Baxter International Inc.

Good morning, ladies and gentlemen, and welcome to Baxter International's second quarter 2024 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 one keys on your touchtone phone. If anyone should require assistance during the conference, please press star then zero on your touchtone phone. As a reminder, this call is being recorded by Baxter and is copyrighted material. It cannot be recorded or rebroadcast without Baxter's permission. If you have any objections, please disconnect at this time. I would now like to turn the call over to Ms. Claire Trackman, Senior Vice President, Chief Investor Relations Officer at Baxter International. Ms. Trackman, you may begin.

Good morning and welcome to our second quarter 2024 earnings conference call. Joining me today are Joel Meda, 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 second quarter 2024 results, along with our financial outlook for the third quarter and full year 2024. 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 2024, The status and anticipated timing of our ongoing strategic actions, including the proposed kidney care separation, and the potential impact of our recent pricing actions, regulatory matters, and the macroeconomic environment on our results of operations contain forward-looking statements that involve risks and uncertainties. And of course, our actual results could differ materially from our current expectations. Please refer to today's press release in our SEC 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 also available 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. Thank you for joining us. Our second quarter 2024 results reflect the continued progress and momentum of our ongoing strategic transformation. Our performance in the quarter was strong, reinforcing the benefits of our redesigned operating model, fueled by the commitment and hard work of our outstanding Baxter team. I will start the call today with some brief commentary on our strong second quarter performance before turning the call over to Joel to provide more detail on our results as well as our outlook for the rest of the year. Then, as always, we'll open up to your questions. As you saw in this morning's earnings release, Baxter's second quarter results exceeded our previously issued guidance On both the top and bottom line, this performance further enhances our confidence in our ability to continue executing against our strategic priorities and build upon this underlying momentum. As such, we have increased our four-year sales outlook and adjusted EPS guidance accordingly. Our second quarter performance provides further evidence that the steps we have taken to date to centralize and streamline our operating model are yielding results. These actions allow for improved visibility both externally and internally to our markets. as well as increased accountability for our segment leaders. These benefits, coupled with enhanced operational rigor, have enabled our teams to better identify opportunities to accelerate innovation to drive growth and expand margins. Turning to some of the highlights from the quarter. Second quarter sales from continuing operations grew 3% on a reported basis and 4% at constant currency rates. As a reminder, continuing operations exclude the impact of our biopharma solutions business, BPS, which we divested at the close of the third quarter of 2023, in line with our strategic transformation roadmap. Sales growth was broad-based, with all four Baxter segments delivering growth above our expectations, reflecting positive demand and improved pricing for products across much of the portfolio. On the bottom line, adjusted earnings per share from continuing operations were 68 cents. These results were driven by our top line performance combined with our continued emphasis on operational efficiency across the company with ongoing contributions from our integrated supply chain network. Our strong operational performance more than offset a negative impact from foreign exchange and a higher than expected tax rate in the quarter. Now looking at performance by segment. Medical products and therapies are MPT delivered second quarter sales growth of 4% at reported rates and 5% at constant currency rates. Growth was fueled by demand across the segment and results include the first US sales of our leading edge Novum IQ large volume pump with those IQ safety software. Customer interest is high for the Novum platform, including both large volume and syringe pumps with their ability to advance connectivity and intelligent infusion therapy. These pumps are already live and in use at multiple sites, making a difference for caregivers and the patients they serve. We have a healthy funnel of opportunities and anticipate continued strong growth. steady uptake from Novum across the balance of 2024 and beyond through the upgrades of existing customers and conversions of new customers. Our pharmaceuticals segment grew 9% at reported rates and 11% at constant currency rates. Performance was driven by double-digit growth in our specialty injectables portfolio, reflecting the recent launches of a range of new differentiated injectables as well as significant growth in our drug compounding business. Growth in the segment was partially offset by lower sales of inhaled anesthetics. Healthcare systems and technologies, or HST, performance advanced 1% at both reported and constant rates. Our care and connectivity solutions division delivered mid-single-digit growth, reflecting positive market demand and strong U.S. cap orders, which increased meaningfully both sequentially and year-over-year. Growth in the quarter was partially offset by an expected decline in the frontline care division, primarily due to a difficult comparison to the prior year period and continued softness in the U.S. primary care market. Overall HST results in the quarter benefited from the operation improvements that we are in process of implementing to enhance ongoing performance. As we discussed last quarter, we expect to see these efforts continue to yield positive results as 2024 continues and going forward. Finally, kidney care was flat year over year at reported rates and grew 3% at constant currency rates. Performance continues to be fueled by demand for our acute therapies portfolio, plus strong growth for peritoneal dialysis products due to positive volume and pricing globally. Growth was partially offset by an expected decline in sales of in-center hemodialysis products due to select product and market exits. Looking ahead, we remain confident and excited about the future of our company and our potential to continue to accelerate sales growth, expand our margins, and drive innovation that will deliver benefits to our customers, shareholders, and many other stakeholder communities. As you all know, we launched our strategic transformation in January of 2023 to recast Baxter as a more simplified, more agile and more focused company, passionate in its commitment to operational excellence and better positioned to accelerate growth through customer inspired innovation. Among the elements central to our plan was the separation of the kidney care business from Baxter in order to provide both companies with improved strategic clarity and greater flexibility to pursue their unique investment priorities. We are continuing to make steady progress toward the separation and while the ultimate pathway has not yet been determined, We currently expect the separation will occur in late 2024 or early 2025 with the separation of kidney care. We have a unique opportunity to redefine ourselves while also remaining firmly grounded in what has powered our success for nearly a century. Our life-sustaining mission, our focus on essential healthcare, our commitment to innovation, and at the heart of it all, our employees. whose unparalleled dedication turns our aspirations into impact. Together, we are united, energized, and eager to take Baxter into a future of sustained healthcare leadership. With that, I will pass it over to Joel to provide more detail on our results for the quarter and outlook for the balance of the year.

