Baxter International Inc.

Good morning, ladies and gentlemen, and welcome to Baxter International's first quarter 2023 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 star 1 on your touchtone phone. If anyone should require assistance during this conference, please press star then 0 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. Claire Trackman, Vice President, Investment Relations at Baxter International. Ms. Trackman, you may begin.

Good morning, and welcome to our first quarter 2023 earnings conference call. Joining me today are Joel Mehta, Baxter's Chairman and Chief Executive Officer, and Jay Siccaro, Baxter's Chief Financial Officer. On the call this morning, we will be discussing Baxter's first quarter 2023 financial results, along with our financial outlook for the second quarter and full year 2023. 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, business development, regulatory matters, and the macroeconomic environment, including commentary on anticipated customer capital spending, contain forward-looking statements that involve risks and uncertainties. And of course, our actual results could differ materially from our current expectations. Please refer to today's press release and our FEC 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. 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 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% year over year on a reported basis. and rose 2% at a constant currency, exceeding our original outlook, driven primarily by better than expected sales in renal care, pharmaceuticals, and frontline care. On the bottom line, first quarter adjusted earnings per share of 59 cents also came in above our guidance range of 46 cents to 50 cents per share, again, driven primarily by operational performance in the quarter. Results in the quarter were impacted by the expected declines in two of our legacy Baxter businesses, Biopharma Solutions and Acute Therapies, reflecting the tough comparisons to the prior year period due to COVID. Looking at our legacy, Huron Businesses' strength in frontline care and global surgical solutions was offset by declining patient support systems or PSS performance. This reflects what we believe to be softness in certain hospital capital spending patterns in the current economic environment. Following what I will candidly describe as a difficult 2022, we begin 2023 with a solid quarter and on a strong footing for future momentum. From a macroeconomic perspective, while the high rates of inflation we absorbed last year continue to impact our performance, most notably in the first half of the year, we're beginning to see more stability in the overall market. We are also starting to see an improvement on the supply chain front, which includes the increased availability of electromechanical components, creating more predictability in our operations in a reduced need for premium cost spot purchasing. Specifically in terms of the healthcare marketplace, admissions and procedural volumes continue to recover from pandemic lows, contributing to positive demand. We also continue to see steady improvement in PD patient growth in many markets, following several quarters of this lower demand linked to pandemic-related mortality issues. In another crucial signal, healthcare staffing levels have stabilized or are rising at hospitals and other facilities, following some concerning lows. That said, we believe based on conversations with our U.S. customers, the hospital capital spending has been deprioritized for certain product areas, which has impacted near-term performance of our PSS business. Our current expectation is that the situation starts to improve over the course of the year. We're nearing the launch of our next version of our market-leading ICU bed, Progressive Plus. Progressive Plus is the only true ICU bed with new features that help clinical staff address complications and provide the best care possible for patients. We are already seeing strong customer interest in the new solution and look forward to the anticipated launch this quarter. Lastly, regarding this topic, I will highlight that we are not currently seeing The softness in capital spending extends to our other businesses, such as infusion systems or frontline care, where demand remains strong for the products. Alongside these trends, we are, of course, moving full speed ahead on the critical strategic initiatives I announced at the outset of the year, focused on