Baxter International Inc.

Second 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, then 1 on your touchtone phone. If anyone should require assistance during the 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, Investor Relations at Baxter International. Ms. Trackman, you may begin.

Good morning, and welcome to our second quarter 2023 earnings conference call. Joining me today are Joe Almeida, Baxter's Chairman and Chief Executive Officer, and Brian Stevenson. Baxter's Interim Chief Financial Officer and Chief Accounting Officer. On the call this morning, we will be discussing Baxter's second quarter 2023 financial results along with our financial outlook for the third quarter and full year 2023. Please note, results in the current periods and prior periods have been adjusted to reflect the pending sale of our biopharma solutions or BPS business. While the closing of this transaction is subject to the satisfaction of customary closing conditions That business is now reported as a discontinued operation. We have posted restated schedules reflecting that presentation for prior periods to our IR website. In addition, we will be providing a walk to reconcile our prior guidance for full year 2023 to our updated financial outlook for continuing operations and in the aggregate. With that, let me start our prepared remarks by reminding everyone that this presentation, including comments regarding our financial outlook, for the third quarter and full year 2023, new product developments, including the impact of pending regulatory approvals, the potential impact of our in-flight strategic and pricing actions, business development, regulatory matters, and the macroeconomic environment, including commentary on continuing supply chain challenges and evolving customer capital spending, contain forward-looking statements that involve risks and uncertainties, and of course, our actual results could differ materially from current expectations. Please refer to today's press release and our SEC filings for more detail concerning factors that could cause actual results to differ materially. In addition, on today's call, non-GAAP financial measures will be used to help investors understand factors ongoing business performance. A reconciliation of the non-GAAP financial measures being discussed today to the comparable GAAP financial measures is included in the accompanying investor presentation and in our earnings release issued this morning, which are both 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 joining today's call. I will begin with an overview of Baxter's second quarter 2023 performance, followed by a look at the progress we're making across the strategic actions we announced earlier this year. I will then turn it over to our interim Chief Financial Officer and Chief Accounting Officer, Brian Stevens, who will walk you through our quarterly performance and outlook in more detail. Finally, as always, we will welcome your questions. Second quarter sales rose 3% on a reported basis and 4% on a constant currency basis. Both measures exceeding our prior guidance of 1% to 2%. and 2% to 3% respectively. As a reminder, and as Claire noted, we are reporting results of our biopharma solutions or BPS contract manufacturing business as discontinued operations in light of its pending sale, which I will touch on shortly. I will note there was no impact in the quarter on top one growth rates from discontinued operations on either a reported or constant currency basis. Our top line outperformance was driven by solid demand across the portfolio. On the bottom line, second quarter adjusted earnings per share from continuing operations totaled 55 cents and discontinued operations totaled 11 cents. In the aggregate, adjusted earnings per share totaled 66 cents and exceeded our outlook range of 59 cents to 61 cents driven by a combination of top-line performance and operational efficiencies. Several factors combined to help bolster both top-line and bottom-line results. First and foremost, I want to highlight positive demand and greater stability across most corners of the healthcare marketplace following the erratic impact of the pandemic and its recurrent surges over the past few years. Overall, we are continuing to see sustained recovery in hospital admissions and procedural volumes, as well as in alternate sites of care, which are contributing to solid performance across the portfolio. The more stable inflationary environment is also contributing to an improved microeconomic backdrop, further helping to steady our operational performance. While positive signs are emerging, we remain cognizant of the potential for inflationary disruptions consistent with our approach this year, and in general, we have tried to capture these potential risks in our updated financial outlook. Similar with last quarter, we are also seeing continued improvement in availability of key electromechanical components, This reflects a combination of overall environmental impacts and steps we have taken to shore up supply within our own integrated supply chain operations. While there is still work to do, these factors and actions are contributing to enhanced cost management and greater predictability on the supply chain front. As we have previously commented, We continue to see a degree of caution in hospital capital spending, which has impacted our patient support systems or PSS performance. Encouragingly, we saw a significant sequential improvement in the second quarter for orders and are building momentum with the recent launches of our Progressive Plus ICU beds and enhanced features to our segment-leading Centrella