Thanks, Joe, and good morning, everyone. As Joe mentioned, we are pleased with our second quarter results. which came ahead of our expectations and further reinforced our goal of consistently meeting and exceeding our financial objectives. Second quarter 2024 global sales of $3.8 billion increased 3% on a reported basis and 4% on a constant currency basis, and as mentioned, compared favorably to our previously issued guidance. Outperformance in the quarter benefited from better than expected sales in many product categories, and particularly in patient support systems, infusion therapies, peritoneal dialysis, and drug compounding. As compared to the prior year period, sales excluding kidney care increased approximately 5% on a constant currency basis. On the bottom line, adjusted earnings from continuing operations totaled $0.68 per share, increasing 24% versus the prior year period, and ahead of our prior guidance of $0.65 to $0.67 per share. Results in the quarter were driven by strong operational performance with continued momentum commercially, partially offset by negative impact from non-operational items totaling $0.05 per share due to Florida's change and a higher than anticipated tax rate. Now I'll walk through our results by reportable segments. Commentary regarding sales growth will reflect growth at constant currency rates. Sales of our medical products and therapies, or MPT segments, were $1.3 billion, increasing 5%. Within MPT, second quarter sales from our infusion therapies and technologies division totaled $1 billion and increased 5%. Sales in the quarter benefited from strong growth internationally across the division, particularly for our IV solutions and infusion systems products, which benefited from both volume and pricing gains. Solid demand for nutrition globally also contributed to growth in the quarter. Sales from advanced surgery totaled $277 million and grew 4%, reflecting solid growth internationally. For our healthcare systems and technologies, or HST segment, sales in the quarter were $748 million, an increase 1% coming in ahead of our expectations. Within the HST segment, sales in our care and connectivity solutions, or CCS division, were $452 million, growing 4%. Performers rebounded in the quarter, driven by a significant growth in orders both sequentially and year-over-year for our CCS products. As Joe mentioned, the actions we are taking to enhance our operational rigor and improve execution are yielding results. These factors contributed to orders growth across our CCS division of more than 40% compared to the prior year and over 60% sequentially. Results in the quarter included upgrades to both existing customers and competitive gains within our patient support systems business. We are very encouraged by the growth of orders in the U.S. this quarter, which will be phased in over the course of the second half of this year and into 2025. Overall, we believe the initiatives we are implementing to improve commercial execution will continue to lead to improved performance both in the second half of this year and beyond. Frontline care sales in the quarter were $296 million, declining 4% in line with our expectations and represented a double-digit improvement sequentially. Growth in the quarter continued to be impacted by a difficult comparison of the prior year as backlog reductions positively contributed to growth in the prior year period. Performance in the quarter was also impacted by ongoing softness in the primary care market which negatively impacted growth in both our connected monitoring and intelligent diagnostics product portfolios. The timing and release of government orders in the U.S. also impacted growth in the border. We expect this division to return to growth in the second half of the year as growth for products in other settings, such as cardiology and acute, is anticipated to more than offset the continued softness in primary care and lower government orders. The anniversary of the prior year impact from the backlog reduction will also benefit performance in the second half of the year. Moving on to pharmaceuticals. Sales in this segment were $602 million, increasing 11%. Performance in the quarter reflects double-digit growth in our U.S. injectables portfolio, driven by new product launches, as well as strong demand for services in our drug compounding portfolio. internationally, which has benefited from supply constraints for certain customers that are expected to ease in the second half of the year. Performance in the quarter was partially offset by lower sales of inhaled anesthetics globally. Sales in the quarter for our kidney care segment totaled $1.1 billion, increasing 3%. Within kidney care, global sales for chronic therapies were $917 million, increasing 1%. Strong PD growth in the quarter was partially offset by the expected negative impact from certain products and market exits in our in-center HD business, as well as lower sales in China due to government procurement initiatives. We estimate that these items negatively impacted sales by just over $50 million in the quarter. Sales in our acute therapies business were $201 million, representing growth of 9% driven by strong demand and competitive conversions in the United States. 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 $22 million and declined 5% during the quarter. Now moving on to the rest of the P&L. Our adjusted gross margin totaled 41.2% and represented an increase of 80 basis points over the prior year. The year-over-year improvement in gross margin primarily reflects the strong operational efficiencies we are realizing within our integrated supply chain network, resulting from execution of the margin improvement programs we were implementing and the anniversary of the negative margin impacts from inflationary pressures that drove higher cost of goods sold in the prior year period. Price initiatives in select markets also positively contributed to margin improvement in the quarter. Product mix and foreign exchange partially offset margin expansion in the quarter. Adjusted SG&A totaled $873 million, or 22.9 as a percentage of sales. an increase of 10 basis points from the prior year period as we are making select investments to support our growth objectives and new product launches. SG&A leverage is expected to continue to improve as sales ramp over the course of the year. Adjusted R&D spend in the quarter totaled $175 million and represented 