enhancing our impact and long-term shareholder value. Our plan to spin off our renal care and acute therapies business into a standalone kidney care company is well underway. The standalone company will emerge as a leader in a growing market segment with 2022 sales of approximately $4.5 billion and more than 1 million patients across more than 70 countries. It will hold leading positions across its portfolio and a well-established presence in homes, hospitals, in clinics worldwide. Perhaps most importantly, as a standalone entity, it will benefit from increased management focus and the pursuit of its unique investment priorities, better positioned to accelerate growth and innovation, emphasizing its distinct market drivers. We are finalizing our search process to identify the future CEO of our spin-off company and hope to share more information on this front shortly. We currently expect the spinoff kidney care to occur by July 2024 or earlier, and we'll continue to keep you informed of our progress. Last week marked the initial launch phase of the new operating model we previewed for you last quarter, realigning our current portfolio of 10 businesses into four vertically integrated global business segments Each segment is being led by an experienced, passionate senior executive with a proven track record of success and compelling vision for the future. Medical products and therapies led by Group President Heather Knight comprises our current medication delivery, advanced surgery, and clinical nutrition portfolios. Healthcare systems and technologies led by Group President Riaz Razoul Includes our legacy heel ROM businesses including patient support systems global surgical solutions in frontline care pharmaceuticals led by group president a look sonic includes our current pharma portfolio as well as our biopharma solutions business and Finally kidney care comprises our renal care and acute therapies businesses each of these segments has global profit and loss accountability, dedicated commercial operations, and fully aligned research and development, manufacturing supply chain, and functional support teams. Note that our global manufacturing sites are being aligned to each business to help fuel greater transparency, foresight, and resilience across the supply chain. While we are in the early stage of this implementation, our teams are moving fast, eager to capitalize on the tighter alignment that can help fuel enhanced strategic clarity, agility, and innovation. Even as we advance organizational and efficiency efforts, we also know that high-impact innovation is a critical factor to delivering accelerated growth among recent innovation milestones. We are very pleased to share that we have resubmitted our leading-edge NovoMyQ large volume pump for FDA 510K clearance. The NovoMyQ syringe pump is now in use in the United States. As a reminder, we have not included any U.S. sales for the NovoMyQ LVP in our guidance. I'm also pleased to report that our newly launched Zosyn premix is experiencing solid uptake in the U.S. hospital pharma marketplace. Other recent launches include Baxter's new patient warming system, which minimizes risks associated with forced air warming, reduces noise and waste in the operating room, and lessens the burden on clinician workflows. Full CO plus Ricothrombin, the first and only active fobable hemostat with a recombinant thrombin resulting in one and a half times faster preparation. Ready connect system from Baxter Centralis Smart Plus Bad, which delivers reliable cable-free connectivity between the hospital bed and most nurse call systems on the market. And finally, Exacta Mix Pro, the next generation automated nutrition compounder designed to enhance security, improve customer experience, and offer stronger data reporting capabilities. Looking ahead, while macroenvironmental factors show signs of improvement, we remain cautious and balanced about the pace of recovery. This is why our current transformational initiatives are so vital. Our goal is to redefine our operations for sustained success in a rapidly evolving environment, while always remaining true to our life-sustaining mission and focus on medically essential healthcare. Our momentum today and tomorrow is fueled entirely by our employees. I thank them for their dedication and resilience, which are vital to the transformation journey we are taking together. Now I will pass it on to Jay for a closer look at our performance and outlook.