beds. Progressive Plus is the latest version of our unique ICU-focused bed, which now offers a range of additional features developed to help healthcare professionals address the complex critical needs of ICU patients. Our current expectation is for hospital capital spending to improve in the second half of the year as compared to the first half of the year as hospitals reevaluate their budgets and reprioritize areas of spending. We're building momentum and making significant progress across the transformative strategic actions we announced to kick off 2023. The proposed spin-off of our renal care and acute therapies businesses into an independent publicly traded company, the pending sale of our BPS business, and the implementation of a new operating model for the remainder of our Baxter businesses. As I noted at the time, these are three initiatives with a single agenda, enhance our focus on patients and clinicians with the goal of creating incremental value for our shareholders. While all are still in progress, these efforts are already enhancing strategic clarity across the company, increasing accountability and helping bring the businesses even closer to the patients, clinicians, and customers they serve. Our proposed kidney care spin-off is moving ahead on multiple fronts. Last month, we welcomed Christophe, who will ultimately serve as CEO of the standalone kidney care business upon its separation next year. I couldn't be more excited to have Chris on board, and I can assure you that our leaders and colleagues across our kidney care team feel the same. He's a passionate and proven leader, and his experience as a longtime executive at Varian, a Siemens health and years company, makes him an outstanding fit as the CEO of the new publicly traded company. I look forward to extending the opportunity for you to meet him at our upcoming investor events. As you may also be aware, we have just announced Ventiv as the name of our kidney care spinoff, Formalizing the brand name is an important milestone as it sets the stage for a range of necessary regulatory legal entity IT and branding work that are essential to successfully establishing the new company. Separately, we are finalizing the organization structure and the financial model for the new company. We expect to file Form 10 publicly with the SEC by early next year, which will provide additional details on the financial structure and other important information for the new entity. As a standalone entity, it will benefit from increased management focus and the pursuit of its unique investment priorities, better positions to accelerate growth and innovation, emphasizing its distinct market drivers. We continue to be on track to launch Ventiv as a standalone company by July 2024 or earlier. Moving on to the developments in our biopharma solution business, in May we announced entry into a definitive agreement to divest BPS to private equity investors, Advent International and Warburg Fincas. BPS is an outstanding and profitable business, but as a contract manufacturer, it is not for to back to strategic fast forwards. Our current expectation is that the transaction will close towards the end of the third quarter, subject to receipt of required regulatory approvals and satisfaction of other customary closing conditions. As previously stated, we intend to utilize the after-tax proceeds to reduce debt consistent with our capital allocation priorities. And lastly, in future, we initiated the launch of Baxter's new operating models. realigning our portfolio of businesses into four global vertically integrated business segments, medical products and therapies, healthcare systems and technologies, pharmaceuticals and kidney care. Under this new reporting structure, each segment will have global profit and losses accountability, dedicated commercial operations and fully aligned research and development manufacturing supply chain and functional support teams. While these are still early days, I believe that this approach is already driving clear, meaningful benefits, including enhanced market responsiveness through greater strategic clarity, tighter alignment, faster decision-making, and an invigorated innovation mindset across all aspects of our operations. Not coincidentally, it has also yielded streamlining and efficiency opportunities that I expect to benefit our bottom line. We plan to complete our transition to the new operating model and report under this new segment structure beginning in Q3, which will provide additional perspective on the financial metrics of each of the four segments. Assessing both our year-to-date performance and the progress of our strategic actions, I'm excited and optimistic about our trajectory. We are responding to a rapidly evolving marketplace with fresh, decisive thinking that will redefine how we operate and serve our stakeholders. We are positioning ourselves to emerge as two leading companies, emphasizing a range of medical essential products focused on delivering outstanding results for our patients, shareholders, and the many other stakeholders communities that rely on us. Before concluding, I would like to point you to Baxter.com, where you can review Baxter's most recent corporate responsibility report published last month. It highlights meaningful actions taken in 2022 in support of our goals to empower our patients, protect our planet, and champion our people and communities. Baxter's well-recognized emphasis on sound corporate citizenship is another important way that we advance our mission to save and sustain lives. Now, I'll pass it on to Brian to provide more detail on our performance and outlook.

