Baxter International Inc.

Good morning and welcome to our fourth quarter 2023 earnings conference call.

Joining me today are Joel Mehta, Baxter's Chairman and Chief Executive Officer, and Joel Grady, Baxter's Executive Vice President and Chief Financial Officer. On the call this morning, we will be discussing Baxter's fourth quarter and full year 2023 financial results, along with our financial outlook for 2024. With that, let me start our prepared remarks by reminding everyone that this presentation, including comments regarding our financial outlook for the first quarter and full year 2024, New product developments, including the impact and status of pending regulatory approvals, the status and potential impact of our ongoing strategic and recent pricing actions, business development, regulatory matters, and the macroeconomic environment, including commentary on improving supply chain conditions and evolving customer capital spending trends, 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 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, along with 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 taking the time to join us. I will begin with a brief overview of Baxter's performance for the quarter and the year. After this, I will review our progress against the transformational actions we laid out for you just over a year ago, including the planned separation of our kidney care business. I will then turn it over to Joe Grady, who will walk through our results and outlook in more detail. Finally, we will open it up for your questions. As you saw this morning, Baxter reported strong performance for the fourth quarter of 2023, with top-line sales exceeding our projections and bottom-line results coming in at a high end of our guidance range. As a reminder, continuing operations exclude the impact of our biopharma solutions business, which we divested at the close of the third quarter. Sales from continuing operations rose 4% on a reported basis, ahead of our outlook of 1% to 2% growth. On a constant current basis, sales increased 3%, also ahead of our guidance, which projected growth of approximately 1%. Strength in the quarter was broad-based with year-over-year growth in the healthcare systems and technologies, medical products and therapies, and pharmaceuticals, which was a slightly offset but an expected decline in kidney care. Relative to expectations, both of our chronic therapies and drug compounded divisions reported better than expected sales. On the bottom line, adjusted earnings per share from continual operations came in at 88 cents, at the top end of our prior guidance range of 85 to 88 cents. Our fourth quarter results further reinforce our building momentum. In 2023, we focused on consistently meeting and or exceeding our financial outlook, particularly in light of the significant supply chain and macro environmental challenge we encountered during 2022. As a testament to this focus, over the course of 2023, we were able to deliver sequential improvement every quarter, and we believe this performance provides us with a solid foundation to build off in 2024. Turning to the four-year sales from continuing operations of $14.8 billion, advanced 2% on a reported basis and 3% on a constant currency basis. driven by sales growth for all of our segments at constant currency rates. First, looking at the constant currency sales growth in the segments set to comprise our future Baxter portfolio following the planned kidney care separation, sales in healthcare systems and technologies were up 7%, in the fourth quarter and 3% for the year. Medical products and therapy sales rose 4% in both the quarter and for the year, and sales in pharmaceuticals were up 7% for both the quarter and the year. Performance in these segments was fueled by strong execution across our commercial and manufacturing teams. New product launches increased availability of electromechanical components in a more stable supply chain and macroeconomic environment relative to the significant volatility experienced last year. With respect to hospital capital spending, while we still believe there may be pockets of softer spending, we are encouraged by the sequential improvement we experienced every quarter in 2023 within our care and connectivity solutions division. Our kidney care segment, which will be called Ventive, post separation, declined 1% in the quarter and grew 1% for the year at constant rates. Strong growth in acute therapies was offset by flat growth in chronic therapies, reflecting a difficult year-over-year comparison. Due to certain discrete items that benefited sales in the prior year, as well as lower sales in China, due to the impact of government-based procurement initiatives and a lower patient census due to the pandemic. The underlying state of the kidney care business continues to improve, and the momentum we are building is evident. Among key indicators, we are seeing renewed growth in the peritoneal dialysis patient population following the earlier impact of pandemic-driven mortality issues. Our strategic rationale and hypothesis For an independent kidney care business remains as strong as ever. Our team is executing and gearing up for a successful separation this year. Given overall business performance and environmental dynamics, I'm optimistic as we look ahead to the prospects for both Baxter Inventive as separate entities. Our solid financial performance was achieved in parallel with meaningful progress against the strategic priorities we announced to open 2023. We kicked off the year with an urgency to rethink both the scope and velocity of our transformation. Since then, our team delivered, executing on a range of goals to position a separated Baxter Inventive for a new era of enhanced patient and shareholder impact. enabled by heightened strategic clarity, operational efficiency, and innovation. We realigned our businesses into newly streamlined, simplified operating models based on globally integrated business segments. Each segment is led by a seasoned and knowledgeable executive who has profit and loss accountability, inclusive of dedicated commercial research and development, manufacturing, supply chain, and functional teams. We are already seeing the benefits of improved line of sight to our customers and greater agility to recognize and capture growth opportunities. We completed the divestiture of our biopharma solutions business at the close of Q3, which further allowed us to streamline our strategic focus on our core businesses. We are in the process of utilizing the after-tax proceeds of approximately $3.7 billion to pay down debt in line with our stated capital allocation priorities, including $2.8 billion of repayments in the fourth quarter. Finally, we continue to make progress towards separating inventive out of Baxter. As we have consistently stated, we believe this separation will ultimately empower both companies to pursue their own unique strategic and investment priorities. Many of you had the opportunity to meet designated Ventev CEO Chris Doth at the JPMorgan conference