Thanks, Joe, and good morning, everyone. As Joe mentioned, we're pleased with our first quarter results, which came in ahead of our previous guidance range. First quarter 2023 global sales of $3.6 billion declined 2% on a reported basis and increased 2% on a constant currency basis. This compared favorably to our guidance, which called for constant currency sales to decline approximately 1%. As mentioned earlier, sales performance in the quarter benefited from better than expected sales in renal care and pharmaceuticals, as well as frontline care, which have reflected improvement in availability of electromechanical components. On the bottom line, adjusted earnings decreased 37% to 59 cents per share, reflecting the increased costs we've recognized due to the significant inflationary impacts on materials, labor, and freight. along with certain supply chain constraints. Adjusted EPS for the quarter also came in ahead of our expectations of 46 to 50 cents per share, driven by improved operational performance and a benefit from lower than expected interest expense. Now I'll walk through performance by our regional segments and key product categories, starting with sales by operating segment. Sales in the Americas declined 1% compared to the prior year on a constant currency basis, Sales in Europe, Middle East, and Africa grew 9% on a constant currency basis, reflecting broad-based recovery in hospital admissions and surgical procedures across the region. And sales in our APAC region increased 3% constant currency. APAC sales reflected strength across the region, offset by a decline 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 care were $892 million, increasing 4% on a constant currency basis. Performance in the quarter was driven by mid-single-digit growth globally in our PD business, partially offset by lower U.S. in-center HD sales following the exit of a distribution agreement at the end of last year. Results in the quarter also reflected the negative impact from ongoing government-based procurement initiatives in China. Sales and medication delivery of $687 million were flat year-over-year at constant currency rates. Strong international growth in solutions was offset by lower infusion system sales. As mentioned, we've resubmitted our Novum IQ large volume pump for FDA 510 clearance. In the meantime, we continue to promote our Spectrum IQ LVP, which has been impacted by supply constraints for electromechanical components. Our teams have been and will continue to work diligently to secure additional parts to meet customer demand for the Spectrum IQ large volume pump. Pharmaceutical sales of $523 million increased 5% on a constant currency basis. Performance in the quarter reflected increased demand for our drug compounding portfolio internationally, as well as double digit growth in our US injectables portfolio. This helped offset lower sales internationally for injectables. Moving to clinical nutrition, total sales were $224 million, increasing 3% on a constant currency basis. Performance in the quarter was driven by demand for our nutrition compounding services. Sales in advanced surgery were $246 million, advancing 11% on a constant currency basis. Growth in the quarter reflects an improvement of elective procedures globally. Surgical volume recovery was strong across all regions. Sales in our acute therapies business were $180 million, declining 1% on a constant currency basis and reflecting a difficult comparison to the prior year. where we had experienced elevated demand for CRRT given the rise in COVID cases. Biopharma solutions in the quarter were $139 million, decreasing 9% on a constant currency basis. This decline was in line with expectations due to lower COVID vaccine-related revenues of approximately $35 million compared to the prior year period last year. Sales in our patient support systems business were $348 million, decreasing 8% on a constant currency basis. As Joe mentioned earlier, we believe performance in this business has been impacted by a slowdown in capital expending with respect to certain product categories. In addition, this business is experiencing lower rental revenues as compared to the prior year period. For the year, we expect growth will continue to be dampened by these factors, but we expect our order rate to improve over the course of the year. In addition, our backlog remains elevated and to date we have not had any material cancellations. We're excited to launch Progressive Plus this quarter and expect it to positively contribute to future performance. Frontline Care sales in the quarter were $302 million, increasing 4% on a constant currency basis. This reflects demand for our Intelligent Diagnostics portfolio. We saw a slight improvement in supply availability of electromechanical components during the quarter, which enabled us to address a portion of the backlog associated with the frontline care business. While we're pleased to see improvement in our supply constraints, the business continues to have an elevated backlog level, which we hope to continue to work down over the course of the year as anticipated demand remains strong for this business. Global surgical solution sales in the quarter were $81 million, increasing 8% on a constant currency basis. Performance in the quarter was driven by increased international placements in the quarter. Moving through the rest of the P&L, our adjusted gross margin of 41.2% decreased 380 basis points over the prior year. reflecting cost of goods sold primarily driven by the factors we've discussed around material and labor inflation, freight and supply chain constraints. Adjusted SG&A of $845 million represent 23.2% of sales, an increase of 10 basis points versus the prior year period, reflecting higher annual employee-based compensation accruals. Adjusted R&D spending in the quarter of $157 million represented 4.3% of sales. an increase of 30 basis points versus prior year, as we increased our investments in innovation, particularly around advancing our connected care technologies. These factors resulted in an adjusted operating margin in the quarter of 13.8%, a decrease of 420 basis points versus the prior year. Net interest expense totaled $117 million in the quarter, an increase of $32 million versus the prior year, driven by the impact of increased interest rates on variable rate debt. Other non-operating income totaled $1 million in the quarter, compared to $16 million of income in the prior year period. Results in the quarter reflected benefit from the amortization of pension benefits, as well as an equity gain, which we 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 reflected the increased cost of raw materials freight and 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 mentioned, we're pleased with the solid start to the year after the challenging macroeconomic environment we experienced in 22, the challenges of which we continue 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 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 approximately 1% growth on a constant currency basis. We now expect full year adjusted operating margin to be between 15.5% and 16%. Interest expense is now expected to total approximately $500 million. We continue to anticipate an 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 $2.85 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 a question, please press star 1 on your touchtone phone. If you wish to remove yourself from the queue, press star 1 again. If you're 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. We 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. Your 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, Joe and Jeb, you mentioned utilization trends moving in the right direction, supply chain constraints easing. So when I look at your Q1 performance and your Q2 guidance, the annual guide implies back half of 0%, constant currency growth. So maybe just walk us through on that. Is this conservatism? Were there any timing elements or what's being assumed for the back half?