Thanks, Joe, and good morning, everyone. I'm happy to be joining the call this morning to provide some additional details on Baxter's second quarter financial performance, as well as commentary on our updated financial outlook. As Joe mentioned, we are pleased with our second quarter results, which came in ahead of our expectations. Second quarter 2023 global sales included $3.71 billion from continuing operations and $142 million from discontinued operations. Sales in the quarter increased 3% on a reported basis and 4% on a constant currency basis and compared favorably to our guidance. Sales performance in the quarter benefited from better than expected sales across nearly every business line, with particular outperformance realized in medication delivery, pharmaceuticals, and patient support systems. On a year-over-year basis, we recognized solid growth across much of the portfolio, which was partially offset by a 1% decline in patient support systems, primarily reflecting lower rental revenues and reduced hospital capital spending as compared to prior periods. We also generated lower sales in BPS, which is now reported in discontinued operations due to a reduction in revenues from COVID vaccine manufacturing. On the bottom line, Adjusted earnings in the aggregate, inclusive of both continuing and discontinued operations, decreased 24% to $0.66, reflecting the impact on our results of the increased cost of materials, labor, and freight we've absorbed due to the significant inflationary environment experienced over the past few years. Adjusted EPS for the quarter came in ahead of expectations of $0.59 to $0.61 per share, primarily driven by sales and operational performance. A lower than expected tax rate offset the negative impacts from foreign exchange and losses on equity investments. Now I'll walk through performance by our regional segments and key product categories, starting with sales by operating segments. Sales in the Americas grew 5% compared to the prior year on a constant currency basis. Sales in Europe, the Middle East, and Africa grew 3% on a constant currency basis, and sales in our APAC region increased 4% constant currency. As we look to the second half of the year, We expect performance in APAC to be negatively impacted by a decline in China sales, resulting from the effect of excess mortality on ESRD patient volumes due to the pandemic, as well as the impact from the ongoing implementation of value-based procurement initiatives. Moving on to performance by key product category. Global sales for renal care were $936 million, increasing 2% on a constant currency basis. Performance in the quarter was driven by mid-single-digit growth in our USPD business, partially offset by lower U.S. in-center HD sales following the exit of a distribution agreement at the end of last year, consistent with our optimization plans for this business. Globally, both PD and in-center HD sales advanced low single digits. Results in the quarter were partially offset by lower sales in China due to the factors just mentioned, including government-based procurement initiatives and a lower patient census in the region due to the pandemic. Sales and medication delivery of 761 million through 7% year-over-year at constant currency rates, driven by strength globally for both infusion systems and IV solutions products. We continue to experience healthy demand in the U.S. for our Spectrum LVP pump. As we continue to work to improve the availability of components for Spectrum, we expect sales to ramp in the second half of the year, and we also continue to focus on growing our Novum syringe base. Pharmaceutical sales of $550 million increased 6% on a constant currency basis, Performance in the quarter reflected strength in our U.S. injectables portfolio driven by new product launches, including Zosyn, norepinephrine room temperature, and bendamustine, as well as increased sales internationally for a hospital compounding portfolio. Total sales for clinical nutrition were $243 million, increasing 7% on a constant currency basis. Performance in the quarter was driven by a strong performance internationally, partially offset by declines in the U.S. reflecting a difficult comparison against the prior year period. Sales in advanced surgery were $272 million, advancing 4% on a constant currency basis. Growth in the quarter reflects an improvement of surgical procedures globally, with particular strength internationally, partially offset by the impact from exiting a distribution agreement in the US, as well as select supply constraints that hampered performance in the quarter. Sales in our acute therapies business were $180 million, representing growth of 6% on a constant currency basis, and represented a return to growth in the U.S. and strength in our APAC region. Sales in our patient support systems business were $359 million, decreasing 1% on a constant currency basis, primarily driven by lower contribution from rental revenues and lower hospital capital spending as compared to the prior year period. In the quarter, we realized better-than-expected sales for ICU beds in the U.S., driven by the launch of Progressive Plus. We have experienced positive demand for that new entrance to our smart bed portfolio since its debut. As Joe mentioned, we saw a significant sequential improvement in orders, increasing approximately 30% driven by demand for our segment-leading hospital beds and care communications products. We currently expect this momentum to continue with orders increasing in the second half of the year as compared to the first half. Frontline care sales in the quarter were $307 million, increasing 9% on a constant currency basis. This growth reflects demand for our intelligent diagnostics, respiratory health, and connected monitoring portfolios. We saw continued 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 are pleased to see improvements in our supply constraints, the business continues to have an elevated backlog level, which we will continue to work down over the course of the year as anticipated demand remains strong for this portfolio of products. Global surgical solution sales in the quarter were 77 million, increasing 9% on a constant currency basis. Performance in the quarter was driven by continued geographic expansion and increased hospital access. BPS second quarter sales, which are now reported as discontinued operations, were 142 million, decreasing 7% on a constant currency basis. This decline was in line with expectations due to lower COVID vaccine-related revenues of approximately 27 million compared to the prior year period. Underlying business momentum continues to build with strong growth, excluding the vaccine impact realized in the quarter. Moving through the rest of the P&L, our adjusted gross margin from continuing operations totaled 40.4%, in line with our expectations and represented a decline of 160 basis points over the prior year. The year-over-year decrease reflects increased costs of goods sold, primarily driven by material and labor inflation, freight, and supply constraints, partially offset by favorable pricing in select areas of the portfolio. The impact of discontinued operations reduced Q2 2023 adjusted gross margins by 40 basis points and Q2 2022 adjusted gross margins by 50 basis