4.6 as a percentage of sales an increase of 10 basis points compared to the prior year period, and reflect our continued investments in advancing new products across the portfolio and bringing innovation to patients across our segments. These factors resulted in an adjusted operating margin of 13.7%, an increase of 50 basis points versus the prior year, driven by the factors above, which more than offset a negative impact on operating margins of approximately 70 basis points due to foreign exchange. Net interest expense totaled $85 million in the quarter, a decrease of $39 million versus the prior year period driven by debt repayments in the fourth quarter of 2023 associated with the proceeds of our BPS divestiture. We plan to continue to repay debt in 2024 consistent with our stated capital allocation priorities. During July, Baxter finalized a bank-financed bridge loan in the form of a Delayed Draw Term Loan, or DTTL, in lieu of a public bond financing with a total size of $2.05 billion. The DTTL provides certainty of ability to fund debt, maturities coming due in the fourth quarter in the event we haven't completed the kidney care separation by that time. We expect to utilize proceeds from the separation to repay the loan if outstanding. We felt this was a better option as compared to bond financing, given the more temporary nature of the cash needed and the high cost of issuing new term debt in current markets. Adjusted other non-operating income totaled $20 million in the quarter, compared to an expense of $22 million in the prior year period, which included losses on both foreign exchange and marketable securities. The adjusted tax rate for the quarter of 23.9% came in higher than expectations and increased as compared to the prior year tax rate of 17.8%. The year-over-year increase is primarily driven by the geographic mix of earnings, decreased utilization of foreign tax credits in the current year period, and a non-recurring foreign tax incentive in the prior year period. And as previously mentioned, Adjusted earnings from continued operations totaled 68 cents per share, an increase 24% versus the prior year, primarily driven by improved commercial performance and a reduction in interest expense, offset by the impact of foreign exchange and a higher tax rate. Let me conclude my remarks by discussing our outlook for the third quarter and full year 2024, including some key assumptions underpinning the guidance. For full year 2024, Baxter now expects total sales growth of approximately 3% on both reported and constant currency basis, which is an increase from prior guidance of 2% to 3% on a constant currency basis. This increase reflects the outperformance we realized in the second quarter and continued momentum for our businesses. Constant currency sales guidance for the full year of our reportable segment is as follows. For MPT, we now expect sales growth of approximately 5%. This is an increase from the prior guidance of 4% to 5% and reflects the outperformance year-to-date and continued momentum for our NOBLM platform. Sales in our healthcare systems and technology segment are expected to be approximately flat to the prior year consistent with prior guidance. This guidance reflects improved performance in the second half of the year, but also assumes the installation of some CCS orders are phased to 2025. In addition, our guidance assumes FLC performance also improves in the second half of the year, but that both primary care and government orders decline in 2024. neither of which we believe represent market share losses. We expect both the primary care market and orders from the government will improve in 2025. We now expect pharmaceutical sales growth of approximately 7%, which compares favorably to prior guidance of 6% to 7%, and reflects the strong start to the year and continued momentum for our new product launches, as well as increased contributions from drug compounding. The contribution from drug compounding is expected to meaningfully slow in the second half of the year as supply constraints for certain hospital customers ease and the business focuses on driving more profitable growth. Collectively, sales for these three remaining bachelor segments are now expected to increase approximately 4% in 2024 and exit the second half of the year at the higher end of our prior expectation of 4% to 5%. For kidney care, we now expect sales growth of 1 to 2% as compared to 2023. This also compares favorably to prior guidance and reflects the underlying momentum of this business. Now turning to our outlook for other P&L line items. We continue to expect adjusted operating margin to increase by more than 50 basis points in 2024. We expect our non-operating expenses, which include net interest expense and other income expense, to total approximately $330 million in aggregate during 2024. We now anticipate a full year adjusted tax rate of approximately 23%. We expect our diluted share count to average 511 million shares for the year. Based on all these factors, We now anticipate full-year adjusted earnings excluding special items of $2.93 to $3.01 for diluted share, which also compares favorably to prior guidance of $2.88 to $2.98 per diluted share and reflects the outperformance we realized in the second quarter and expect for the remainder of the year and includes an incremental headwind from non-operational items totaling approximately $0.02 per share. Specific to the third quarter of 2024, we expect global sales growth of 3% to 4% on a reported basis and 4% to 5% on a constant currency basis. And we expect adjusted earnings excluding special items of $0.77 to $0.79 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 the star one keys on your touch tone phone. If you wish to remove yourself from the queue again press star one if you're using a speakerphone please lift the handset task your question. So that we may be respectful of everyone's time, please limit your comments to one question and one follow up question, if necessary, we appreciate everyone's patience and would like to provide as many of you as possible, the opportunity to ask a question. We will pause for a moment while the list is being compiled. I would like to remind participants that this call is being recorded and a digital replay will be available on the Baxter International website for 60 days at www.baxter.com. Our first question comes from Robbie Marcus of J.P. Morgan. Your question, please.