Yeah, Vijay, thanks for the question and the 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 line and also very importantly from a general macro context. Those were some really important underpinnings of the guidance that we originally shared. We needed to see that and we did. So really, really good start to the year. As it relates to sales cadence first half versus second half, really there are a couple of specific drivers that lead to a slightly slower growth in the second half, and it's really not unplanned, or it's consistent with our expectations. Essentially, our renal business has nearly $100 million of one-time headwinds, either through specific payments that occurred, exiting of distribution agreements last year, or 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 pharmaceuticals business, we really had outstanding performance in the first quarter. We'll expect to see some continued growth there, but we do see a little bit of a deceleration, most notably in compounding in the second half of the year. So that has an impact on the overall sales cadence. I think the most important thing from my perspective was the steady macro environment and utilization and patient trend. So we saw that in the first quarter. We're happy to carry that forward.

That's helpful, Lajie. And perhaps one follow-up on Hill-Rom. I think the prior guidance was for 4% constant currency. Did that change at all? And perhaps, Lajie, if you can comment on, you know, Hill-Rom was 2% declines, mostly driven by PSS. I think most of your peers, they're talking about easing supply chains, electronic components, you know, backplug and converter. But why is Baxter confident that this is not share loss? I think you made some comments on backlog and orders, so maybe if you could slice that for us.

Vijay, good morning. Just to preface on whole Hiram, we're very happy with the performance of most of the businesses under Hiram and how we've been integrating the business into Baxter. We had a very strong FLC quarter. Frontline Care has done a great job, and this has improved because supplier product. So we see low to single digits, 3% versus 4%. Suppliers are really getting better, and this is affecting FLC. Not only the performance of FLC is doing better, but also our backlog is increasing significantly. further than we thought was going to increase, so it's really good momentum. We see PSS with a reduction in sales in the first quarter. I want to remind you that we had a reduction of 20% in rentals. This is from the peak of COVID and a lot of rentals going on in early 2022. We saw a significant reduction. Also, some postponement of capital spending. But we're very excited about the launch of Progressive Plus and improvement in our Central Abad. So those are coming in this quarter and will be great launches for us. We haven't launched a new platform like Progressive Plus in almost 10 years, so this is a really good thing. We are number one in the ICU and we'll be able actually to continue to capitalize not on the Baxter accounts, but hopefully into new accounts, competitive accounts. I would say that it is important to note that capital postponement has specifically been focused in this category of spending. We have not seen that at all in the other Baxter categories. As I just mentioned, FLC has shown very strong growth. Our infusion therapies business, our pumps business has shown very strong growth and strong forecast growth for the rest of the year. So this is a phenomenon specifically for BADs. But as I said, with the launch of new products, we're really excited to come in and have this situation reversed as we plan to have it reversed and ameliorates in the second half of 2023. Fantastic. Thanks, guys.

Thank you. Thanks, Vijay.

Your next question comes from the line of Pito Chickering with Deutsche Bank. Please go ahead.

Good morning. Thanks for taking my questions. The first one is similar to BJ's question, but relative to your guidance that you've updated today, where's been the biggest source of upside and downside in the first quarter as it relates to both revenues and inflationary pressures?

