Baxter International Inc.

Good morning, ladies and gentlemen, and welcome to Baxter International's fourth quarter 2021 earnings conference call. Your lines will remain in a listen-only mode until the question and answer segment of today's call. At that time, if you have a question, you will need to press the star and the number one on your touchtone phone. If anyone should require assistance during the conference, please press star, then zero on your touchtone phone. As a reminder, this call is being recorded by Baxter and is copyrighted material. It cannot be recorded or rebroadcast without Baxter's permission. If you have any objections, please disconnect at this time. I would now like to turn the call over to Ms. Clara Trackman, Vice President, Investor Relations at Baxter International. Ms. Trackman, you may begin.

Good morning and welcome to our fourth quarter 2021 earnings conference call. Joining me today are Joel Madoff, Baxter's Chairman and Chief Executive Officer, Jay Saccaro, Baxter's Chief Financial Officer, and Giuseppe Iacoli, Baxter's Chief Operating Officer. On the call this morning, we will be discussing Baxter's fourth quarter and full year 2021 financial results, along with our 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 first quarter and full year 2022, including the anticipated impact of COVID and inflationary pressures on this outlook, The recent acquisition of Pilgrim, including anticipated cost synergies and future net leverage targets, new product development or launches, business development and regulatory matters contain forward-looking statements that involve risks and uncertainty. 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 details 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 Factor'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. As mentioned in our press release this morning, following Baxter's acquisition of Hillrun on December 13, 2021, Baxter's fourth quarter and full year 2021 financial results include Hillrun's financial results for the last 19 days of the quarter ended December 31, 2021. Hillrun's financial results for these periods are recorded as a new operating segment in addition to Baxter's existing three geographic segments. On the call this morning, we will be discussing operational sales growth, which for the fourth quarter and full year 2021 adjusts for the impact of foreign exchange, the December 2021 acquisition of Pilgrim, and the February 2021 acquisition of the rights to Calix and Doxil for specified territories outside of the U.S. Later in the call, Jay will discuss our guidance for the first quarter and full year 2022. Operational sales growth for 2022 will include the impact of foreign exchange and the acquisition of Hillrump. Historical 2021 quarterly sales for Hillrump have been posted to the investor section of our website. Now I'd like to turn the call over to Joe.