Oh, great. Thanks for taking the questions and congrats on a nice quarter. Two for me. I wanted to start with the revised guidance. And it looks like it's pretty much going higher from the second quarter beat and then third quarter upside versus the street. So you gave a lot of detail, but I was hoping you could just walk us through the underlying drivers. And did I get the raise and impact correct? Thanks.

Hi, good morning, Robbie. It's Joel. Thank you for the questions. Yes, I think certainly... The new guidance actually starts with the performance we had in Q2. We had a strong operational quarter, and obviously that's part of what's carried through to the rest of the year. What I would just say in general, though, is that our businesses continue to have strong momentum in them. And so I think when you think about this from a sales perspective, it's the recovery, the continued recovery over the course of the year, sequentially in HST. Again, we've raised the guidance for MPT as well from a sales perspective, as well as pharma. And so I think all those businesses, again, are continuing to improve from a sales perspective. So on the top line, that's probably a really key driver. From a margin perspective, we continue to expect a positive progress from a pricing standpoint. from an ISC standpoint. I think our margin improvement programs and the continued work there are also a part of obviously what's driving ultimately the bottom line beat as well. The offset to some of that from an operating margin perspective, we're making continued investments in our business from a sales and marketing standpoint, from an R&D perspective, from new product launch perspective. And so those things Continued impact in the opposite direction, as well as we've got an MSA in pharma that I think you're aware of is related to BPS sales. So that's an offset. And then finally, on the bottom line, we do have a headwind from an FX and a tax rate perspective. But again, punchline here, continued sales momentum, margin expansion with a couple of the offsets I talked about.

Thanks, and maybe just a quick follow-up here. The HST had a tough first quarter. It looks like it improved sequentially in second quarter. Frontline care is still negative year over year. Maybe just speak to the underlying trends you're seeing in the two businesses there and your confidence in a reacceleration and return to positive growth in the second half of the year. Thanks.