Sure. I think there were a few areas that where we saw a solid performance in the first quarter. Our pharma business, we added a new leader to this area last year. That team is really doing an excellent job with respect to new products and accelerating commercialization of some of these products. So we saw we had a really nice performance in the first quarter. Now some of that did benefit from a buoyant procedure and admissions backdrop. but overall really happy on the pharma side. From a renal standpoint, I think this is an important one. Renal benefited from solid pricing and mix, along with outside of certain markets in Asia, we saw some decent patient growth. So I think the renal story, notwithstanding my comments earlier around second half comparable issues, the renal story has started strong this year, and we expect that to continue. And then finally, our advanced surgery, another area, you know, we've got a great leader in this business and that team as well, benefiting from procedures clearly, but at the same time, solid execution across the board leads to some favorability there. So those were some of the bright spots that we saw. As it relates to challenges, I think, you know, Joe explained clearly, we were a little bit soft in PSS, but we remained very optimistic. I, you know, spent some time looking at our Progressive Plus, our new product there, It's really an exciting new development. So we'll see how that goes, that launch is happening. And it's something that I think the market will welcome. So those are a few comments on favorability and unfavorability for Q1. And then, Peter, you had a question about supply chain. And what I would say there, obviously, after the challenges that we experienced from a general macro backdrop last year, I was really happy to see a, generally speaking, cooperative environment. And when I say generally speaking, on the one hand, commodities are going in the right direction. We're seeing indices support the forecast that we put forth. Some of our suppliers are still looking to sort of increase prices to Baxter, and we constantly work through those situations very carefully. But I would say, generally speaking, we have a fairly stable backdrop. from a supply chain standpoint.

Okay, and then specifically, can you refresh us on what assumptions you made in your updated guidance around transportation costs for 2023? What percent of those costs are over the ground, and what do you assume in diesel costs for the rest of the year? Just if you're wondering whether diesel is serving the low fours at the pumps now, how should we think about the tailwinds from lower diesel costs rolling through the P&L?

So listen, I don't want to do a detailed operational review here, and we don't really share mix by ground versus air on freight costs and things of that nature. What I will tell you is we try to reflect, in terms of the forecast that we put together, we try to reflect the most current indices that we have along with expectations from a number of reputable sources in terms of where those areas are going when we put the forecast together. When we do this, not only for diesel freight logistics costs, but also for residence, packaging, corrugate, et cetera. I think we have definitely significantly improved how we forecast this area as a necessity coming out of last year. Our supply chain finance team working with the team there has done a lot of work to enhance this. But generally speaking, we look at current index levels. We look at the most reliable forecast going forward. And our performance is directly tied out to that. Part of the reason why we do see a step up in margin in the second half of this year relates to some of the costs that we're experiencing at this point in time, not only from a freight and logistics, but also in some of those other categories. Great.

Thanks so much. Thank you, Pito.

Your next question is from the line of Travis Steed with Bank of America Securities. Please go ahead.

Hey, thanks, everybody. Jay, I'd love to dig a little bit deeper in that second half margin wrap that you just mentioned. I know you have the $300 million in cost savings, the macro cost. Can you help just give some confidence in the back half margin wrap?

Yeah, I think, you know, it's interesting. The first quarter performance really was a nice element for the performance sake in the first quarter. But importantly, I think 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's 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, 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 half. And that has margin benefit. that also has a significant EPS benefit. So you'll see about 30 plus cents of EPS from those incremental sales dropping through. The second thing is integrated supply chain. The cost that we're experiencing today are costs that we realized or experienced in Q3, Q4 of last year when there were very elevated prices. As those indices have eased in the last few months, We have line of sight to improvements in supply chain that yield roughly 15 cents approximately of improvement first half to 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 in plants. But that's 15 cents of 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 efforts that we're undertaking. And those benefit more the second half than the first half. And we've largely concluded those programs. They're in place. But because a lot of those activities occurred in the first and second quarters, the benefit only is realized in the third and fourth quarters. And that's roughly 15 cents. If I were to say, why are we going to go from point A to point B with a very substantial improvement in margin, it really comes down to those three specific factors.

That's super helpful. Thank you, Jay. And a follow-up question on NovimiQ. I assume when it gets approved, should we think about that as like $100 million in full-year revenue, $200 million? Margins are those above, below corporate average? And when you think about the potential for share gains, I don't know if you'll 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 on the approval of the pump because it's not dependent upon us. It's with the FDA at the moment. We are optimistic about the performance of the pump when it gets approved. but we're not commenting in anything that the FDA is doing. I would say to you that there's an opportunity. There's a significant amount of pumps on recall at the moment, including brand new pumps which just launched, I recall, class one the other day. So we are currently capitalizing on that with our SIGMI spectrum. We up our forecast significantly on SIGMI spectrum. We are now more optimistic about the components. We're also doing some redesign of components to make sure there's more durability. And when Novum gets to the market, it's going to be for us to make the decision how to phase that in. because some accounts may want to stay with the 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're going to be putting more money in research and development action to develop other categories of pumps within Baxter. So I'll tell you that we're not giving you what's the forecast for Novum once approved. As soon as we get news, about Novum from the FDA. We'll let you know what that means in terms of numbers. But at the moment, I tell you the demand for pumps is high, primarily because Sigma Spectrum is a good pump that is performing extremely well and facing competitors who have consent decree and recalls in many different categories.

