have experienced significant interesting. This business wished you were exploring strategic alternatives and we left.
Let you folks know as soon as we make the decision if there if there is a sale proceeds.
Proceeds will be exclusively mostly directed to debt repayment. So you're opens the opportunity for Baxter for future reinvestment in the stock share share buybacks and other opportunities, but the first thing for depth motto cash if that is the alternative.
We decided to go forward with will be to to repeat that.
Thanks for taking the questions.
Q.
Your next question is from the line of requires with Stifel. Please go ahead.
Good morning, Joe Hi, Jay couple of questions.
Joe maybe talk us through where you see.
Since everyone's where you feel like you are with the he'll run the integration is it fully integrated so to speak into Baxter now you've got the people and.
Everything's functioning and we're just waiting for supply chain to cooperate.
Cooperate alright sort of and maybe just help us think about how you were thinking about the time on that it's going to take for it he'll run to get back to a more.
More typical.
Mid single digit kind of growth rate, if you would think so.
Good morning, Rick.
We we have been very successful with the integration. So the first part of your question is the integration of <unk>.
<unk> everything some key talent, but also we put a lot of Baxter talent and he'll wrong right now we have <unk> running fuel wrong, the <unk> with a mix of Baxter and former heal rummy employers in <unk>.
Charge of the divisions under under re us in terms of the sooner Jews, we as I mentioned before we.
In the first year it came.
To realize twice as much as we had planned and we continue on track to deliver while we promised.
The onset of the acquisition.
Other than the supply chain.
He should still we had last year, we we start to see the power of frontline Karen the power off that portfolio right now delivering good growth for us in the U S O U S.
Chips are made more available and as I said before our power back.
Backlog of frontline care is actually growing with growth in sales and growth in backlog. So.
Very excited about that business R. PSS business in the U S. Like a sad has has a setback in dispersed quarter as I said, 20% reduction in the rentals.
Due to Covid, Fortunately, partially last year and the year before but we see the launch of of progressed surplus any enhancements to send trailer a great catalyst for us in the second quarter that we believe with alleviation of <unk>.
<unk> Ah postponement off of.
Capital buying that is going to accelerating the second quarter and we are confident to reestablish that business in a more normal run right hopefully 20 at the doors 20th twenty-three accident 23, 2024, we continued to look it up or choose to enhance leadership in all parts of depth I'll step business.
By the way so bsf's outside the U S is doing well and the GSS business, albeit smaller is doing well both in the U S and outside the U S. So all in all we're excited about he'll Rob with things brings in new new avenues for growth for Baxter and also.
Product launches I'm looking at our pipeline of new launches in a great deal of Denmark coming from so there's a lots of come from there we're going to navigate the short term constrained in the U S. Four cats don't Embeds, but as I said launching this new products represent a great catalyst for the future.
Great. Thanks for that and follow up maybe J her wardrobe.
Instead of a simple <unk> weekend as discretion, but.
Clearly electro mechanical components are critical to this ongoing turnaround process.
And you can reframe <unk>, but are you 50% of the way back in terms of having what you need 10%, 90% are you optimistic that you're largely have what you need.
As you exit the second half can you just help me thinks that a little bit. Thank you so much.
Rick the worst thing we can do is to feel good about something just to start turning around so we are we are we are.
Very excited about having a feel of <unk> as I said before that the demand for our our Sigma spectrum infusion pump is very high and we are very happy actually still have significant amount of components.
They'll allow us to increase the sales of depth product and satisfy the backlog that we have if we had more we could sell more we see alleviation a backlog of products they need to be shipped on frontline care already coming out are bad quarter has reduce.
Seeing half, while we had about nine months ago and a lot of that is related to semiconductors with death said, we're not letting this.
Go away, we got an opportune to improve so we have significant amount of of of initiatives within the company for redesign of components to go on boards similar very critical somewhere less critical we have a transfer office establish wisdom Baxter not only for microprocessors, but also for other.
Ponant things are not 100% normal right now we still have a great deal of suppliers trying to get pricing on a Baxter where offsetting those were were were absolutely not accepting but also upsetting with significant cost reductions so.
We as we navigate through 2023 will be very important to the company does not lose its focus in finishing what we started in the semiconductor transformation in the supply chain.
<unk> <unk>, but we feel cautiously optimistic that we have turned the corner when it comes to to supply of components into our business.
Create the perspective too thanks.
A walk.
Mix it with Barclays's online. Please go ahead with your question.
Alright, great. Thanks, so much for taking a question so Joe.
Joe J.
Some of the themes that obviously come in here for Q1, so far this hearing cycle healthcare.
An extra.
Providers as well as putting it on vision volumes.
A strong emissions.
My.
My neighbor cover services, and and improving staffing in an evening as those constraints you talked about some of these things and that and your prepared remarks, but could you maybe just.
Give us a sense of what what strong uptake in these this is <unk>. That's mean to you and that meant to you in a quarter and then what are they mean in terms of you know pull through increased it sounds kind of some of the products that you sell as well as you know the available.
Ability at staff to get.
Some of the inflammation in the implementation of the system like it connected care or the rollout of beds.
Just some additional color on that and then I have one follow up.
Larry what we see is.
Matt I'm sorry.
<unk>, what we see is is a an alleviation of the pressure.
The Huskers, we're having last year with with more availability of nursing.
We just as a point of reference we had some one timers medication delivery business as we reported as we continued.