points. Adjusted SG&A totaled $844 million, or 22.8% as a percentage of sales, a decrease of 40 basis points versus the prior year period. Performance in the quarter benefited from our ongoing transformation initiatives to enhance operational efficiencies, partially offset by higher bonus accruals under our annual employee incentive compensation plans versus the prior year. On an aggregate basis, inclusive of discontinued operations, adjusted SG&A was 22.1% as a percentage of sales in Q2 23 and 22.4% as a percentage of sales in Q2 22. Adjusted R&D spending in the quarter totaled $165 million, and represented 4.5% as a percentage of sales, an increase of 40 basis points versus the prior year. We have ramped up our R&D efforts, particularly increasing our investments and advancing our connected care technologies. On an aggregate basis, inclusive of discontinued operations, adjusted R&D was 4.3% as a percentage of sales in Q2 of 23 and 4.0% as a percentage of sales in Q2 of 22. These factors resulted in an adjusted operating margin of 13.2%. a decrease of 150 basis points versus the prior year. On an aggregate basis, inclusive of discontinued operations, adjusted operating margin was 14.4% as a percentage of sales in Q2 of 23 and 16.2% as a percentage of sales in Q2 of 22. Operating margin came in ahead of our expectations, primarily driven by top-line performance and enhanced execution on our transformational initiatives, driving improved operational efficiency. Net interest expense totaled $124 million in the quarter, an increase of $35 million versus the prior year, driven by the impact of increased interest rates on our variable rate debt. Adjusted other non-operating expense totaled $22 million in the quarter, compared to $33 million of income in the prior year period. Results were unfavorable to expectations and driven by losses in both foreign exchange and marketable securities compared to gains in the prior year. The adjusted tax rate in the quarter was 17.8% compared to 20.5% in the prior year period. The year-over-year decrease was primarily driven by changes in geographic earnings mix. With respect to cash flow, in the first half of 2023, we generated free cash flow of $485 million, including discontinued operations, compared to $171 million in the prior year period. We expect to remain on track to more than double our free cash flow year-over-year in 2023. And as previously mentioned, adjusted earnings from continuing operations totaled 55 cents and declined 25% versus the prior year. Adjusted earnings, including discontinued operations, of 66 cents for diluted share declined 24% versus the prior year period, reflecting the increased cost of raw materials, freight, and labor, as well as the impact of higher interest rates on variable rate debt, foreign exchange headwinds, and higher bonus accruals. With respect to our original guidance, Earnings favorability was driven by better than expected sales and SG&A savings as the benefit from the lower tax rate offset the negative impact from FX and losses on marketable securities. Let me conclude my comments by discussing our outlooks for the third quarter and full year of 2023, including some key assumptions underpinning the guidance. As mentioned, we are pleased with the operational performance to date and positive momentum we have seen through the first half of the year. While we continue to work to mitigate the macroeconomic challenges that have impacted our results to date, the latest signs are reassuring. Our business fundamentals remain solid and demand for the portfolio is broad-based. Taking into account our positive second quarter results, I'll now walk through our updated guidance. Our current expectation is that the pending sale of BPS is likely to close towards the end of the third quarter. However, as the ultimate timing of completion is uncertain, we are providing adjusted operating margin and EPS guidance for full year 2023 that contemplates two scenarios, one where the deal does not close in 2023 and another that assumes it closes at the end of the third quarter. For full year 2023, Baxter now expects total sales growth from continuing operations of 1% to 2% on a reported basis and approximately 2% on a constant currency basis. We now expect foreign exchange to be a 50 basis point headwind to reported results on a full year basis. Assuming that BPS were to remain a part of Baxter through year end 2023, our outlook for sales growth in the aggregate, including discontinued operations, would be the same as continuing operations growth on both a reported and constant currency basis. If BPS were to remain a part of Baxter through year end, we would continue to expect full year adjusted operating margin in the aggregate, including discontinued operations, of 15.5% to 16%. On a continuing operations basis, we expect full year adjusted operating margin of 14.1% to 14.6%, which would not be significantly impacted by the timing of the pending BPS closure. If the pending BPS transaction does not close by year end, we would expect to incur interest expense of approximately 500 million for fiscal 2023. However, if the BPS transaction closes by the end of September as currently anticipated, we would expect a reduction of interest expense of approximately $40 million, which would result in a benefit to continuing operations in the fourth quarter. We now anticipate a full year adjusted tax rate of 20.5% to 21% on both an aggregate and continuing operations basis. Given current foreign exchange rates, we expect to absorb a negative earnings impact of $0.05 to $0.07 per share in the second half of the year relative to prior expectations. Lastly, we expect a diluted average share count of 508 million shares. Under this scenario, where BPS remains a part of Baxter through year-end 2023, we now expect 2023 adjusted earnings on an aggregate basis, including discontinued operations, to total $2.92 to $3 for diluted share, which includes adjusted earnings from continuing operations of $2.49 to $2.57, and adjusted earnings from discontinued operations of 43 cents. If the pending BPS sale were to close at the end of the third quarter as currently anticipated, we would expect full-year adjusted earnings in the aggregate, including discontinued operations, of $2.87 to $2.95 per diluted share, adjusted earnings from continuing operations of $2.54 to $2.62, and adjusted earnings from discontinued operations of 33 cents. This outlook excludes estimated fourth quarter adjusted earnings attributed to BPS consistent with the assumed September 30 closing date and includes a benefit of approximately $0.05, primarily due to reduced interest expense after giving back to the anticipated debt repayment plan associated with closing of the pending BPS sale. Specific to the third quarter of 2023, we expect global sales growth from continuing operations of approximately 2% on a reported basis and 1% on a constant currency basis. and we expect adjusted earnings from continuing operations excluding special items of $0.65 to $0.67 for diluted share. We expect adjusted earnings of 13% for diluted share from discontinued operations. Taking this into account, we would expect adjusted earnings in aggregate of $0.78 to $0.80 for diluted share. With that, we can now open up the call for Q&A.