Thank you, Claire. Good morning, everyone, and thank you for joining today's call. As always, I hope that you and your loved ones are healthy and safe. I will start this morning with some perspective on our performance last year and future trajectory. Jay will take a closer look at the financials and share our outlook for the first quarter and full year 2022. Then we'll take your questions. As you all know, this is our first earnings call since acquiring Hiram. The next inflection point impacts this multi-year transformation. The combination further extends our already diverse MedTech portfolio and provides opportunities to broaden our reach, both geographically and across the CARE continuum. Importantly, it also unlocks exciting new possibilities for connected care innovation across our product lines, with the potential to spark clinical insights, enhance patient outcomes, and increase workflow efficiencies. In short, it holds the promise of greater value for all of our stakeholders, from patients and clinicians to our employees and investors. The deal closed on December 13th, so our Q4 and full year 2021 financials reflect 19 days of contribution from Hiram. Looking at company-wide performance, Baxter delivered fourth quarter 2021 sales growth of 10% on a reported basis, 12% at constant currency, and 4% at operational rates. Fourth quarter adjusted earnings per share were $1.04. Up 30% year over year, Hill-Rom contributed $212 million in sales and $0.08 of adjusted earnings per share in the quarter. For full year 2021, sales growth was 10% on a reported basis, 7% on a constant currency basis, and 5% on an operational basis. On the bottom line, adjusted earnings per share of $3.61 increased 17% year over year, which also reflects the contribution of Eurom. Growth for both the quarter and year reflect the ongoing, somewhat erratic impact of COVID-19, which negatively affected top-line sales for certain businesses while fueling demands for others, particularly later in the fourth quarter as the Omicron variant surged. Our top-line performance for the year continues to demonstrate the diversity and durability of our portfolio, which allowed us to deliver operational sales growth of 5% for the year. Demand across both our legacy Baxter and legacy Hiram businesses is strong. During the fourth quarter and continuing through the start of this year, we have been experiencing a higher than normal rate of backwaters due to certain supply chain limitations and staffing-related challenges in our plants resulting from high rates of absenteeism amid the rising cases of COVID. We're working expeditiously to address the situation and anticipate continued improvement in the coming weeks. As we have discussed throughout the year, our cost structure has been negatively impacted by rising rates of inflation, as well as an increasingly challenging supply chain network situation. which has at times resulted in expedited shipments and extraordinary steps to procure necessary components. While our teams have worked diligently to offset many of these pressures, our fourth quarter results reflect higher than expected freight costs. Given the critical and essential nature of our products, we made decisions to expedite product to our customers to ensure we stay true to our mission, which means prioritizing the needs of patients and clinicians who depend on steady access to our lifesaving products. We will never compromise on this commitment. We are realistic about the supply chain challenges that continue to test the global industry as a whole, and we are laser-focused on addressing them successfully now and going forward. We are in the process of implementing new measures in procurement and logistics, including evaluating opportunities to pass through certain costs in selected geographies. that will enhance performance and deliver value to all stakeholders, both in the near term and long run. We're focused on making sound choices to promote our long-term success as a viable, growing enterprise. We're building off our solid foundation and remain focused on executing against our multi-year transformation. This transformation has bolstered our operational efficiency and given us the tools to navigate through these challenging times with the resilience and tenacity this team has demonstrated over the course of the last two years. Beyond this, the acquisition of HealROM introduces crucial growth drivers across multiple fronts. The integration process is moving forward productively. We are already identifying opportunities for geographic expansion as well as synergies to drive meaningful cost reduction and margin expansion. And we are advancing connected care across our newly expanded capabilities. As always, we continue to evaluate our portfolio to ensure the businesses we operate are aligned with our long-term strategic objective to accelerate top-line growth and expand margins. This commitment was clearly demonstrated with the Hiram acquisition, which augmented and strengthened our underlying portfolio. As part of this ongoing process, to the extent we identify areas that do not align with our long-term objectives, we will look to exit or divest these businesses while also continuing to identify new opportunities to enhance future performance. We recognize that innovation is at the core of any successful enterprise, and we're focused on introducing new products that address the evolving needs of our customers and patients. Some of these include the anticipated U.S. launch of our Novum IQ smart pump this year, as well as our TrueView connected digital solutions for our Prismax2 continuous renal replacement therapy technology, which is in early stage launch right now in the U.S. and Europe, Middle East, and Africa. Obviously, we assess our performance across multiple dimensions, just as we must continually strengthen our performance as a thriving and resilient enterprise. Our mission also demands our continued leadership as a corporate system, 2021 marked the launch of our 2030 corporate responsibility commitment, comprising 10 key goals for the next decade and beyond, focused on three key action areas. Empower our patients, protect our planet, and champion our people and communities. We have also taken significant steps in the past year to advance or activating Change Today, or ACT, initiative to advance racial justice within Baxter and across the communities and markets we serve. Our progress as both a business and as a corporate citizen is entirely the commitment of our employees worldwide. This outstanding team has achieved so much in several years, from building our transformation to stepping up tirelessly in the face of COVID-19. Now it stands prepared for our new chapter of momentum and growth. With these teams' proven track record, I'm confident in our ability to deliver on the opportunities we have worked so hard to create. We will be sharing much more about our strategic trajectory at our investor conference later this year. Now I will turn it over to Jay to share a closer look at our performance and outlook.