last month. Chris has been hard at work building out his organization, meeting customers, and setting near-term and long-term strategies. Among recent developments, Chris has onboarded Matt Harbaugh as designated vent of CFO. Many of you may know Matt from his days as CFO at Newvasive. Meanwhile, we continue to hit key separation milestones across operational, legal, regulatory supply chain IT domains. In summary, 2023 was a year of rebuilding and renewing our momentum. We made significant progress on an ambitious slate of strategic initiatives coupled with solid financial performance while never losing focus on our foundational commitments to our customers and patients. Additionally, we have created new potential to embrace more exciting opportunities to come. I do not take the accomplishments of this past year for granted. I want to thank and recognize all of the employees who hard work and commitment helped us to achieve our objectives. I have never been more impressed by what a team could achieve in a single year. And that is why I'm so energized by our potential to seize on opportunities we have created together. Now we turn it over to Joel for a closer look at our fourth quarter and full year 2023 performance, as well as our 2024 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 fourth quarter and full year 2023 financial performance, as well as commentary on our financial outlook for 2024. As Joe mentioned, we are pleased with our fourth quarter results, which represented another step forward in our ongoing business transformation. Fourth quarter 2023 global sales of $3.9 billion increased 4% on a reported basis and 3% on a constant currency basis, and compared favorably to our previously issued guidance of 1% to 2% reported and approximately 1% constant currency. Outperformance in the quarter benefited from better than expected sales in many product categories, and particularly in chronic therapies and drug compounding. As compared to the prior year period, we reported solid quarterly growth in healthcare systems and technologies, pharmaceuticals, and medical products and therapies. And collectively, sales for these three businesses, which will comprise Baxter post the separation, increased approximately 5%. As expected, kidney care sales declined slightly in the quarter due to the factors Joe mentioned earlier. On the bottom line, adjusted earnings totaled 88 cents per share increasing 13% versus the prior year period. These results reflect the ongoing operational improvements we are recognizing, both commercially as well as within our supply chain network, as that team successfully executes on its margin improvement programs. Lower interest expense and a benefit from foreign exchange also contribute favorably to the quarter, partially offset by the impact of a higher tax rate compared to the prior year. Adjusted earnings per share for the quarter came in at the high end of our expected range of $0.85 to $0.88 per share, primarily driven by better sales and operational performance. Now I'll walk through performance by our reportable segments. Commentary regarding sales growth will reflect growth at constant currency rates. Sales in our medical products and therapy segments were $1.3 billion, increasing 4%. Full year 2023 sales totaled $5 billion, also advancing 4%. Within medical products and therapies, fourth quarter sales from our infusion therapies and technologies division totaled $1 billion and increased 4%. Sales in the quarter benefited from strength in our IV solutions portfolio, particularly outside the United States as well as solid performance in our infusion system portfolio. Sales from advanced surgery totaled $278 million and grew 6%, coming in ahead of expectations and reflecting strong growth internationally. For our healthcare systems and technologies, or HST segment, sales in the quarter were $795 million and increased 7%. Full-year 2023 sales totaled $3 billion, advancing 3%. Within the HST segment, sales in our Care and Connectivity Solutions, or CCS division, were $492 million, increasing 11%. Performance in the quarter benefited from double-digit growth in all key product categories within the division, including our Care Communications, surgical solutions, and patient support systems product offerings. Growth in the quarter was partially offset by lower contribution from rental revenues. Fourth quarter United States orders within CCS continued to improve sequentially, but notably also grew on a year-over-year basis for the first time in 2023. While we are encouraged by the improvement in capital spending we've seen from our U.S. hospital customers, we continue to believe there may still be select pockets of cautiousness in the marketplace. Frontline care sales in the quarter were $303 million, increasing 2%. Given the improvement in electromechanical component availability over the course of 2023, we're able to successfully address our elevated backlog and exited the year at more normalized levels. Sales in our pharmaceutical segments were $596 million, increasing 7%. For the full year, sales were $2.2 billion, also advancing 7%. Performance in the quarter reflected double-digit growth in our U.S. injectables portfolio, driven by new product launches, as well as continued strong demand for our services within our drug compounding portfolio internationally. Other sales, which represent sales not allocated to a segment, and primarily include sales of products and services provided directly through certain of our manufacturing facilities, were $18 million and declined 58% during the quarter, in line with our expectations. This lower level of sales reflects reduced demand for certain contract manufacturing volumes and the termination of a royalty arrangement. Moving on to kidney care, sales in the quarter were $1.2 billion and declined 1%. Full year 2023 sales totaled $4.5 billion and increased 1%. Within kidney care, global sales for chronic therapies were $950 million, declining 3%, though as mentioned earlier, came in better than expected. Sales growth in the quarter was impacted by a difficult comparison to the prior year period, which included certain discrete items in the US that totaled approximately $25 million. Finally, performance in chronic therapies continues to be impacted by lower sales in China due to certain government-based procurement initiatives and a lower patient census due to the pandemic. We estimate that collectively, these country-specific factors negatively impacted sales by approximately $35 million in the quarter. Sales in our acute therapies business were $206 million, representing growth of 6% with strength across most regions, including double-digit growth in the United States, where we've now rebased this business following the pandemic-related benefits we previously experienced. Now moving through the rest of the P&L. Our adjusted gross margin totaled 42 percent and represented an increase of 80 basis points over the prior year. The year-over-year improvement in gross margin primarily reflects the stabilization of macroeconomic factors and