Thank you. We will now begin the question and answer session. If you have a question, please press star one on your touch tone phone. If you wish to remove yourself from the queue, again press star one. 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. And your first question comes from a line of Robbie Marcus from JP Morgan. Your line is open.

Thanks for taking the question and congrats on a good quarter. Joe, maybe to start, You know, it looks like the recovery is progressing nicely, beat and raised, but it's a bit complicated with discontinued and continuing operations. So we'd love to get a sense of, you know, how did the pro forma, the combined company, do in the quarter on margins? And, you know, so we can compare it apples to apples. What's the expectation for the back half of the year and your confidence in – regaining the margins.

Thank you, Robbie. Good morning. I'm going to ask Brian Stevens to ask. We will make sure that everything you guys need to know is clarified as we had a very solid quarter and want to make sure that the information is clearly understood and that we can talk about the other things that drove our success this quarter.

Thanks very much, Robbie, for the question. And as you mentioned, due to the signing of our agreement to sell BPS, which right now we expect is going to close likely in about two months at the end of September, although that's subject to customary closing conditions, as you can imagine, this has triggered discontinued operations reporting. One thing I did want to highlight is that at the end of our investor presentation, we have gone back and recasted recent quarters to show our adjusted results on a discontinued operations basis. to provide some visibility apples to apples going forward. One thing to point out, though, that what that does is while it takes out the contribution from BPS in the comparable periods, that recasting does not reflect the benefits that we expect to get going forward from interest expense savings. So I think if you're looking at EPS for the full year, while we expect about a $0.43 impact from discontinued operations, after you net in the interest savings and things like that, we really think the headwind on an annual run rate basis is probably closer in the range to 15 to 18 cents. So specific to your question, as far as where our operating margins landed, we reported on a discontinued operation basis adjusted operating margins in the ballpark of about 13.2%, including the full company. We came in for the quarter at 14.4%, which was a little bit above where we were expected to land. On a full year basis for the entire company, as if we own BPS for the full year, we would expect our operating margin, our adjusted operating margin, to come in at 15.5% to 16.0%, which is consistent with the prior guide that we gave last quarter. Now, you'll note that this guide implies a 300 basis point margin expansion in the second half of the year. There's really three main drivers of that. The first driver is sales growth. As you know, our sales tend to be very back-end loaded. in the second half of the year, which gives us greater absorption against our fixed cost base. And that is what the largest driver of the sequential operating margin improvement that we see and that we continue to be on track for. The second component really relates to integrated supply chain. As you recall, we had adverse manufacturing variances coming into the year that rolled out during the first part of the year as the related inventory was sold. Additionally, a lot of the margin improvement initiatives that are integrated supply chain and manufacturing have been working on have been overshadowed by the high levels of inflation. As we've seen inflation start to stabilize in recent periods, we're now expecting in the back half of the year, benefits from the savings from those initiatives is now starting to lap the inflation we're seeing such that we're expecting that's gonna drop to the bottom line with expanded margins. And then finally, we're seeing benefits from cost savings. As you'll recall, we had some significant cost savings initiatives earlier this year in connection with our reorganization to a new operating model. And those cost savings already benefited and contributed to our beats this quarter, which, as you saw, we came in $0.05 above the top end of our guidance range for EPS on overall company. And then even more of those cost savings initiatives are going to float through in the second half. So really good traction we're seeing, and we're confident about where we're landing on the operating margin side.

Great. That's really helpful. And maybe as a follow-up, your competitor recently got approval for their infusion pump platform in the U.S. I know you resubmitted Novum large volume pump in early June. I was just wondering if there's any update there or any comments you could provide. Thanks a lot.

Robbie, we have, you know, we believe we have successfully resolved the open issue that was primary subject of the FDA's last additional information that they requested. Additionally, we have practically implemented software changes that we had planned in consultation with the FDA. We have regular communications with the FDA during the review. We are committed to resolving any questions or issues that come up during the process and through learnings in connection with this recent launch of NOVA and LVP in Canada and related regulatory issues. So we are working. on software upgrades to our current version of the Canadian pump. As we work through this in the next few months, we work alongside the FDA to tell them what's going on. And we are cautiously optimistic. We have a very good pump platform, and we want to get this thing done and through with the FDA. But we want to make sure that the best and most recent updates to the product are implemented. before in Canada and so we can communicate with the FDA properly. We're in constant communications with them. I just also want to add that our Sigma Spectrum pump is doing extremely well. We are augmenting the supply chain of that pump to make sure that pump continues to be available. We need that pump to be available. We have hundreds of thousands of these pumps on the market. And by doing that, we're able actually to give continuity to hospitals which own that today. As a matter of fact, that growth has been great. This year, we upped our forecast twice since the beginning of the year as the supply chain became better, and we're making sure that in the next 12 months, that pump will be backward integrated into the new gateway system that Novum uses in hospitals. So we have really alternatives for everything. I tell you, we've been getting market share steadily year over year, and we'll continue to do that. Of course, we're looking forward to have Novum LVP in the U.S. market and just a little plug for our syringe pump which has done extremely well and we are actually exceeding by far our expectations for this year.

Appreciate it. Thanks a lot. Thank you.

And your next question comes from the line of Larry Beagleson from Wells Fargo. Your line is open.

Good morning. Thanks for taking the question. And congrats on a nice quarter here. Joe, or sorry, or Brian, yeah, I wanted to ask about the guidance. You put up a nice 4% growth number in the second quarter, but I believe the third quarter you're guiding to about 1%. And Joe, you talked about improving trends. So maybe talk about what you're assuming in the second half and why growth might be lower in the second half than what we've seen here in the second quarter, and I had one follow-up.

Sure, I'll get this started, and then Joe can add anything. Thanks very much for the question. As you saw in the current quarter, we're really excited about our growth. We came in at 4% on a constant currency basis, which reflected really strong contributions and outperformance from our NPT business, which came in around 7%. Our pharma business, which was at around 6%, reflecting some of the recent launches we've had in the U.S., including Zosyn and Rimp Temperature Nori. Our frontline care business came in around 9% as it worked down some of the backlog, and we saw strong demand for intelligent diagnostics and respiratory health. And then finally, we started to see some traction in PSS in recent periods, which, as we talked about before, we've seen some softness in capital orders that appears to be stabilizing. And we're seeing good traction going into the second half of the year as our order volume has picked up, although that business is still facing some headwinds from lower rental revenues following COVID, where demand for rental beds was high. So really, the story for The sequential deceleration in our growth going into the third quarter, we're expecting it to slow down a bit to around 1%, is really driven most significantly by the headwinds facing our PD business in China. As we mentioned, within that business, we have excess mortality that has reduced our patient census counts following some of the impact of the pandemic that they've had over there. And then also in the second half of the year is where we're starting to see a little bit more of the impact of volume-based procurement in China. So I think net-net for that kidney care business, which includes renal as well as acute, we're seeing about a 250 basis points impact from some of those headwinds. Additionally, there's some discrete items that happened in the prior year period that we've highlighted previously. that we're going to be lapping, which is driving down our sequential growth a little bit. But I think overall, we've still been able to offset those headwinds with strong performance across the rest of our portfolio.