Hi, Robbie. Good morning. We feel that a great deal of the operational issues are being addressed behind us. We still are addressing them and will be throughout the 2024 calendar year. Primarily, the one involved in one of our plant transfers is being addressed and is in really, really good shape at the moment. I want to make sure that we also have Our sales force is doing a fantastic job. We did a significant amount of revamping there. So we see that going well. We also see a very positive trend in capital. And the positive trend in capital allows us to have very strong, one of the strongest quarters we ever had in orders. It was the second quarter. So we see that going extremely well. This is in the CCS business, which is our beds and nurse call systems. FLC, completely different dynamic. That has to do with the primary care market. It has significant shift during 2024 with big players coming in and out. We believe our market share is still growing in debt slightly, but it's very high, and we feel that business is going to come back into business into normality towards the end of the year, as well as government orders, which has been very, very low. And the most important factor was the comp versus last year. All in all, I think HST has turned a corner. We see some very interesting dynamics on the market with our product offering gaining ground and stable market share and possibly growing into Q3 and Q4.

Great, thanks a lot.

Travis Steed of Bank of America Securities is on the line with a question. Please state your question.

Hey, thanks for taking the question. I wanted to ask about the kidney co-separation. I think that it was new that you added early 2025, so I wanted to ask about that. And has your thinking changed at all on spin versus sell? And also noticed any impairment charge on that business, so wasn't sure if there's anything to kind of read into that impairment charge this quarter.

So a couple things on this. First of all, thanks for the question, Travis. From a timing perspective, you know, again, look, we're continuing to make progress and continue to move forward in a dual path to ensure that we're ready for both from a sale and a spin process. And so we're obviously doing that in a way that's going to maximize our shareholder value. for all of our stakeholders. And so, you know, we continue to make solid progress, what I would say. I think the timing difference, you know, again, I just look at it, you know, as we've continued to evolve the process and move it forward, again, I think we're in a good place the perspective of both but the timing has shifted a little bit as we continue to move through the year and so our plan is to still continue to get it done by the end of 2024 but uh but it could move into the early part of 2025 which is why i only put the guidance out that it did uh from a goodwill perspective uh you know the way i would take would you know take that is we've had a now a process where we actually had bidders put a value into uh what the goodwill is and sort of as we assess that relative to the, obviously, the value of the books, there's a negative impact there from a goodwill perspective. I would say this, you know, in the event that there was a sale moving forward, we would be recognizing a gain on that sale, so there's a little bit of a timing issue from that perspective. It's just part of a normal process to reassess our goodwill. And now that we have an actual kind of what I call market value for that, so to speak, and that's where that came from.

Great. Thanks a lot. I wanted to ask a follow-up on the margins. So first of all, the second half total company, you've got a couple hundred basis points, second half margin ramp. So I wanted to ask about the confidence and kind of what's driving that. But also if you think about the segment margins in the first half of the year, all the margin expansion for the total company was more in the renal side and, you know, the core Baxter business down year over year. I wanted to kind of think about how we get confidence that, you know, X the renal code longer term, like the remain code Baxter business is going to be, you know, expanding margins, you know, kind of the 50 basis points or so a year that you've kind of set out in the past.

Sure. Let me start by taking what I'll call some of the drivers of our margin perspective, and then I'll get to the second part of your question. Our margin drivers continue to be from a couple different things. One is, again, our top line, obviously our top line growth and some of the new product launches that are coming into play. That's both a short-term and something over the longer term that's going to be a driver from a margin perspective. Pricing, we continue to see upside opportunities from a pricing perspective. In the current year, it's been primarily outside the U.S. We looked for some of that inside in the U.S. Next year is, again, some of the GPO contracts take hold, et cetera, et cetera, and we continue to take pricing. ISC continues to be an area where we expand our margins. Again, both the margin improvement programs, just the efficiencies we continue to gain from some of our investments in automation, et cetera, et cetera. So that's where the kind of the really key drivers and why we feel confident in our ability to actually drive our margins going forward. I think from an ex-kidney perspective, there's a couple things that I would just say. Number one, as we move to a vertical structure in this company, we've continued to refine the process of allocations. Some of this, from an ex-kidney perspective, is an impact, again, as we continue to refine our allocation methodology. And you see some of that, again, impacting where the difference between kidney and some of the margins ex-kidney. The other part to it from just as I mentioned in some of my comments in the earlier question, we are continuing to invest in R&D. We are continuing to invest in new product launches and things that ultimately are going to drive growth that are impacting operating margins in general. So that answers your question.