Thanks, Joe. Good morning, everyone. As Joe mentioned, we're pleased with our fourth quarter results, particularly in light of ongoing pandemic and global supply chain disruptions that we experienced during the quarter. Fourth quarter 2021 global sales of $3.5 billion advanced 10% on a reported basis, 12% on a constant currency basis, and 4% operationally. Sales came in at the high end of our guidance range, which is in line with commentary we shared in early January and underscores the essential nature and durability of our portfolio. Shale's growth this quarter reflects the benefits of revenues associated with the manufacturing of COVID vaccines, strength in medication delivery, renal care, OUS sales of Calix, Doxil, which totaled approximately $35 million in the quarter, and a contribution of $212 million from Hillrum. On the bottom line, adjusted earnings increased 30% at $1.04 per share. Results in the quarter reflected a contribution of $0.08 per share from HILROM, inclusive of incremental interest expenses related to the transaction, as well as unplanned foreign exchange losses totaling $0.04 and higher than expected freight costs of $0.05, As Joe mentioned, we incurred significant expedited freight costs late in the quarter as cases of COVID-19 surged. Now, I'll walk through performance by our regional segments and key product categories, starting with sales by operating segment. Sales in the Americas increased 5% on both the constant currency and operational basis. Sales in Europe, Middle East, and Africa grew 5% on a constant currency basis and 1% operationally. And sales in our APAC region advanced 6% on a constant currency basis and 5% on an operational basis. As Claire mentioned, Hillrump's financial results are reported as a new operating segment in addition to Baxter's existing three geographic segments. Moving on to performance by key product category, note that for this quarter, constant currency growth is equal to operational sales growth for all global businesses except for our pharmaceuticals business, for which we will provide both constant currency and operational growth, adjusting for the acquisition of rights in select territories outside the U.S. for Kalex Doxil. Global sales for Renal Care were $1 billion, increasing 4% on a constant currency basis. Performance in the quarter was driven by global growth in both our HD and PD businesses. PD benefited from year-over-year improvement in global patient volumes, despite persistent pressures from increased mortality rates in ESRD patients, delays in new patient diagnoses, and market-wide staffing shortages. Patient growth improved sequentially throughout the year, with Q4 representing the highest patient growth in 2021. Renal care sales in the quarter also benefited from mid single-digit growth in our HD business, primarily driven by increased international sales of dialyzers. We expect that higher mortality rates and delays in new patient diagnoses resulting from the pandemic will continue to somewhat dampen the rate of new patient growth in 2022, although we do anticipate these rates to improve from 2021 levels. Sales and medication delivery of $784 million increased 6% on a constant currency basis. Strong global growth in this business reflects continued recovery in the pace of hospital admissions compared to pre-COVID levels, as well as increased demand for large volume infusion pumps and small volume parenterals. For the year, we estimate that U.S. hospital admissions were down mid-single digits compared to pre-COVID levels. Pharmaceutical sales of $604 million advanced 8% on a constant currency basis and 2% operationally. Performance in the quarter was driven by demand for our international pharmacy compounding business, growth in anesthesia as our international markets continue to recover from COVID-19 and the contribution from OUS sales of Calix Doxil. This growth is partially offset by declines in our U.S. generic injectables portfolio business related to lower surgical procedures and increased competitive activity for certain molecules. Moving to clinical nutrition, total sales were $249 million, increasing 4% on a constant currency basis. Performance in the quarter was driven by the benefit of new product launches within our broad multi-chamber product offering. Sales in advanced surgery were $255 million or flat on a constant currency basis. Within the quarter, we saw a strong growth in some of our international businesses, but this was offset by performance in the U.S. as surgical procedures, particularly in the second half of December, came in below our expectations due to the impact from pandemic along with staffing shortages. Sales in our acute therapies business were $202 million, declining 7% on a constant currency basis, reflecting a challenging year-over-year comparison. Despite this, performance in the quarter did exceed our expectations as we continued to see elevated demand for CRRT given the rise in COVID cases associated with new variants. Biopharma solution sales in the quarter were $145 million, representing growth of 31% on a constant currency basis, reflecting incremental sales related to the manufacturing of COVID vaccines, which totaled approximately $50 million in the quarter. While our results only include Hillrun's financial results for the final 19 days of the quarter, for transparency and completeness, we're providing some sales commentary for Hillrun's full quarter ended December 31st, which would have represented their first quarter of fiscal year 2022. Unaudited Hill-Rom sales for the full quarter were $724 million. Sales in the quarter reflect a difficult comparison from prior year period following the exit of the international surgical OEM business, as well as significant supply constraints, which impacted Hill-Rom's ability to ship products within the quarter. Moving to the rest of the P&L, our adjusted gross margin of 44.3% increased by 290 basis points over the prior year, reflecting the favorable product mix, operational improvements in manufacturing, and the contribution from Hillrond to our financial results. Adjusted SG&A of $710 million increased 14% as compared to the prior year and represented 20.2% of sales. Adjusted R&D spending in the quarter of $133 million increased 1% versus the prior year and represented 3.8% as a percent of sales. Adjusted SG&A and R&D spend both include the incremental contribution from Hillelm. In addition, adjusted SG&A expense in the quarter reflects the higher freight expenses we absorbed in the quarter as well as higher bonus accruals compared to the prior year under our annual employee incentive compensation plan. Adjusted operating margin in the quarter was 20.3%, an increase of 260 basis points versus the prior year, reflecting the factors I just mentioned. Adjusted net interest expense totaled $44 million in the quarter, an increase of $6 million versus prior year, driven by higher outstanding debt balances related to the financing of the Hill Run acquisition. Other non-operating expense totaled $21 million in the quarter, compared to $5 million in the prior year period. Fourth quarter 2021 reflects unplanned expenses related to foreign exchange losses from our subsidiary in Turkey as a result of the devaluation of the Turkish lira, as well as an unrealized loss on an equity investment. The adjusted tax rate in the quarter was 18.5% above our expectations, driven primarily by the mix of earnings in the quarter. The tax rate in the quarter also reflects the seclusion of Hill Run's income, which carries a higher tax rate than Legacy Baxter. And as previously mentioned, adjusted earnings of $1.04 per share advanced 30% versus the prior year period. Turning to full year 2021, sales of $12.8 billion increased by 10% on a reported basis, 7% on a constant currency basis, and 5% operationally. On the bottom line, adjusted earnings increased 17%, $3.61 per diluted share. On a four-year basis, we generated operating cash flow from continuing operations of $2.2 billion in free cash flow of approximately $1.5 billion. Throughout 2021, we remained focused on strategically redeploying capital to advance our performance and position Baxter for future success. We returned approximately $1.1 billion to shareholders, through dividends and share repurchases, and deployed over $12 billion to inorganic investments to fuel growth, including our acquisition of Hillrun. With the acquisition now closed, our capital allocation priority will be to aggressively de-lever through the next two years to reach our net leverage target of 2.75 times by year two post-close. Let me conclude my comments by discussing our outlook for the first quarter and full year 2022, including some key assumptions around phasing for the year. We currently anticipate that many of the factors that impacted our fourth quarter results, including increased inflationary pressures, supply chain disruptions, staffing challenges across our manufacturing network, and ongoing impact of the pandemic, will continue to weigh on performance. with the anticipated impact expected to be most pronounced in the first quarter.