I just want to augment the part on the concerns in the beginning of the year that we had with CAPTA. We've seen that alleviating. And I have to say that the launch of Progressive Plus has been a tremendous success. We've seen good momentum, a very strong update in quotations, and also conversion from quotations to PO and to delivery. As a matter of fact, we're starting to see competitive conversions, which is we're taking market share from competitors. So this has been a good... track record for the company when they launch new products. And now with a very good team in place, we are able to actually execute on the plan above and beyond the great performance of frontline care and our medication delivery business as well in the US. So just a little bit of more color to Brian's comments on our excitement around that business.

That's super helpful. Just one quick follow-up for me. Obviously, the Pfizer injectable plant, the damage to that plant got a lot of media coverage the last couple of weeks. It seems like it was more just a warehouse that was negatively impacted. Do you see any potential benefit from that, or is it your understanding it was more the warehouse, not the manufacturing that was impacted? Thanks for taking the question.

Larry, I'm not going to comment on Pfizer's status. They have to answer their own questions. I can tell you that from the portfolio that they sell, we have a little bit of competitive products that we can ramp up in the second half of the year. We will depend a lot about how much inventory is in the chain. But I say probably a little bit north of $10 million is one opportunity that we have. Maybe a little bit more than that, a little bit less. Depends what's in the chain. Depends how this is going to be there. One important thing is Vaxra will be there for the patients when they need it. And if the customer needs, we'll be there to serve them with the products that we have.

Larry, just to clarify that, we have not included any upside in the guidance that we provided. Obviously, we're continuing to evaluate the situation. As Joe mentioned, we do believe there is some overlap, and so the team is working on how we can address and fill those gaps in the marketplace to ensure the customers get those products.

Thank you.

Your next question comes from a line of Danielle Antelfi from UBS. Your line is open.

Good morning, guys. Thanks so much for taking the question. And not to be too greedy here, I know we just have updated 2023 guidance and tough to talk about 2024 at this point given all the moving parts here. But I would love to get some thoughts maybe at a qualitative or high level as we look ahead to 2024 in the RemainCo piece of the business, xRenal. what the key growth drivers will be. Obviously, hopefully, NovumIQ is one of them. But beyond that, Joe or Brian or Claire, if you can talk about sort of over the next 12 months, what you see as the key growth drivers beyond NovumIQ that we should be focused on here for the business. Thanks so much.

I want to highlight what we call HST, which is our former call to hero in business, but our HST, I think that is a great opportunity. It's still in the frontline care. Frontline care is really driving single, high single-digit growth. I think that will continue. And I think the recovery and the potential gain of market share embeds is a good possibility for us looking at the performance of our new bed launch today. I think another one is advanced surgery. We have per clot coming in. The demand is high. The product is superior in side-by-side testing that we've seen to competitors. I'm not claiming anything on the label. I'm just saying that when we do, it looks like the product has a performance that pleases the customer by the speed and completeness of the hemostasis products. This is the first product that is Baxter's passive hemostat. We don't have a passive hemostat, and we're now constrained just by the capacity of the company to make the products, but we are working the supply chain to get a second supplier. and we which is going to come in line hopefully in 2024 uh but that demand is really good and that's a good driver for it and we have in the pharmaceutical business have new launches uh our new management pharmaceuticals has really uh uh uh improve our ability to launch products and get the time to pick sales so we have some really good stuff happening clearly we we work We would like to count on Novum. We're going to do everything we can to get that on the market. But as a backup to Dell, we have a very solid platform with Spectrum that's still taking market share. And the syringe pump really makes it easier for us to penetrate hospitals that otherwise were never available to us before. So I think Baxter, all in all, as we execute all those changes, the sale of BPS, that then is spin off Reno, is to create a company that is smaller, driven by innovation, and the ability to actually impact lives of our patients is what we're targeting for 2024.

And maybe if I could add to that a little bit, Joe. Another item that we're really excited about is the recent launch of our Progressive Plus ICU bed. We're seeing really good demand from that, even though it's in the early stages. And we're also excited about some of the new features that we just came out with for our Centrella platform as well. The other item I'd like to highlight that's a big internal focus for us in terms of driving growth going forward is really the impact of the new operating model that we're transitioning to. As we've talked about previously, earlier this year we started the process of shifting from a regional focused organization to really a vertical focused organization where we have leaders of our new segments that are really like mini CEOs that own the entire business from top to bottom, including the supply chain aspect of that. And I think as we mentioned before, we're planning to transition to our new segment reporting in the second half of the year. Right now we're actually expecting that that's gonna be coming up this coming quarter. So we're really excited to be able to share some of the financial performance at that cut with all of you at that time. But as part of this transition, our new segment leaders are very much focused on developing portfolios of initiatives that we're looking to really grow the business going forward.

Thank you, guys.

And your next question comes from the line of Patrick Wood from Morgan Stanley. Your line is open.