inflationary pressures that previously contributed to higher costs for raw materials, overhead, and labor that impacted our margins earlier in the year. Margin improvement in the quarter also benefited from pricing initiatives in select markets and ongoing margin improvement programs in our integrated supply chain network. Performance for the quarter was in line with our expectations as top line outperformance in the quarter was driven by lower margin divisions which drove a slightly negative gross profit mix in the quarter. Adjusted SG&A totaled $829 million, or 21.3 as a percentage of sales, an increase of 20 basis points versus the prior year period. Performance in the quarter benefited from our ongoing transformation initiatives to enhance operational efficiencies, offset by higher bonus accruals under our annual employee incentive compensation plans compared to the prior year, and select investments in sales and marketing initiatives. Adjusted research and development spending in the quarter totaled $172 million and represented 4.4 as a percentage of sales, increasing 20 basis points versus the prior year. We have ramped up our R&D efforts, particularly increasing our investments in advancing new products across the portfolio and, like SG&A, R&D expenses include the impact of higher employee incentive accruals as compared to the prior year period. These factors resulted in an adjusted operating margin of 16.2%, an increase of 30 basis points. Overall, we are very pleased with the second half margin expansion we're able to realize, with operating margins improving approximately 300 basis points in the second half of the year as compared to the first half of 2023. Net interest expense totaled $73 million in the quarter, a decrease of $44 million versus the prior year and down $55 million sequentially driven by debt repayment of approximately $2.8 billion associated with utilization of the proceeds from our BPS divestiture. We plan to continue to repay debt in 2024 consistent with our stated capital allocation priorities. Adjusted other non-operating income totaled $11 million in the quarter compared to an expense of $11 million in the prior year period. Year-over-year improvement was largely due to lower foreign exchange losses incurred as compared to the prior year period. The adjusted tax rate in the quarter was 21.0% compared to 14.6% in the prior year period. The year-over-year increase is primarily driven by statute expirations on certain tax positions benefiting the prior year period. The tax rate in the quarter came in higher than expected, primarily driven by changes in geographic earnings mix. And, as previously mentioned, adjusted earnings totaled 88 cents and increased 13% versus the prior year, primarily driven by better than expected sales and operational efficiencies, as well as lower interest expense partially offset by the tax rate in the quarter. For the full year, Baxter's adjusted earnings from continuing operations decreased 14% to $2.60 per diluted share, reflecting the impact of higher cost of goods sold, driven primarily by the macro environmental factors we previously discussed, greater annual employee bonus accruals, as well as increased non-operating expenses. These factors were partially offset by our operational and supply chain savings initiatives. With respect to cash flow, we generated free cash flow for the year of over $1 billion from continuing operations compared to $411 million in the prior year period. Going forward, cash flow generation and in particular improving our working capital metrics is a key priority both for me and the Baxter team. To close on our full year results, we were pleased with our operating performance through 2023, which reflected both consistent progress and building momentum. And it is important to note that our teams were able to achieve this performance while also making meaningful progress against our strategic initiatives designed to enhance our future performance and drive incremental value for all stakeholders. We look forward to building on that positive momentum as we enter 2024. Let me conclude my remarks by discussing our outlook for the first quarter and full year 2024, including some key assumptions underpinning the guidance. For full year 2024, Baxter expects total sales growth of 2% on both reported and constant currency basis. as the impact from foreign exchange is currently expected to be minimal on a full year basis. Constant currency sales guidance for the full year by reportable segments is as follows. For medical products and therapies, we expect sales growth of 3% to 4%. Sales in our healthcare systems and technology segments are expected to increase approximately 3%. we expect pharmaceutical sales growth of 4% to 5%. Collectively, sales for these remaining Baxter businesses are expected to increase 3% to 4% in 2024. For kidney care, we expect sales growth to decline 1% to 2% as compared to 2023. Factors impacting year-over-year growth are primarily driven by select market and product exits in connection with our margin expansion initiatives for this segment, which we estimate will negatively impact sales by approximately $150 million. Additionally, the incremental impact from the ongoing government procurement initiatives in China is expected to total approximately $70 million in 2024. Now turning to our outlook for other P&L line items. We expect adjusted operating margin to increase by at least 50 basis points in 2024. We expect our non-operating expenses, which include net interest expense and other income and expense, to total approximately $350 million in aggregate during 2024. We anticipate a full year adjusted tax rate between 22.0% and 22.5%, which reflects an approximate 100 basis point impact to the 2024 tax rate from the implementation of Pillar 2. We expect our diluted share count to increase slightly and average 510 million shares for the year. Based on all these factors, we anticipate full-year adjusted earnings excluding special items of $2.85 to $2.95 per diluted share. Specific to the first quarter of 2024, we expect global sales growth of approximately 1% on a reported basis and 1% to 2% on a constant currency basis. And we expect adjusted earnings excluding special items of 59 cents to 62 cents per 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 1 on your touch-tone phone. If you wish to remove yourself from the queue, press star 1 again. If you are using a speakerphone, please lift the handset to ask your question. So that we may be respectful of everyone's time, please limit your comments to one question with one follow-up question if necessary. We appreciate everyone's patience and would like to provide as many of you as possible the opportunity to ask a question. We will pause for a moment while the list is being compiled. I would like to remind participants that this call is being recorded and a digital replay will be available on the Baxter International website for 60 days at www.baxter.com. Our first question comes from Travis Steed of Bank of America Securities. Your question, please.