We're working expeditiously to address order backlogs and anticipate a strong ramp in sales into the second quarter and the remainder of 2022, driven by new product launches and easing of COVID-19 dynamics globally. In addition, we're continuing to implement actions to increase

We anticipate these actions coupled with the improving sales performance will result in meaningful margin expansion and earnings growth for the company, particularly in the second half of the year as compared to the first half of 2022. Given these dynamics for the first quarter of 22, we expect global sales growth of 24 to 25% on a reported basis, 27 to 28% on a constant currency basis, and low single-digit revenue growth on an operational basis. And we expect adjusted earnings excluding special items of 79 to 82 cents per diluted share. For full year 2022, we expect global sales growth of 24% to 25% on a reported basis, 26% to 27% on a constant currency basis, and approximately 4% on an operational basis. Moving down to P&L, we expect adjusted operating margin for the year of approximately 19%, with first-half margins below this estimate and second-half margins above, as we expect performance to significantly improve throughout the year. For the year, we expect an adjusted tax rate of approximately 19% and expect diluted average share accounts to stay consistent with 508 million shares exiting 2021. Based on these factors, we expect 2022 adjusted earnings excluding special items of $4.25 to $4.35 per diluted share. With that, we can now open the call up to Q&A. Ready?

Thank you. We will now begin the question and answer session. If you have a question, please press star, then the number one on your telephone keypad. Press the pound key if you are using a speakerphone. Please lift the handset to ask your question so that we may be respectful of everyone's time. Please limit your comments to one question with one follow-up question if necessary. We appreciate everyone's patience and would like to provide as many of you as possible the opportunity to ask a question. We will pause for a moment while the list is being compiled. I would like to remind participants that this call is being recorded and a digital replay will be available on the Baxter International website for 60 days at www.baxter.com. Our first question comes from Robbie Marcus of J.P. Morgan. Your question, please.

Oh, thanks. Good morning, everyone. Morning, Javi. Morning. Maybe to start, you know, if I use the load teams accretion you've talked about for Hillrom, it gets me to somewhere around 7% EPS growth for base Baxter, which is below the LRP. So maybe first start off with, you know, what's driving it. You touched on supply chain issues and inflation, but I think it would be important to put a finer point on it. And then I'll just ask the second question up front as well. You know, the first quarter is coming in a good clip below where the sell side is sitting, coming into today. What gives you the confidence that supply chain issues will resolve in second quarter? And you can see that acceleration and the drivers for the big discrepancy. Thanks.

Sure. Robbie, there are a few impacts that we're seeing in 2022 relative to previous LRT expectations. The good news from my perspective is a lot of these issues are short-term in nature, many of them related to the Omicron variant and some of the challenges that's created in our manufacturing facilities and supply chain. So if you think about it, over the last six weeks, we've seen increases in our expectations around expedited freight. We've seen some increases in expectations related to supply chain labor costs, in part related to absenteeism in the plants. We've also seen a bit more inflation. And then finally, you know, we've had a backorder situation that really is some of the highest levels of backorders, both on the Baxter side and the Hill Run side, that we've ever seen. And so from my standpoint, we have weathered. a very challenging short-term environment. Some of that featured in our Q4 result, but it clearly impacts our Q1 and, as a result, the full expectations for 2022. And so what's interesting is we are seeing improvements in absentee levels at our plants. We are also seeing supply chain situation improve as we speak. So all of these things we believe are short-term in nature, but they definitely impact the first quarter and then also the second quarter from a margin standpoint before we get back to a trajectory which is much more normal and much more in line with our expectations in the third and fourth quarter. I think as we take a step back, look, we acknowledge there's some disruption in the short term, but really, really like the durability of the business along with the pathway we have going forward over the course of this year and then the future years. So really, and then as it relates to Q1, the issues are most pronounced and really centered on Q1. We won't resolve the backorder issues until at some point in Q2. Furthermore, we won't get out of an expedited freight situation for a few more months here. So that's really why Q1 is where it is. And then we start to see improvements as we move forward. Great.