Amazing. Thank you so much for taking the questions. I'm just curious, in renal, if we make the adjustment, obviously, in HD for that distribution agreement, how you're seeing the relative performance of PD versus HD, if you're seeing any kind of a shift there, or if you're seeing comparatively similar trends in patient flow across those two sort of verticals. Very curious there.

Our PD business, with exception of China, which I think we, in the prepared remarks, we spoke about the two things affecting them, being the VBP and also the mortality due to COVID, if you isolate that, the rest of the business is starting to recover from the COVID. We're starting to see patient growth, some geographies with mid-single-digit growth, some others with low single digits, but coming up from negative growth last year. So we're starting to see that going well. We also took other initiatives to augment that business. We see HD as a portfolio rotation for us. We're looking at where to be, how to make that business We are in full-fledged optimization process. We're looking at our dialyzer business, we're looking at our HD monitors and making sure that we are in the right place at the right time, competing the right way. We want to make sure that that is a supplemental business to Baxter that is profitable and is growing. But we're starting to see, with optimism, with the exception of China, growth and recapture of the PD marketing. Remember, this is a business that we, post-COVID, project long-term to be a mid-single-digit growth business in terms of patients. So we want to make sure that as the situation stabilizes in China, we are prepared 100% to continue to grow in that market.

Amazing. Super helpful. Thank you. Thank you.

Your next question comes from a line of Travis Steed from Bank of America Securities. Your line is open.

Hey, thanks for taking a question and good quarter. I did want to follow up, Joe, on Novum. It sounds like you have to upgrade the Canada pump first, and that takes a few months, and then after that's finished, then you can move and work with the FDA. I just wanted to make sure I understand the nuances there from your earlier response.

Travis, the pump in Canada is on market. The U.S. doesn't have Novum. It's not approved. So to your point is we had some software updates. We're making make we have some available to go through working with Health Canada to make sure they are okay with us moving forward. We also have other changes that we're gonna be making in the next couple of months to make sure that that pump is all the potential upgrades and improvements are in place. And then as we work with the FDA, our application has those changes factored in but we want to make sure that we want to execute them in Canada and we work with the FDA. We want to make sure that, but I want to tell you that we don't speak on behalf of the FDA, neither Health Canada. We work with both of them trying to, and we will address all those problems as we're confident that our technology and our platform is solid. we continue to upgrade like we would have done to any other products to address any concerns on the market.

Perfect. Thanks for that clarification. And then the other question I had was on the CFO update, an ability to announce that by your end, any color on the type of person you're looking for or progress you're making with that search.

Well, first of all, we have Brian doing a great job here sitting in for CFO and As always, a great, great contributor to Baxter. And then during this quarter, a tremendous amount of work our teams were able to do to be able to provide you guys with discontinued operations, all the reconciliation. We are in process, continue to interview internal and external candidates, and we will be hopefully in a position in the next 30 to 45, 60 days to make a final call.

Travis, the one thing I just want to augment to Joe's comments on Novum is to remind everyone that Novum is a brand new, innovative platform that has some of the most advanced safety features out there. So again, to Joe's point, we're going to look at that and obviously work with FDA. We can't speak on behalf of FDA, but this is a brand new, innovative platform. And we mentioned the Novum syringe is doing really well in the market already. So we're going to look at... obviously address the situation with Health Canada and some of the issues as you find when you launch a brand new platform, those issues can come up. So we're going to address those and obviously work with both agencies to get this pump on the market.

This is not a legacy pump which is decades old on the market. They had issues to be remediated. This is a brand new pump like Claire said. It is a complex technology. and we have the competence in Batchster to address those issues. And as I said, I'm very confident in the technology, and we're cautiously optimistic about how we get this approved.

Great. Thanks a lot.

Thank you.

Your next question comes from a line of Vijay Kumar from Evercore ISI. Your line is open.

Hi, Joe. Congrats. Good print here. Maybe my first question on the product side, Joe, I think you mentioned 30% orders growth. How does it translate to revenue growth for your PSS segment? U.S. pharma up double digits. Are we seeing pricing being stable in the U.S. at this point in time?

Vijay, we'll take one thing at a time. We are seeing the order between Q1 and Q2 growth for PSS and that has encouraged us. We're going to cross the threshold on growth. Remember this growth now was slightly negative. This quarter was ahead of our expectations and we were looking at sequential growth In this product line.

Yeah, so here's what I would, let me augment that a little bit. So to Joe's point, we did see around 30% sequential improvement across all of PSS, which obviously is both our furniture plus our care communications products. Just to be in the third quarter, Hill ROM did have their year end in the third quarter. So we do face, obviously, as we continue to kind of anniversary that we do face a little bit more of a challenging comp from just an overall sales dollar in the third quarter. But the order rates are improving. And as we go to the second half, we expect the second half orders to be ahead of what the first half is. So we're kind of seeing that continued momentum, second half versus the first half of the year. But I think the key is, that both on the Progressive Plus and the Central OCLR, we're seeing a lot of positive momentum there, and we're going to continue to augment that with a lot of the features that we have within the Connected Care space for the HST business.

And in terms of pricing, I think you refer to pricing in general, or are you talking about pricing of PSS?

Sorry, for U.S. Pharma pricing.