Hey, good morning, everybody, and thanks for taking the question. I'll go ahead and ask both of mine up front. One on the revenue side, you talked about sequential improvement every quarter, and when you look at the 2024 revenue guidance, the 2%, maybe think through some of the areas that could improve over the course of the year where there could be some conservatism built in to the 24 and how to think about the cadence of the year. And the second question really is on margins. You think about the 50 basis point margin guidance. Curious what some of the underlying assumptions are on FX and inflationary pressures and stuff like that. Thanks a lot.

Hi, Travis. It's Joel. Thanks for the call. So I guess I'd say a couple of things. First of all, we feel very good about the momentum in our business. I think we had a solid fourth quarter. We are pleased with some of the results that we have heading into this year. And I think the revenue guidance that you see, if you think about overall, the business outside of kidneys growing three to four percent that we have as we talked about our forecast with kidney itself if you think about that we actually have about there's about a hundred fifty million dollars of purposeful business that we're actually exiting products we're exiting markets and so if you actually factor that into that equation again we're up you know over that three percent number of for the year, which I think is great. If you think about the foliar guidance itself, couple some of that strong sales performance with the fact that we're actually expanding our margins over 50 basis points, and we're actually leading to double-digit EPS growth. I said, we feel really good about that. Now, on the margin side, the question you asked, I think the main puts and takes in that, the main part of it is the operational cost improvements. In that, there's a big piece of that from also pricing, from volume. And again, so I think some of the things that you have in there are some of the key assumptions on the margins. I think in all those areas, we feel good about the opportunities, again, to build on the momentum we've had. If you remember in the last quarter, our HST business, we were very pleased with the momentum we had from a sales perspective in Q4, and we do anticipate that heading into the year as well. Again, lots of good stuff there, but I'll pause there for any other points.

Yeah, and Robbie, I'll just, I'll add in a little, or sorry, Travis, I'll add in a little bit here. That was my fault. So, in terms of the cadence, I would say, you know, if we think about just the shape of the P&L, I think sales will be relatively, you know, you'll see some slight acceleration in the second half of the year. But in terms of margin expansion, you are going to see first half margin expansion more outside than you will see in the second half, obviously, just given the comp. And similarly, you'll see that on earnings growth. So earnings growth in the first half of the year will be very strong. Your question on FX, Travis, was FX is negative on margins for the year, about 40 basis points of an impact on our operating margins on a year-over-year basis.

Great. Thanks a lot, Claire and everybody.

Great. Robbie Marcus of JP Morgan has a question. Please state your question.

Thanks. This is Alan on for Robbie. I had a question on some of the strengths that we saw in fourth quarter and, you know, the little bit of the softer first quarter guide. Was there any pull forward of sales into this quarter? You know, you talked about how you recovered some of the backlogs. I expect some of that drove the outside strength. But also just looking at first quarter, given what we view as an easy comp, why aren't you able to put up a better growth number to start off the year? How much of that is conservatism versus realism?

Yeah, so what I would say is probably one of the biggest drivers in terms of the quarterly cadence is within our HST business, where sales do ramp over the course of the year. So very similar to what we saw in 2023, you will see our HST business have growth, accelerated growth in the second half of the year as compared to the first half of the year. So I think that's probably one of the bigger drivers in terms of the first quarter guidance.