<unk> continued to report medication delivery few exclude the one time was between gains and losses between 22, and 23 first quarter, our groceries around 6.2%. This is exactly what we see in terms of growth coming not a hospice, which are publicly traded companies in the reporting right. Now. So we see that is that is.
For business like medication delivery, which are steps in an infusion infusion Ah solutions and vitamins that is a pretty good pick up on the business. They usually have with growth of low single digits. So that is twice as much. So there is a rebound and into a back to normal.
Reality that we see so dancer comments on our prepared remarks.
When you think about the relentless look for optimization of work Flowy hospitals desks, when we start seeing some of our products coming to fruition, we just.
Integrated are seeking respect and the other day on the two way communication for hospitals, there's no more hospitals that will come in and ask just for a pump where a monitor everything needs to be integrated the workflow needs to be improved and desperate batteries focusing on a significant amount of extra money. We gave him to research and development of frontline care for instance.
Increase their ability to launch products faster to integrate to create solutions to help hospital. So we are cautiously optimistic that we've seen an uptick in procedures, we see higher admissions in the are hired emissions and operating room, you can see the growth of our our advance surgery business was.
Very very robust very robust closest 10%.
And that shows that in the U S. You have a good flow of procedures. So.
All in all it indicates that the deaths of good track for 2023.
That's terrific and just I could have a follow up on a question that we get occasionally here on the stand I know, it's still early and get working too many of the details as you to lead up to that.
But around around the dividend J, if you could talk a little bit of balance.
Thinking about managing that and what is.
Is your expectation or aspiration to just sort of.
Continue to pay it back.
Extra dividend.
For for the entire entity as you kind of get through this get through this transaction next year.
Yeah, it's listen in terms of capital structure for the two companies and dividend policies and approaches and all of that and it is very early days, we understand the importance of the dividend, we have backs and Kate the dividend very seriously. So we understand that that's that's a that's a great <unk>.
Tool to return capital to shareholders.
It's been a very effective one for us over the years.
So we take the dividend very seriously, but at this point, it's too early to comment on capital structure and all of those things will unveil all of this as.
As we go somebody's, we get much closer to the spin and I think we'll talk about things like what is the dividend policy for Reno co. If they have won all of these things will come to bear, but I think it's a little premature to do that uhm as we're still in the early stages of preparing for the spin off.
Got it congrats on the corner and thanks for the color.
Thank you.
Julian Lynch from city is online with the question. Please go ahead.
Good morning, and thank you and Uhm nice corner.
Two questions one big picture wanted specifics take take care Uhm, you talked about transformational initiatives and I'm curious how you start to measure that is and what time frame you see that kind of goes instead for 2023 thing. It's just well over the next five years called the L. R. P.
More specific question is progressive plus bed new.
A new bed skip taken up is it you have a backlog of people, saying now.
Now that you've watched it I want it they're just walking through you know, how we think about that new talent. Thank you.
Hi, Joanne good morning.
The transformation has.
Three specific objectives one is.
Of course.
B bring a more effective way of managing Bextra business instead of regionally management manage into business between three large regions in the world give P&L responsibility to business leaders, who are many C E OS who control, 100% off their business, including supply chain and all that.
<unk> picks up that business.
So that transformation it seemed process and we started to see the difference in how the ownership with this business have transaction how effective this new model I guess, the second us through a new motto youre doing it not only because we needed more effectiveness organization, but also we need to reduce cost of upgrading so bad.
<unk> one of the lowest sg&a's amongst peers, where 21, 22%, we wanna be sub 20 and to do that we need to do with two different ways. One is more effectiveness effective use of all personnel. The second you just use a system such a sufficient intelligence and different locations in the.
A world for us to provide our service we are upon that fast 20th Sentience organisation finance has done a significant amount of work with with moving back office to different parts of the world. In this is specific change which is made an organization is.
Gonna give backs or significant amount of dollars. We're gonna realizing 23, but also full bowling 24, very large cost savings till we deal with the reorganization that true a reduction in force. So reduction forced income first the organization design came first reduction in force.
As a consequence of better use of our resources and lastly, and also probably the most importantly, he has the ability to accelerating in innovation and move some of the money, though we're saving Beck and research and development with just the <unk> gave the HST what did the Neil Teal ROM business under <unk> Russell.
More money for research and development and we're going to actually also improve increase the amount of dollars going to our pump platforms, because we want to accelerate some of the R&D.
Developing in that area. So this transformation is very profound for backstory no spark of transforming the company that I started back in 2060 and this is the third leg of distilled the third phase of this transformation.
Perhaps you moved to the last and final question.
Yeah. So we moved to the final question now and then it comes from the line of men Taylor with Jeffries. Please go ahead.
Hi, Thanks for taking the question.
J. So I wanted to ask you you kind of a big picture question.
And I was just thinking about you know the 2022 analysts say you talked about.
How those things are related if at all and then you gave a gross savings number could you talk about.
Well I I would I would say is as a company.
In the backdrop against the backdrop of a calmer inflationary environment, because what you'll see is you'll see some of the savings initiatives go discuss but you'll also see some of the great progress that we're making from.
Hey, Matt maybe could you go on mute.
Sorry, Yeah no problem.
You'll you'll also see the tremendous work that we're doing in the integrated supply chain area. We recently approved a very large automation program that will allow us to simplify how a number of our plants offer and you know that's going to have a great impact for years to come in so what what I would say is we feel very.
[noise] good about the activities that we outlined in 2022 at the Analyst day, and then now we've supplemented that with a reorganization of Joe described all of this is intended to accelerate margin improvement and so we're excited to see the impact of that over time.