Thanks a lot.

Thank you.

We can take our next question.

B.J. Kumar of Evercore ISI is on the line with a question. Please state your question.

Good morning, Joe and Jay. Thanks for taking my question. Maybe one on the revenue guidance here. Perhaps, Jay, I'm not sure if I'm doing the math right. The implied Hill-Rom revenues, it seems to be perhaps – down year-on-year, because if I look at their operational growth for Standard and Baxter, and then look at the implied Hillbron, are very neat. Can you just, one, remind us, has any assumptions changed on these two businesses, where Hillbron was 5+, Baxter clearly guided to 4+, are there any COVID headwinds, tailwinds we need to be aware of, and I'm doing this year-on-year math?

Sure. Good question, Vijay. The Hill Run business, our expectation is mid-single-digit constant currency growth. As I said earlier in my prepared remarks, Baxter is approximately 4% operational growth. With the real – and it's not a demand-related item. It really is related to back orders in the first and second quarter. And as I say, we hope to resolve those throughout the year. So the Baxter side, we're talking about approximately four. Kilbron is mid-single-digit constant currency. And then the reported growth, you know, I think that there's some rounding going on on both the Baxter side and the overall reported revenue growth side that leads you to the numbers that you're looking at. But as we look at it, we see he'll run in the mid-single digits.

And in my follow-up, sorry, are there any COVID headwinds? And I think, you know, when the deal was announced, a lot of questions around the strategic rationale, and now one of your peers just did a connected care or communications deal. So maybe elaborate perhaps for Joe on this strategic rationale, connected care. How big of a deal is this, Joe, as we look at the next three to five years?

Vijay, good morning. We are working on those opportunities, and we'll have more on that when we speak to our investors and our investors today. But let me give you three different examples. The first one is a short-term opportunity that we have is our home peritoneal dialysis and the well-sharing remote monitoring. Bringing them together is a very short-term opportunity that we have. It will give us insight into fluid overload and also the workflow of current PD patients and allows us to do Bluetooth-enabled vitals and analytics integrated with a shared source, reducing then the potential burden for patients. and more proactive and accurate management of the patient. This is the very short term. The vote system, the vote alarm systems, midterm one to two years, bringing together delivery of visualization of alarms from the bathroom fusion pumps, TRT devices, and Starling is our our monitoring platform to hold. Bringing them together improves the workflow in med-surg, for instance, ICU, pharmacy, and other parts of the hospital. Just some benefits would be alarm fatigue reduction, transition from reaction to proactive, so you can see things ahead of time, creates a much better environment for for the nursing staff who will be focused on what actually matters versus alarm overload. So we think that is a good opportunity to bring together both platforms, and both is a very important part of the platform that Hurom has. And then on the long term, we're going to close the loop fluid management system, which is how do you actually monitor from a series of inputs, including all the way to the urine output, to the infusion pumps output and alarms and types of drugs, bring our monitoring together, and all the information that comes out of the smart beds. How do we create an environment that reduces significantly the load to the clinician and alarms to the clinician when problems are really arising and eventually preventing some of the bad outcomes to happen. So those are just three examples of things that we are working on, and there's much more. And we had a significant amount of workshops, actually one specific with a significant amount of ideas. So I'm very excited about that.

And maybe, hi, Vijay, this is Giuseppe. Maybe I would add a couple of other or probably another angle to that, that is the site of care. There is a lot that we can do having 2 million connected devices or connectable devices in the field of the two companies together. So there is a lot that we can do in the acute environment, but there is a lot that we can do in the home care environment, geotouch based on the vault and care communication. Think about the PD patients now at home. with hypertension, we can monitor them in a better way, and we can communicate to them. We can add more critical vital signs collection together with the cycler, and we can involve with both families. We can involve the family in the treatment of the patient, which is very, very important.