And also, we are continuing to see momentum from 2023 into 2024. So I feel cautiously optimistic about the momentum that we got in Q4 going into Q1. Of course, we look at many different factors when we are guiding, but I can tell you that based on the market growth, some of the demand that we're seeing, we feel very comfortable with Q1. And also, we have always a crescendo throughout the year as we have product launches. We have 10 molecules launching in pharmaceutical. They're starting this quarter. They will see ramping now throughout Q2, Q3, and Q4. And also, there's some very important accounts that we are still closing on for the rest of the year that will also boost our ability to do well in 2024.

Got it. And then if I could slip in a quick one, you know, you've talked about the capital equipment environment continuing to improve, you know, some pockets of weakness. What are you assuming for 2024 in the guidance? You know, are you expecting continued, you know, little bits of pockets of weakness, or are you having that basically normalized over the course of the year? Thank you.

Most of our assumptions are large system, medium to large systems continue to improve. We can see that, and we're going to see that slightly in Q1, but going into Q2, Q3, and Q4. There are pockets of softness in capital, like always are, primarily smaller systems. Remember, interest rates are still very high, and those affect the smaller systems. But for the majority of our customers, we're starting to see a recovery in CAPTA when we feel really comfortable in 2024, that that is recovering completely from what we saw in the beginning of, end of 22 into 23.

Yeah, and Alan, just to add on to that, similarly, I think we will see sequential improvement for capital orders within our CCS business every quarter this year, leading to orders being up on a year-over-year basis. And as mentioned in our prepared remarks, we saw a very similar trend kind of in 2023 as well. And then in the fourth quarter, we did see our orders up on a year-over-year basis. So we've been seeing this steady sequential improvement. And so we're going to build on that momentum as we go into 2024.

Matt Mixick of Barclays is on the line with a question. Please state your question.

Hi, thanks so much for taking the question. Can you hear me okay?

Yes, we can.

Great, thanks. So I had to congrats on the solid results here and the pickup in the old Hill Rock business. I just had a question on the seasonality of that business and also if you could maybe just the you know, to the extent of recurring revenues in that business. And I think we're used to the history there of being capital driven, Q4 driven. But with some of the increase in sort of contracting around connected care and systems that I'm wondering, you know, is that a mix of recurring revenues that we should see over time or you're starting to see a mix change in that business any color on that front would be super helpful. Thanks.

So we always have the seasonality. We see hospitals a little bit more cautious in the first quarter, and then as they get through the first quarter, they start spending the money that they have for the year, and it culminates usually with a strong Q4 in terms of growth because a lot of spending gets done there. We try to, as much as possible, create more, less seasonality, but those things happen. And our folks are there. I think one important program we have in Batch, as you'll notice, is Strengthen Our Beds, in the fourth quarter, we continue to go for some larger accounts and conversions, and we're starting to get some success there when we bring Baxter together. You know, what Baxter can do as one company is incredible for hospitals. So we feel that that momentum is starting to kick in with accounts that are partially penetrated going full blow into a Baxter account. We saw that with the conversion that we get that's gonna launch in early 2025 in Northern Cal, that we have large accounts and other things that we can see. So this is a really good momentum for Baxter. We can see that going. But the first quarter is always a much lighter quarter than the rest of the year. The revenue in terms of frontline care is a business that has less seasonality than the CCS business under HST. The reason is that it's more consistent with procurement in doctor's offices and monitors into hospital and med-surg floors. So that brings less seasonality. A business that is very predictable is our MPT business, which has been, you know, successfully growing, as you can see in 2023, 150 basis points above its market growth rate, driven tremendously by infusion systems as well as solutions, IV solutions. So that brings that business to a quite less seasonable, more repeatable. I hope I was able to answer your question.

Yeah, if I could just add one thing to that. I think the way to think about that HSC business over the course of the year Just to build on what Joe said is that we're going to see, I'd say, sequential ramp up over the course of the year in that business. So I think, again, as Claire talked a little bit earlier, there's going to be somewhat of a ramp up in sales that you're going to see, and that's particularly going to be applicable to that segment. The other thing I would just say, you'll recall last year, Footline Care had a fairly sizable amount of growth in 2023 as they worked through some of the backlog. There's a bit of an early headwind on that business during the first part of the year as well. So again, sequential ramp up on that business is just one add I would make to that. So thanks. Great. Thank you.

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

Hey, guys. Thanks for taking my question. Joe, maybe my first one for you. High-level, when I just look at the business X kidney care, 2% to 4%, that's a reasonable number, but it's still below med tech, right? When I look at the utilization environment, what some of your peers are talking about, like why is Baxter 2% to 4%? Are there any one-offs in that 2% to 4% ratio? ex-kidney care, when I look at the legacy Hill Run business, Q4 was really strong. Why should that business slow down if capper order book is turning around in fiscal 24?