Great. Thanks, Joe. And congrats on the good quarter. Thanks. Thank you.

Robbie Marcus with JPMorgan is on the line. Please go ahead with your question.

Oh, great. Thanks for taking the questions. Maybe to start, we'd love to get your thoughts on pricing, what it was in the quarter, and your ability to take price going forward. We see peers taking it in the capital components, and we hear some of your peers talk about it in some of the hospital supply areas. We'd love to get your thoughts and the potential for Baxter moving forward.

Sure. I'm not going to get into specific amounts in the first quarter, but pricing was a contributor and an important one. And I think for us, as we went through last year, we had significant incremental costs across the portfolio in 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. in a given quarter or a given year. And in some instances, you actually have to wait a couple of years before you actually address 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're working very carefully. There was positive pricing in renal. There will be positive pricing from a hospital capital standpoint in all of the areas that we operate, we are expecting to see decent price. The one exception, of course, is pharma, where that's been more stable, particularly in the first quarter, but that's still an area of more price competition. But I think, Robbie, 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 potential sale of the bioprocessing unit. Just the latest update on your thoughts on that business and how it will proceed. And if a sale does go through, is debt repayment the primary use of cash? Thanks.

Robbie, good morning. We have experienced significant interest in this business. We're still exploring strategic alternatives and we'll let you folks know as soon as we make that decision. If there is a sale, the proceeds will be exclusively and mostly directed to debt repayment. So it opens the opportunity for Baxter for future reinvestment and even stock share buybacks and other opportunities. But the first thing for that amount of cash, if that is the alternative we decide to go forward with, will be to repay that.

Thanks for taking the questions.

Thank you.

Your next question is from the line of Rick Wise with Stifel. Please go ahead.

Good morning, Joe. Hi, Jay. A couple of questions. Joe, maybe talk us through where you see, I mean, you've addressed them in several ways, but where you feel like you are with the Hill ROM 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, you know, sort of cooperate, sort of, and maybe just help us think about how you're thinking about the timeline that it's going to take for Hill-Rom to get back to a more typical mid-single digit kind of growth rate, if you would. Thanks, Joe.

Good morning, Rick. We have been very successful with the integration. So the first part of your question, the integration of Hill-Rom, we have retained some key talent, but also we put a lot of baxter talent in hill rom right now we have riaz razul running hill rom the three divisions of hill rom with a mix of baxter and former hill rom employees in charge of the divisions under under rias in terms of the synergies we as i mentioned before we um in the first year came to realize twice as much as we had planned and we continue on track to deliver what we promised at the onset of the acquisition. Other than the supply chain issues that we had last year, we start to see the power of frontline care and the power of that portfolio right now delivering good growth for us in the U.S. and all U.S. Chips are made more available. And as I said before, our backlog in frontline care is actually growing with growth in sales and growth in backlog. So we're very excited about that business. Our PSS business in the U.S., like I said, has a setback in this first quarter. As I said, 20% reduction in the rentals due to COVID-19. partially last year and the year before, but we see the launch of progressive plus and enhancements to Centralia a great catalyst for us in the second quarter that we believe with alleviation of specific postponement of capital buying that is going to accelerate in the second quarter and we are confident to reestablish that business in a more normal run rate, hopefully towards 2023, exiting 2023 and 2024. We continue to look at opportunities to enhance leadership in all parts of that business, by the way. So, BSS 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. All in all, we're excited about HealROM. We think it brings new avenues for growth for Baxter and also product launches. I'm looking at our pipeline of new launches, and a great deal of them are coming from HealROM. So there's a lot to come from there. We're going to navigate the short-term constraint in the U.S. for capital embeds. But as I said, launching these new products represent a great catalyst for the future.