That's helpful. Just to close out on your question, we have roughly year-over-year $50 million worth of headwind in our DPS business related to vaccines. And then as we look at admissions and procedures, we expect those to to normalize throughout the year. But in the first quarter, they are down a bit. Low, perhaps low mid-single digit impacts in the first quarter of the year, so down approximately 4% as we see it today. Now, from a COVID impact standpoint, i'm not speaking to the back order situation and the situation that we've seen in the plants that's you know i'm treating i'm i'm viewing that separately um it's more of a supply chain related issue but uh but but from a from a demand standpoint those are the key items impacting sales in 2022. understood thanks guys thank you detail chickering of deutsche bank is online with a question

Please ask your question.

Hey, good morning, guys. Good to take my questions. The first one is actually a bridge. Can you help us bridge the midpoint of the 1Q guidance of $0.81 for the last year's $0.76? What's the contribution from Hillerum within the first quarter guidance? I'm trying to understand the cost and backlog pressures on sort of core Baxter. And can you quantify the backlog you're assuming in the first quarter in 2Q?

Sure. From an EPS standpoint, there is definitely a good contribution from Kilram as we look at it year over year. And, you know, if you think about 2021, Q1 actual, 76 cents. But really, between some price impacts, some inflationary impacts, and freight. We're talking about roughly 15 cents of negative impact. And what we would normally expect to see on the Baxter side is really substantial organic volume growth to offset that. We see some of that, but it's not sufficient enough to really carry the day in terms of driving the normalized levels of earnings growth and power that we expect from the business. So we're not seeing that organic volume pickup, in part because of this supply chain situation, which, as I said, should normalize throughout the year. And then Hillrun is north of $0.10 in terms of contribution in the quarter, which is something that is a great add. The business is impacted as well, though, by some of these supply chain issues. And so Hillrun's growth accelerated throughout the year as well.

Great. And then a follow-up question. You talked about passing on some of the inflationary costs to customers in some geographies. Can you expand on which product lines and geographies you can pass through those costs? I think most are global revenues. Any ballpark of sort of what percentage of those can be passed through and sort of what pricing you can get on that?

Peter, this is something that we comment very little. Our pricing is a strategy that the company has. We have pricing built into our contracts. What we're looking at here is an exceptional amount of extra cost the company has to pay. has to carry on the expedite freight, the ability to get components in the door, inflation in labor, as well as the components that are coming in. So we will selectively decide where we're putting those costs, those price increases. They will come in different forms, but we're not going to specifically speak about geography. We know that we have put them in our plan and will be executing on to them.

Great. Thanks so much.

Larry Bagelson of Wells Fargo is on the line with the question. Please state your question.

Good morning. Thanks for taking the question, guys. Just first, on NOVA MyQ, Joe, I heard your comments up front about expecting approval this year in the U.S., I believe. You know, I think at J.P. Morgan earlier this year, you talked about some cybersecurity issues that you were, I think, refiling on or submitting additional information on. Could you please update us on the timing, you know, a little bit more detail on the timing there on NOVA MyQ? and your confidence in approval this year, and I have one follow-up.

Larry, good morning. We want to file this last set of documentations, which you know the FDA will have 31 days to provide a response to us, okay? So this is not the beginning of the application. This is the end. So to that end, we want to make sure we have some new set of eyes to look at the whole application. It looks really good. But there were areas that we think we could do better. Cyber security is one of them that we want to be always tough when it comes to that. So we went back and made some adjustments and improvements, and that took time. So we will be filing with the FDA hopefully soon, and we're expecting that to be 31 days after that we'll have the answer on our large volume parenteral LVP pump. And then following that, we're going to apply the same 31 days at the end of it for the syringe pump and related software that will be our enterprise software as well as the software that controls the pumps the way they work with the networks. So that's pretty straightforward. We are doing the best we can to get the best chance to get this product approved. I don't speak on behalf of the FDA. I never do. I don't have any control on the internal process. One thing that we can control is the quality of the application that we have. And to that end, we want to make sure that we increase our probability to the highest possible before it goes in for those 31 days.

Thanks for that, Joe. And one other thing you talked about in your prepared remarks was about evaluating the portfolio and potentially exiting or divesting, I think, non-core businesses. How long will that process take, and when do you think we'll hear more about it? Thanks for taking the questions.