Vijay, let me give you perspective on 3% to 4% for this business. It's still growing above its market growth rate because we expect to be on the high end of that guide. What makes that business go 100 basis points above that? First of all, this business has pharmaceutical in it. We still have price erosion there, but pharmaceutical is going to be punching 4% to 5%. Our MPT is going to be between 3% and 4%, and probably with opportunity to go above that. now becomes HST. What is happening in HST? We have significant amount of launches going in the end of 24 and 25. We have new monitors, we have a new cardiology device, and we continue to be successful in Progressive Plus. So a lot of that has to do with our, to get to the 4% to 5%, it has to be new product launches in 2025. not for pharmaceutical because that you can see already is making a difference to their growth rate. It's not for MPT, which continues to do extremely well in fusion systems. We're going to have more than 40% growth between 24 and 23 in our infusion pumps. It's going to be new products in HST, primarily frontline care, and CCS with care communications, new versions of Volt. Three new versions will be launched this year. as well as our new wireless communication device that we plan to launch in 2025. So monitors, wireless communication, and cardiology. That is what's going to drive that business to go above 4%. And if we execute well, it will do it.

I would also say, too, if you think about the, as we separate the kidney business, and we talk about later on in this year having an investor event, What you're going to hear us talk about is how we think about capital allocation, how we think about the opportunity for, again, portfolio ultimately. Because think about it, we have a lot of products with very high market share businesses, and so the opportunity to accelerate that growth is something we're going to talk about later on. But again, that's part of the benefit of the kidney separation is the ability to actually really focus our capital allocation on accelerating the growth to the levels that you're thinking about there.

Understood. And then maybe one on the guidance question. Is inflation still a headwind to margins? What is price versus inflation and interest expense? Q4, you didn't know the sequential step down on debt payments. Is that a sustainable number? Thank you.

So I'll start with interest. What I would say, Vijay, on interest is that in the first half of the year, it's probably, you know, I'd say first quarter probably similar. It steps up likely a little bit in the second quarter, and then we'll step up in the second half of the year. We are planning to pay down some low coupon debt in the second quarter, and so right now we're earning some cash or earning interest income on the cash that we have, and so that will go away in the second half of the year. So that's why you'll see a bit of a higher interest expense in the second half of the year as compared to the first half.

Yeah, and on the debt pay down, I mean, again, we used all the $3.7 billion in proceeds after tax we got from the sale of EPS. We actually used 2.8 of that to pay down debt in the fourth quarter. Again, we have some debt coming due that's maturing in 2024 that we'll use some of the rest of that for, particularly the Euro bond, as Claire talked about. And then obviously we have some debt maturing later in the year that we'll actually address at that point in time.

And then to your other questions kind of just on overall the inflationary environment and pricing, what I would say, and we referenced this earlier, is that our integrated supply chain team is executing on their margin improvement programs. And so those programs and the savings we will generate this year will positively contribute to our margin expansion. So they will more than offset any sort of normalized inflation that we have. In addition, we are getting pricing will be a benefit this year as well. So we are getting pricing, particularly in markets outside the US as well. So we are going after all of those, all of those, you know, our businesses are targeting price in all of those markets as well. So pricing will be positive for the year as well. In terms of kind of all of those pieces, what I would say on the non-op side is that, well, you know, you have a positive on interest, but, you know, you will see that our tax rate is increasing. We did comment on that because of the implementation of Pillar 2 FX. So we have some FX. I talked about it being kind of negative on the operating margin. So all in, our non-op is probably, you know, probably about a couple cents negative impact for us on the year.

Understood. Thank you, guys.

Peter Chickering of Deutsche Bank Securities is on the line with a question. Please state your question.

Hey, good morning, guys. Joel, you've not been in that seat for very long, but I just take a fresh set of eyes on the operations of Baxter. Can you walk us through where you think the most margin upside is over the next several years and what you need to do to hit those cost reductions in the areas that you want to highlight, like procurement or any other sort of low-hanging fruit?

Sure, absolutely. Thanks a lot for the question. Yeah, I think one of the biggest opportunities we have from a margin perspective is to continue the work that we're doing in our independent supply chain group. I think the team's got a lot of really good margin improvement programs going that are designed specifically around things like automation. They're designed around things like how do we enhance our procurement abilities. They're around continue around things about how do we optimize our network and some of the logistics opportunities. I think some of the areas that are the most impactful over time sit in that space. Again, the team has gotten off to, again, a really good start on that. You've heard Claire talk about the fact that as we continue to see some inflationary pressures coming out, I think the work that they've done has gotten us to a place where we have the ability to offset that. But to continue the expansion of the margins, to your point, fall into some of those categories that I just referred to. I think the other piece of it, and some of you heard me say this already, we're not going to SG&A ourselves to prosperity. But nonetheless, there are still opportunities in that space as well around things like, again, how do we think about a shared services environment that actually allows for consistent execution of operations across business and I know this is not a margin question but part of what we're going to focus on heavily is cash that we will continue to how do we drive and improve use of working capital how do we improve our cash conversion ratio again I know that's not specifically what you asked but again that's going to be an area I see the opportunity and what that all leads to is then the opportunity for us to continue to reinvest in some of that back into our business around innovation, around new product development. And back to the question that was asked earlier, how do we continue to accelerate growth? That's what I call a flywheel that allows us to continue to grow, continue to invest, to continue to grow, et cetera, et cetera, which is where we want to get into the company.