Great. Thanks for that, and a follow-up, maybe, Jay or Joe. It's sort of a simple-minded way to ask this question, but clearly, electromechanical components are critical to this ongoing turnaround process. I mean, and you can reframe the way I'm asking it, but are you 50% of the way back in terms of having what you need, 10%, 90%? Are you optimistic that you largely have what you need, as you exit the second half. Can you just help me think through that a little bit? Thank you so much.

Rick, the worst thing we can do is to feel good about something that just start turning around. So we are very excited about having availability, as I said before. The demand for our Sigma Spectrum fusion pump is very high, and we're very happy actually to have significant amount of components that will allow us to increase the sales of that product. and satisfy the backlog that we have. If we had more, we could sell more. We see alleviation of backlog of products that need to be shipped on frontline care already coming out. Our back order has reduced in half what we had about nine months ago, and a lot of that is related to semiconductors. With that said, we're not um letting this uh go away without an opportunity to improve so we have significant amount of of of initiatives within the company for redesign of components to go on boards some are very critical some are less critical we have a transfer office established within baxter not only for microprocessors but also for other components things are not 100 normal right now. We still have a great deal of suppliers trying to get pricing out of Baxter. We're offsetting those. We're absolutely not accepting, but also offsetting with significant amount of cost reductions. So as we navigate through 2023, it will be very important that the company does not lose its focus in finishing what we started in the semiconductor transformation, in the supplier chain resilience. But we feel cautiously optimistic that we have turned the corner when it comes to supply of components into our business.

Appreciate the perspective, Joe. Thanks.

You're welcome.

Matt Mixing with Barclays is online. Please go ahead with your question.

Hi, great. Thanks so much for taking the questions. So if Joe or Jay, you know some of the themes that have obviously come in here for Q1 so far, the starting cycle, health care and med tech and providers as well as improving utilization, volume, you know, strong admissions is what I hear from my neighbor that covers services and improving staffing and easing. of those constraints. You talked about some of these things in your prepared remarks, but could you maybe just give us a sense of what strong uptick in these sort of elements meant to you in the quarter, and then what do they mean in terms of pull-through, increased consumption of some of the products that you sell, as well as the availability of staff to get some of the implementations of these systems done, like in connected care or the rollout of beds. Maybe just some additional color on that, and then I'd want to follow up.

Larry, what we see is... Matt, I'm sorry. Matt, what we see is an alleviation of the pressure the hospitals were having last year with more availability of nursing Just as a point of reference, we had some one-timers in our medication delivery business as we continued to report medication delivery. If you exclude the one-timers between gains and losses between 22 and 23 first quarter, our growth is around 6.2%. This is exactly what we see in terms of growth coming out of hospitals which are publicly traded companies and are reporting right now. So we see that is for a business like medication delivery which are sets and infusion solutions and vitamins. That is a pretty good pickup. On a business, they usually have a growth of low single digits. So that is twice as much. So there is a rebound. and back to normality that we see. So hence our comments on our prepared remarks. When you think about the relentless look for optimization of workflow in hospitals, that's when we start seeing some of our products coming to fruition. We just integrated our Sigma Spectrum the other day on a two-way communication for hospitals. There's no more hospitals that will come in and ask just for a pump or a monitor. Everything needs to be integrated. The workflow needs to be improved. And that's where Bactria is focusing a significant amount of extra money we gave to research and development of frontline care, for instance, to increase their ability to launch products faster, to integrate, to create solutions that help hospitals. So we are cautiously optimistic that we've seen an uptick in procedures. we see higher admissions in ER, higher admissions in operating room. We can see the growth of our advanced surgery business was very, very robust, very robust, close to 10%. And that shows that in the U.S., you have a good flow of procedures. So all in all, it indicates that that's a 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 spin. I know it's still early, and you're working through many of the details as you lead up to that event. But around the dividends, you know, Jay, if you could talk a little bit about how you're thinking about managing that and, you know, what at this stage is your expectation or aspiration to sort of continue to pay, you know, the Baxter dividends for the entire entity as you kind of get through this thin transaction next year?

