Baxter International Inc.

Good morning, ladies and gentlemen, and welcome to Baxter International's third quarter 2022 earnings conference call. Your lines will remain in a listen-only mode until the question and answer segment of today's call. At that time, if you would like to ask a question, you will need to press star, then one on your telephone keypad. If anyone should require assistance during the conference, please press star, then zero on your telephone keypad. As a reminder, this call is being recorded by Baxter and is copyrighted material. It cannot be recorded or re-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. Claire Trackman, Vice President, Investor Relations at Baxter International. Ms. Trackman. you may begin.

Good morning and welcome to our third quarter 2022 earnings conference call. Joining me today are Joe Almeida, Baxter's Chairman and Chief Executive Officer, and Jade Saccaro, Baxter's Chief Financial Officer. On the call this morning, we will be discussing Baxter's third quarter 2022 financial results and full year financial outlook for 2022. With that, Let me start our prepared remarks by reminding everyone that this presentation, including comments regarding our financial outlook for the fourth quarter and full year 2022, our 2022 to 2025 long-range plans, the acquisition of Pilgrim, new product development, the potential impact of proposed pricing actions, business development, portfolio optimization, and regulatory matters contain forward-looking statements that involve risks and uncertainties. And of course, our actual results could differ materially from our current expectations. Please refer to today's press release in our SEC filing 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 issues this morning and available on our website. On the call this morning, we will be discussing operational sales growth, which adjusts for the impact of foreign exchange and the acquisition of Hill Round. Now I'd like to turn the call over to Joe. Joe?

Thank you, Claire, and good morning, everyone. We appreciate your joining today's call. I will start with a look at our third quarter performance, including sales. some perspective on the macro environmental factors impacting our near-term trajectory. They will provide a deeper dive on our financials and outlook after which we will open up the lines for your questions. Q3 2022 represents the third full quarter since the close of our Hill Realm acquisition. Total company sales of 3.8 billion grew 17% on the reported basis and 23% at a constant currency rates. Legacy Hill Realm contributed $735 million to sales in the third quarter. Excluding the impact of Hill Realm and foreign exchange, third quarter sales rose slightly on an operational basis. On the bottom line, third quarter adjusted earnings per share of 82 cents were the higher end of the guidance range we had provided previously. Both top-line and bottom-line performance in the quarter reflect the continued impact of macroeconomic headwinds, including significant inflationary pressure, as well as ongoing global supply chain constraints, consistent with what many others are encountering globally. With further regard to the macroeconomic environment, I want to note the impairment charge in our third quarter of the nation is related to the Hill-Rom acquisition. Jay will provide additional details, but in short, this chart relates to many of the shifting market dynamics, including rising interest rates and lower valuation multiples. They have reduced equity values broadly, along with the increased supply chain-related costs that we've previously discussed. With that said, and with 10 months of progress in perspective, I want to underline our continuing confidence in the potential of the Hill-Rom acquisition. This is already playing out as an opportunity to expand the reach of both legacy portfolios geographically and across the continuum of care. It is also accelerating our connected care journey. expanding our digital footprint, and helping to unlock the next wave of innovation across our R&D pipeline. Integration of our legacy organizations is advancing swiftly, and as previously shared, we are achieving even greater value capture through cost synergies than initially anticipated. Additionally, overall demand across the Baxter and legacy Huron portfolios remains solid, but we continue to experience meaningful backorders and backlogs due to reduced access to a variety of raw materials and electromechanical components. As I have shared previously, this has resulted not only in higher cost spot purchases, but also expedited freight costs as we work steadfastly to get our life-sustaining products to the patients and clinicians who depend on us. While we see signals that some of these macro factors may begin to ease next year, our current expectation is that select supply constraints will persist into 2023, particularly as it relates to semiconductors where we continue to see high levels of volatility in supply. During the quarter, we experienced several decommits from various suppliers meaningfully impacting our overall demand planning process. We have also seen supply constraints from other raw materials, which has further impacted performance. In total, we estimate that the semiconductor and raw material constraints we've experienced negatively impacted Baxter's top line performance in the quarter by more than $100 million, or approximately 400 basis points. And on a year-to-date basis, we estimate this period to be approaching $300 million. We continue to take decisive action to help mitigate these constraints and position the company for improved future performance. Some of the actions we've already undertaken include extending the horizon of our demand forecast out to 24 months for supply constraint category. to allow our suppliers to allocate capacity and inventory to Baxter over a long horizon, validating alternate supply options to provide flexibility in sourcing, establishing direct buying relationships with critical secondary component suppliers, enhancing our manufacturing processes to further optimize mature usage and reduce waste, and meeting with the management teams of our key suppliers and select government officials to reinforce the criticality of Baxter's products. We are confident that these actions will further enhance our ability to help mitigate supply chain impacts on Baxter's near and mid-term performance. At the same time, we remain focused on improving the operational efficiency across the organization We've already implemented several initiatives that are expected to drive improved future performance, including ensuring that we have the optimal organization structure and business processes in place. In addition, we are pursuing some near-term actions to help offset the increased expenses we're experiencing. These actions, including recent restructuring initiatives, broad hiring freeze, reduced discretionary spending, and accelerating our hero integration efforts. Additionally, we do expect to realize savings this year through lower annual employee incentive bonuses, which are directly tied to business performance. Also, as mentioned last quarter, we have already passed on a portion of the incremental costs we've absorbed to our customers and are collaborating with them to finalize agreements, which include revised pricing terms to address continued cost pressures. We deeply value these relationships and appreciate the challenges our customers themselves are facing. Upon successful execution and implementation of these agreements, we anticipate the related revenues will be reflected in our results next year. We believe these actions will help underscore our unwavering commitment to our patients and customers. Collectively, these initiatives are fueled by the sustained emphasis on operational efficiency and cost-based optimization that has powered our transformation to date. And, as I will continue to stress, we will never pursue any action that compromises our fundamental mission to save and sustain lives. We are also actively advancing our strategic review of the portfolio to ensure the optimal structure to execute on our vision of transforming healthcare to improve patient outcomes, enhance workflow efficiency, and enable cost-effective care. We anticipate that we will be in a position to provide more details on these ongoing activities early next year. I want to reiterate that our strategic core and prospects remain firm as is our commitment to driving long-term value for our shareholders and the many other stakeholders we serve. Backstreet Strength is founded on our diverse, durable portfolio of essential healthcare products, which will continue to be enhanced by our focus on driving innovation in connected care and core therapies. Baxter's industry leadership and increased scale, combined with our rapidly advancing digital capabilities, create a spectrum of prospects to help advance our impact in line with our life-saving mission and, in turn, to share our success with our shareholders and other stakeholder communities. I want to recognize and thank our employees for their remarkable effort always, and especially as we navigate the current macro environment. Our global team consistently embraces our life-saving mission above all, rising to meet each new challenge with dedication, passion, and a keen focus on serving the many stakeholders who depend on us. Now, Jay will provide more details on our third quarter performance and outlook for the remainder of the year.