Great. And then for follow-up, you open Pandora's box a little bit here by providing segment-level margins for 4Q in 2023. And now we're going to be looking possibly to rebuild our models. Can you break out sort of the margins in each division for what you assume for 2024? And then a quick pump question here. How is market share for pumps and 4Q? Is it competing against the next-gen pumps? And any update on NOVA?

Let me start with the pumps, and then Claire is going to answer the first part of your question. You know, yesterday we just got awarded best-in-class, K-L-A-S, for our Sigma Spectrum pump, which is a great honor. That pump continues to do a great job. Nonetheless, we're looking forward to get Novum approved. But in terms of market share, we continue to advance our market share. This year we have 40 plus percent growth in our pumps versus last year. That's our forecast. So we continue to do well. and we look forward to continue to gain market share and now with a nice award to our pump. It's the seventh award that that pump received since it was launched. So back to Claire now to answer the first part of her question.

Yeah, in terms of the 2024 operating margin guidance, we aren't going to give that by segment, but obviously all of our actions are aligned to improve both the segment and total backster margins. The one caveat I would point out is that within our pharmaceuticals business, As you're aware, we did divest our biopharma solutions business last year. And so as a result, we entered into some MSAs, which will have a negative impact on the pharmaceutical margins and obviously on total Baxter margins for the year as we've now entered into that MSA. So you will see that impact in the pharmaceuticals margins.

Great. Thanks so much.

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

Hi, it's Leigh calling in for Larry. Thanks for taking my question. I just want to make sure I didn't miss it. Did you comment on the status of Novum IQ, the resubmission, and your thoughts on potential approval in 24? And I have a follow-up.

I didn't comment on the details, and we usually don't comment on anything that is with the FDA on behalf of the FDA. We can tell you that we answer all their questions. There's no other questions to be answered. All the documentation was submitted. So as always, this is at their at their side now to make a final decision on this. But as I said before and said this about a month or so ago, I feel I feel cautiously optimistic because there is nothing else for us to do. We answer all the questions. So there will be a that happened in 24 will be a great thing. Nevertheless, We continue to gain market share with Sigma Spectrum. As I said before, we just got an award at Best in Class for that pump, and we're very happy. We continue to be very busy quoting new accounts and competitive accounts, which we are actually winning with that pump.

Got it, thank you. And my follow-up is just what you said about expectations for the two segments in 24. So Baxter X Reno, you expect three to 4% growth. Is that the right way to look at it longer term? And similarly in the Reno business itself, you're expecting one or 2% decline this year, but once you adjust for the exits and China VBP, does Reno normalize to kind of low single-digit growth longer term? Thanks again for the question.

Yeah. So, Leigh, I'm going to go back to something that Joel mentioned earlier. We, you know, plan to have a capital markets day, you know, later this year where we will discuss our long-term expectations for the business. But I think that both Joe and Joel have said that, you know, while we're growing 3% to 4%, Through the introduction of new products, continued market expansion, our goal is to grow ahead of our weighted average market growth rate. So we do want to grow in advance of that. And so we'll be unveiling those longer term. But no, I would say our goal is to accelerate growth off of that. With respect to kidney care, again, yes, we made $150 million of exits to that business, all aligned with our goal of enhancing profitability for that business post-separation. So I think that what we want to ensure is that we're setting this business up for success as a standalone entity. We also have the value-based procurement. There might be some follow-on to that in 2025, but I think the key is that the fundamentals for this business are improving. We're seeing solid patient growth. We're seeing a rebound in our acute therapies business, so I believe this business can accelerate off the levels, or that will grow off the levels that we're seeing once we make these adjustments.

Yeah, and I would just, to the question you asked, we did, again, make purposeful decisions around exiting markets, exiting products, and so if you actually add that back, some of that $150 million we referred to earlier, I think, yes, you'd find yourself in a place where the growth is actually in the low single digits.

Matt Taylor of Jefferies is on the line with a question.

Please state your question.