For U.S. Pharma, we see continuing pressure. What Baxter is doing is by launching new products that we call the specialty generics, which are our premixes, like we did with norepinephrine and bendamastine. It has been a phenomenal execution of launches, and those products carry significant gross margins. So as we continue to face price pressure on more generic molecules, we're able to offset that, as you can see by the growth of this business in the second quarter and how we're going to go forward with this business. We are making huge progress against price erosion, and that can only be done can only be done with launches of new products, and we've been executing extremely well in all of them.

Yeah, you know what I would say to that, Vijay, is within our U.S. injectables business, I mean, this business is really growing double digits, kind of low double digits, really driven on the success of these launches. So we have been able to now fully offset that price erosion. That will go on, but we will be offsetting it with our new product launches.

That's helpful. Then maybe one on margins, your back half, 200 basis points step up. How much of that is related to the volume leverage on higher revenues versus your supply chain and cost actions? And those supply chain cost actions, should we assume those are structural and should flow through for next year?

So if we're looking at our overall operating margin improvement, I think just sales growth alone is contributing close to 200 bps of that improvement. I think on the supply chain side, with some of the stabilization of inflation and the continued savings initiatives, I think we're seeing roughly about 70 basis points of improvement. And then on the cost savings initiatives that we've been undertaking, the impact for the back half of the year, we're expecting is going to drive around 80 basis points. And those three items are actually offset by the impact of FX versus where we're at when we give our prior guidance, which is coming back about 50 basis points. Extremely helpful. Thanks, guys.

We have time for one more question.

Our final question comes from a line of Matt Mixick from Barclays. Your line is open.

Hey, thanks so much for squeezing me in. So, I guess, you know, I'd love to ask just a couple of broad questions, if I could. And the first, I think the perception may be that, you know, one of your pump competitors got a pump approved. You have not yet got your new pump approved. You know, the perception is that this is skewing sort of the competitive landscape in a way that's maybe disadvantageous to Baxter in the near term. I know you've just stepped through a little bit of this, but I'd love to get your sense of, you know, having a stigma spectrum on the market, you know, and this being your next-gen pump. If you could talk a little bit about what the current competitive dynamics look like on the pump front and what you expect them to look like from now until when you're able to introduce your sort of next-gen platform. And then I had one follow-up, if I could.

Yeah, so I'll let Joe weigh in on this, Matt. But as I just reiterated, again, Novum is a brand new, innovative platform. But we also do have Spectrum, Sigma Spectrum, our version 9, and we have Spectrum IQ. We've been successfully selling that. We are ramping up production of that. And to Joe's point, we are going to make it backward compatible with our gateway platform. so that it will have all the features and be able to integrate within the hospital EMR, similar to what Novum was going to do.

I think we've said this multiple times, Matt. It is, we have an on-market pump, and we've been converting market share. As a matter of fact, we've just converted accounts from a competitor for the reasons of the merits of Spectrum by itself. So we do have that opportunity. Do we have greater opportunity with Novum? Of course we do, because it's a platform that has some safety features and integration that is a great opportunity for customers to have other software that we have come into play. So we're looking forward to that approval, but until then, we continue to do well with the current platform, and it's going to make that even more friendly by backward integrated into our new gateway, which is also developed by Baxter for our new platform that makes it easier to integrate between the Syringe and the Sigma Spectrum.

That's super helpful. And then just on growth, you know, I think we understand, you know, the sale of Biopharma and the deal leveraging opportunity that that's provided and, you know, positive change here to your capital structure. In terms of the Hill Run business and the growth trends, I think, you know, we get the question often, like, what can that business grow? I mean, it looks like it's already kind of accelerated from you know maybe down one percent in the in the first quarter on a combined basis to like up four percent or something like that here in secular if i'm looking at the numbers right um is that you know are we on our way to is that is that current growth rate a representative growth rate of you know based on you know what you would say what you know about the business now do you think there's there's more room to lift that business into the back gap and into 2024, any color there? And I know, sorry, you touched on these topics also during the call. I just want to be clear about, you know, the growth potential as you look at it right now. Thanks.

Yeah, Matt, I'll just give some of the facts. You're exactly right. In the first half of the year, the Hill Run, or obviously we call it the HSP business, was up low single digits, we expect that to accelerate to mid-single digits in the back half of the year, consistent with our prior expectations, really driven by all the factors that we've talked about. Improvement in frontline care, and then within the PSS business, the new product launches. So we believe that that is, that mid-single digit, that underlying run rate, is what we will continue to see going forward. But I'll let Joe.

Yeah, I think not only the product launches in PSS, but also some of the success that we have in cardiology, which is smaller still in our frontline care, as well as some other new products that we have in store for 2024. I believe this business is, their growth is above the Baxter weighted average growth rate. So that is augmented, it's an augmented opportunity augmented growth for us i'm excited about that that's the reason why we acquired huron was to create that differentiation in growth rates to be able to get to meet single digits for our businesses and with the portfolio moves we're making we're going to get there and and has been a a really no last year was all about supply chain and what's a real difficult period for both businesses. As we see us making significant progress in creating resiliency to the business, I see that PSS with great opportunity. And don't discount our surgical business, our GSS business, which also is a great potential source of growth in the future. So we are excited about that business and we have the potential to transform even further Baxter with even more growth in adjacencies through that business.

Great. Congrats on the quarter. Thanks. Thank you.

Ladies and gentlemen, this concludes today's conference call with Baxter International.