Yeah, it's, listen, in terms of capital structure for the two companies and, you know, dividend policies and approaches and all of that, it is very early days. We understand the importance of the dividend. We at Batch take the dividend very seriously, so we understand that that's a, you know, that's a great tool to return capital to shareholders. And 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. We'll unveil all of this as we go, as we get much closer to the spin. And I think we'll talk about things like what is the dividend policy for Renalco if they have one. All of these things will come to bear. But I think it's a little premature to do that as we're still in the early stages of preparing for the spinoff.

Got it. Congrats on the quarter, and thanks for the color. Thank you.

Joanne Lynch from Citi is online with a question. Please go ahead.

Good morning, and thank you, and nice quarter. Two questions, one big picture, one specific big picture. You talked about transformational initiatives, and I'm curious how you start to measure those and over what time frame you see those to the goals. Is this a 2023 thing? Is this goal over the next five years called the LRP? And then my more specific question is the Progressive Plus bed. How do new beds get taken up? Do you have a backlog of people saying, now that you've launched it, I want it? Or just walk us through how we think about that new tail end. Thank you.

Hi, Joanne. Good morning. The transformation has... three specific objectives. The one is, of course, bring a more effective way of managing Baxter business. Instead of regionally managing the business between three large regions in the world, give P&L responsibility to business leaders who are mini-CEOs who control 100 percent of that business, including supply chain and all aspects of that business. So that transformation is in process and we start to see the difference in how the ownership of this business have transition and how effective that new model is. The second is through a new model, you're doing it not only because you need more effectiveness in your organization, but also we need to reduce cost of operating. So Baxter is a company that has one of the lowest SG&As amongst peers. We are 21, 22%. We want to be sub 20. And to do that, we need to do it two different ways. One is more effective use of our personnel. The second is use of systems such as fish intelligence in different locations in the world for us to provide our service. We are on that path. For instance, Jay's organization, Finance, has done a significant amount of work with moving back office to different parts of the world. And this specific change we just made in organization is going to give back a significant amount of dollars that we're going to realize in 2023, but also full-blown in 2024. Very large cost savings that we did through the reorganization that drove our reduction in force. So reduction in force didn't come first. The organization design came first. Reduction in force was a consequence of better use of our resources. And lastly, and also probably most importantly, is the ability to accelerate innovation and move some of the money that we are saving back in research and development. We just did that. We just gave the HST, or the new Hill Run business under Riaz Razzou, more money for research and development. also improve and 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 Baxter. It's part of transforming the company that I started back in 2016, and this is the third phase of this transformation.

Joanne, I think we lost you.

Perhaps we move to the last and final question.

Yes, we'll move to the final question now, and it comes from the line of Matt Taylor with Jefferies. Please go ahead.

Hi, thanks for taking the question. Jay, so I wanted to ask you kind of a big-picture question. And I was just thinking about, you know, the 2022 Antelope Day. You talked about a billion in gross savings through 2025. Now you've got this $300 million restructuring. And I know some things have changed, but I guess I was just hoping you could give us some perspective on how those things are related, if at all. And then you gave a gross savings number. Could you talk about what are kind of the net savings we could see from some of these programs?

Well, what I would say is, as a company, we are very much committed to to enhancing operating margin over time. And there are a lot of different levers to get after that. New products, sales growth, pricing, and then things like operational efficiency. And so we outlined a series of activities in 2022 at our analyst day. And I would say that in the short term, they were overshadowed meaningfully by inflationary impacts. What I'm really excited about is our ability to put those on full display 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 Joe discussed, 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 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 operate. And that's going to have a great impact for years to come. So what I would say is we feel very good about the activities that we outlined in 2022 at the Analyst Day. And then now we've supplemented that with a reorganization that Joe described, All of this is intended to accelerate margin improvement, so we're excited to see the impacts of that over time.

Great. Thank you for that. All right.

Great. Thanks, everybody, for joining us today.

Thank you all for joining today's meeting. We appreciate your participation. You may now disconnect.