Hi, thanks for the question. I know you noted some progress on pricing. I was wondering if you could comment on that and your expectations for pricing in 24 and any updates on some of those bigger contracts that you've talked about in the past and your opportunities to reprice solutions, dialysate, nutrition, et cetera.

yeah sure i so we did make progress in pricing in 2023 and uh some of that was uh more temporary in nature in the sense that we had some ads to uh to pricing uh that will you know again fall off at the end of the year here but we do have part of our growth and our margin expansion in 2024 that is continued progress in the areas of pricing and i think One of the things that we've talked about is, just as a reminder, some of the contracts with the GPOs that we've signed, we've made continued progress on. That actually doesn't kick in until 2025. So just to remind you of that, that that's not part of what we're talking about in terms of progress. But again, the team has made solid progress in terms of continuing to take pricing in 2024. And the other thing I would say that we've done a a good job of, or continue to do an even better job of, is to give ourselves the opportunities to actually have indexes within our pricing that allow us more flexibility to pass along costs that are coming into our world that we have historically struggled to pass along to our customers. Again, we're making progress in that area as well. So generally speaking, as Claire talked about, our expansion margins really is focused around some of the operational work that we're doing, but also, again, our pricing progress continues in 2024, and we look to accelerate that further in 2025 and beyond.

Thanks. I just asked a follow-up. When can we hear more about the bigger contracts? Are you going to talk about that throughout the year? And can you comment at all on the kind of opportunities you have with some of those contracts? What's the order of magnitude of pricing you could get?

We are making Great progress. We're in the middle of doing it. Once these contracts are signed, the next steps for us to secure the IDNs underneath them. And Baxter do well in that. We are well poised to take that action. We are feeling quite comfortable where we are today in terms of signing these agreements. We're not going to tell exactly the status of where we are signing them for competitive reasons, neither the volume of dollars. So you need to think about this as value. Value is dropping profit to the bottom line, is value. That will be achieved with pricing and volume. Volume is important to us, the size of our plans. We're getting a combination of both is the important thing for us. So our focus price is always important because the amount of headwind that we had in 2022, of course. So we are considering that, but also expansion of market share is important to us as well because we have capacity and we've been serving the market very well. So think about our objective in 2024 into 2025. is to continue to add value and a significant accretion potentially to the bottom line by getting those contracts signed. But we are in good position.

And we're not going to give specific details on the pricing or volume, as Joe referenced. So just think about that as guidance that we ultimately give on margins and volume growth will be inclusive of the progress we'll make with those contracts.

Thanks, Joe. Thanks, Joel. Thank you.

Danielle Entelfi of UBS is on the line with a question. Please state your question.

Thanks, everyone. Good morning. And just a quick question on sort of what the longer-term focus is post-kidney care. I assume we'll get some more color here once we have the, you know, pre-spin analyst day. Just at a high level, Joe and Joel, curious about where you see the most opportunities to improve, whether organically or inorganically, from an R&D perspective, and just longer term, i.e., over the next few years, where you think Baxter will be most focused and investing behind. Thanks so much.

So, Dania, we're thinking about a strategy, and the overarching imperative of this strategy is to advance and significantly improve the intrinsic value of the company. And we're gonna do that organically and eventually inorganically as well with some tuck-ins and strategic acquisitions that will supplement some of our business. So in the organic side to drive that, that intrinsic value multiplier is innovation, acceleration of innovation, expansion of our commercial footprint in areas that we currently don't participate well, as well as doubling down in operations excellence in all aspects of Baxter, from the plants all the way to our back office. So creating value in all parts of the company. So we can take some of that money, reinvest modestly in research and development, and continue to accelerate the innovation. And the innovation, all of this is going to be done with a significant amount of importance to capital allocation, meaning where money goes inside of the company, how much is share buyback. So this is a post spin when we are looking at a different debt structure and a different company fast debt. So think about our strategy to accelerate innovation accelerate penetration in commercial areas. We're not like alternate sites of care, ASCs. Those are the drivers of our organic growth, and that should drive a quest for a multiplier on our intrinsic value as a company.

And, Daniel, just to follow on and, you know, specific to kind of kidney care, you know, what I would say is, you know, within kidney care, and obviously Chris Toss will, you know, elaborate more on this, but they're going to focus on continuing to increase PD penetration globally, really focusing on how do they enhance this digitally as well and what digital capabilities are out there to really help both clinicians and patients advance that therapy. In addition, within the acute therapies business, I think they'll continue to build upon the continuous renal replacement therapy, and brought it into more multi-organ support therapies as well. So I think that they have a strategy there that they'll continue to build upon and execute as a standalone entity.

Yeah, and I just think what Joe said and what Claire's talked about is just reinforcement of the strategic rationale for the separation that then allows us and kidney, frankly, to both focus their capital allocation on those areas that really accelerate their growth. And as Joe said, I see that once our debt is at a level that we have targeted, to actually reinforce this idea that we're going to have both organic and inorganic growth opportunities ahead of us.

Thank you so much.

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