Larry, when we started transformation on Baxter, we had three very specific areas of improvement. I would say four. not three, four. First is to bring the company into a profitability state that will put us close to our peers and transform the company's ability to generate free cash flow. The second was, most importantly, the culture of the company, bringing the right talent to get the culture going. The third was innovation, and we just spoke about it. Now, getting a pump with the FDA, that was unthinkable when I first got here because we did not have any internal programs or any devices within the company other than fuel that we acquired through Gambro. And the fourth piece was the one that we haven't touched much. We did some touching acquisitions, and then we thought about how do we transform the portfolio of the company, change the kicker, the direction, the innovation, go where the puck is going. That was the acquisition that Hill-Rom brings that year. part into Baxter. Conversely, we do have a couple areas that we don't believe are the right businesses for Baxter to own. And to that end, we are in the middle of analysis, and we should have more in that area either by May or a little later than that in how we're going to adjust our portfolio. What we want to do is always look at a portfolio in a way that can increase the CAGR of the markets we serve, increase the profitability of the company and remove businesses that have been sometimes legacy businesses that are sitting here with probably not a wide capital allocation and bring that to people who can bring that capital allocation to them freeing up the cash flow for bachelors to invest in what really we want to invest, which is in our connected care, digital health, and then, you know, double down on parts of Huron that are doing so well.

Thank you.

Joshua Jennings of Cohen is on the line with a question. Please state your question.

Hi, good morning. Thanks for taking the questions. I wanted to just ask, it sounds like from your commentary, Joe, Jay, Claire, that there are potential revenue synergies with this combination. I was wondering if there are any sales synergies baked into 2022 guidance and then just when to communicate fully the level of sales revenue synergies. And then the follow-up is just any change to the outlook in terms of the potential for the combined business to accelerate organic revenue growth as we move through 2022 and some of the challenges that are present throughout the med device industry and into 2023 and beyond. Thanks for taking the questions.

Sure. As far as revenue synergies go, we have included none in our numbers for 2022, so there's no revenue synergies. Now, having said that, we're incredibly excited, and Joe's highlighted some of the work, and I'll let Giuseppe talk in a second about some of the progress that we're making, because we're really excited about the opportunity for revenue synergies long-term. And I think as we learn more about the Hill Run business, And then we also see how the Baxter business has weathered, you know, a very volatile environment. I think we're very confident about our long-term ability to drive growth across this combined platform. So, Giuseppe, why don't you talk about some of the revenue synergy ideas and some of the excitement we're generating there? Sure, Jake.

So the teams, both the regional teams and the GPU teams, work diligently. on understanding which are the themes and the drivers of sales synergies. And we see a few of them very clearly. The first one, geo-expansion and channel optimization. It is clear that Vaxxer presence outside of the U.S. is much stronger than legacy Euron presence, and that will end up to good sales synergies there. But there are also synergies in connected care, analytics, and services. There are synergies in strengthening our position in alternate care and synergies in strengthening our position at home as well. Don't forget that before the Hiram acquisition, home for Baxter was mainly peritoneal dialysis. Now we have new therapies like respiratory, like cardiology monitoring. which are very, very interesting to us, so we have a more comprehensive offer as well at home. So just to recap, geographic expansion, connected care, alternate care, and home are the main drivers of synergies.

We will have the opportunity to share more about this at the upcoming Investor Day, including some quantification of revenue potential and some refreshment of the financial long-term outlook for the combined company. Great, thank you.

Matt Mitick of Credit Suisse is on the line with a question. Please state your question.

Hi, thanks so much for taking the question. I should have one follow-up on the topic of synergies, if I could, and then on supply chain and staffing. So I appreciate the color on the revenue synergies you were just describing. Can you maybe talk a little bit about what you've seen so far in terms of the cost side, you know, logistics and operations integration that have begun, both on the positive side and any risks you're building into your outlook in terms of disenergies as you bring these organizations together here in the near term?

So on the cost side, we previously shared $250 million in expectations by year three as part of really focusing on certain G&A areas and procurement opportunities and so on. And what I will tell you is we are very comfortable with that number, and as we learn more, we're getting increasingly comfortable. There have been no negative surprises as we think about the cost synergy opportunity. So this one has been, you know, very much according to plan. I think, you know, we've been really pleased with the talent that we've seen at Hillrom, the processes. So there's a lot of great opportunity there and thoughts that we can leverage. But as far as the cost synergy goes, you know, it's right in line with where we hoped it would be, if not trending even more positive.

That's great. And then on supply chain, I know there's been a couple of questions, but you made a comment, and I think some other companies presenting Q4 earnings and talking about Outlook have made similar comments about this idea of improvements in the back half. And, you know, we've been talking about supply chain and input costs for over a year now, I think. And I guess the visibility of just, you know, the mistake in the ground and saying, you know, we do expect these things to improve both in terms of staffing and inflationary costs and backlog and things like that. Can you maybe just give some sense as to your confidence in that visibility? It would be appreciated.

Matt, I will start. I want Jay to actually also supplement my answer. I see this in two different buckets. I see the short-term. or the COVID impact, and then what is the long-lasting effect of having those inflationary costs? So the first is labor availability created by Omicron was significant. It didn't take much. You could read the news and how it affects the country and the curve and acceleration of that infection took a lot of people. from our plants. They were either infected or had contact with people who, in fact, were very much in number one priority of the company's patient safety and quality, as well as employee safety. So we did not allow people to come to work, and we followed the guidelines of the CDC. To that end, we end up with significant disruptions that caused all these air freights that we had to actually incur, which came actually towards the end of the fourth quarter is we will never let patients out of products as soon as we found that we start flying products, despite the fact some of the products were in value of ships that were going in because the rate and the escalation of that. That problem of the labor availability and absenteeism is starting to subside. We have significant efforts in place and we're starting to see our plants filling up with people and the situation will be resolved. Part and parcel to that was the fact that you have to attract employees to your plant, and there is an inflationary cost to the labor cost of the company, and that is the one that we also are upping our salaries and making sure that we retain people. costs of inflation will go now on for a long time. You don't reverse salary increases. What you do actually is create more cost reductions and automation to offset that. And our supply chain has a pretty healthy cost reduction program in 2022 and beyond to offset this inflationary cost. The component availability is nothing new. We've been signaling that for a long time. We're working very hard to get to our components by an advanced by-large loss and things like that. We're managing that. And that is in Baxter being managed. And we just, according to you, Ram, we... had they had similar issues, we are resolving those along the way. And we believe the alleviation of our backwater and backlog will happen throughout 2022. One last point I want to add is that the demand is very strong for our products from two different things. One is the Omicron variant itself, but also a lot of consumption of product that happened and shelves are empty. So you're probably going to have replenishment of those products going out throughout the year. So we don't see a demand at this moment from our vantage point abating. So we have some short-term capacity issues that we're taking care by adding shifts and adding other things we alleviate that. So we're doing everything we can always with the first thing in mind to serve the patient. Second, to do it in a cost-effective manner. So I think we have managed this to the best of our ability and done pretty well based on our footprint and the size of our company going into 2022. We will alleviate these pressures throughout the year, and it's not an immediate solving the component issue. It's going to go throughout second quarter and continues to improve throughout Q3 and Q4. And we want to make sure that our cost reduction, and we just verified that, is very healthy. As a matter of fact, I would say our cost reduction program for 2023 is the largest the company ever had in terms of integrated supply chain.

Very helpful. Thanks.

Welcome. Joanne Lynch of City is on the line with the question. Please state your question.

Good morning, and thank you for taking the question. In your 2022 guidance, could you share with us what your COVID vaccine revenue is? Sure, Joanne. It's about $100 million, a little north of $100 million is what COVID vaccine revenue is this year. Okay. And then also, historically, you've given us your thoughts on hospital census and returns to sort of, I'm not sure what we're calling normal anymore, but could you sort of give us a backdrop of how you thought about that and putting together the guidance?

Sure. We're down roughly 4% on surgical procedures and admissions, and then we have that improving throughout the year to be perhaps slightly below towards the end of the year and on a full year basis relative to 2019 normalized levels. We're not banking on a significant new variant, so that's an important assumption that underlies our guidance. And we're not banking on that variant both from a revenue side and also from a supply chain disruption side. We don't have any line of sight that that's going to be a phenomenon that we have to deal with, and we certainly hope we won't have to deal with that through the remainder of 2021. So really, the story is down 4%, a lot of that relates to Omicron, and then it improves throughout the balance of the year.

Yeah, and that's specific to surgical procedures, Joanne. So again, down kind of that mid-single digit, low to mid-single digits in the first quarter and improving, you know, throughout the rest of the year. With respect to admission, we kind of have it planned versus kind of those pre-COVID levels, down kind of in that low single digits, really kind of throughout the course of this year. Terrific. Thank you so much. We have time for one more question.

Matt Taylor of UBS is on the line with a question. Please state your question.

Hi. Thank you for taking the question. I just wanted to clarify on the Novum pump. It doesn't sound like you've taken any revenue for that in the guidance. Just wanted to clarify that. And then previously when you gave guidance Q4 of 20, I think, you know, it was about a 1% contribution. Is that how you're still thinking about it once it gets launched or any other thoughts you could provide there?

We've included in our guidance revenues for Novum and really prominently in the second half of the year that reflects the successful launch of the product. As always, if that changes, we're happy to adjust that moving forward. As far as specific volumes, I don't know that I would get into too much detail on specific amounts. But to the extent that the pump is deferred, we've been able to offset that either with sales of Spectrum or other product sales. So it's definitely underlying in our guidance.

Thank you, Jay.

Thanks, Matt.

Ladies and gentlemen, this concludes today's conference call with Baxter International. Thank you for participating.