Yeah, thanks a lot.

Appreciate that.

David Roman of Goldman Sachs is on the line with a question. Please state your question.

Thank you and good morning, everybody. I wanted just to start on the revenue outlook for the balance of the year and recognizing the comment on exiting the year at the higher end of the 4% to 5% on the core Baxter business. But if you look at the sort of guidance that you've provided for Q3 in the balance of the year, I think that implies revenue growth in Q4 below 1%. Can you just help us understand the drivers of the phasing of revenue for the balance of the year, and then I have one follow-up on the strategic capital allocation side.

Sure. Thanks for the question. Yeah, the primary driver of some of the movement there in terms of what I'll call the squeeze math in the fourth quarter is really product mix impacted. It starts with compounding and pharma. We've had some, again, that's been a significant driver of some of the Upside, in addition to the other parts of the business, and that actually starts to slow down in the second half of the year, but in particular in the fourth quarter. And so I would say that's really one of the key drivers of some of the little bit of the phasing from what you call a third quarter perspective in the squeeze math on the fourth quarter.

Got it. And then maybe just to follow up, if you look at kind of the increases in discretionary spending on the SG&A and R&D side, can you maybe go into a little bit more detail about the internal capital allocation priorities, where those incremental dollars in SG&A and R&D are being deployed, and maybe any early look you can give us into some of the either product launches or geographic expansion initiatives that may come out the other side of these investments?

Good morning, David. How are you? Thank you. It's nice to talk to you. Likewise. Listen, just adding a bit to Joe's previous answer is compounding, we had a customer in Australia which had maintenance planned into their hospitals, and we took a great deal of that volume. So you see that volume dwindling down in the 34th quarter. which we knew about it. So when you do this squeeze method in the fourth quarter, you got what you get, but primarily driven by that part of the business having a specific event in the first and second quarter. Moving to the capital allocation. Our capital allocation now putting kidney care on the side. is driven by innovation so what is the highest innovation drivers for the company is going to be in infusion technology so we have more investment to do into uh new categories of pump more software we have intelligent software coming out in 2025 with artificial intelligence that that attaches to the pump We also have five new product launches that we're planning the next 12 months for HST, significant ones, really good ones. We need to put the money behind to close the gap in the research and development, as well as the commercial launch. So that is where we allocate the money, and we have some molecules in pharmaceuticals. So you're talking about infusion systems, specifics into PSS, and care communications, and what we call the injectable specialty drugs, primarily via flow style that we have coming out of one of our facilities. So all the capital allocation is going to products that have higher margin and higher contribution to the company, plus associated to that is the spending that goes along. So it's a good spending, spending for good use. We did a lot of work internally to understand the major drivers of shareholder value to be able to achieve that.

Very helpful. Thank you for taking the question.

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

Good morning. Thanks for taking the question and congrats on the nice quarter here. Joel, I was hoping you could just give us a refresher on the key assumptions for Kidney Co. sale or spin. You know, the tax basis, you know, how might it look different from, you know, the BPS sale, just the margins for Kidney Co. You know, first half was 10.9%, which is much higher than in prior years. So, you know, when we're trying to, you know, estimate the dilution,

know what should we you know think about for for margins and the stranded cost assumptions and and use of proceeds um would be helpful any color on that thanks for taking the question sure uh thanks for the question let me just start with the again a little bit of the from a margin perspective uh you know again our first quarter with kidney you'll recall uh was i had some substantial uh one-time impact that drove that margin at what I'll call a disproportionately high level. So I think, you know, as we've talked about kidney in general, you know, the, you know, think about that, I think, as a high single-digit sort of low double-digit margin profile at this point. And again, that was somewhat inflated, so particularly in Q1 would be the way I would answer that question. From a stranded cost perspective, this is an area we haven't specifically given that type of guidance yet on it. What I will tell you is that that's one of the key initiatives that I'm driving personally. in terms of our ability to, again, to reduce the dilutive impact on that. And so I think, you know, that's something we're going to, you'll hear more about as we go forward. But that's really, again, we haven't come out yet and given that type of information. And we have plans already underway and, again, we're starting to execute that to get way ahead of it. You know, certainly from a sale versus spin perspective, you know, obviously the overarching goal is to maximize shareholder value. And so we're going to do what is best in order to accomplish that. And, you know, if I weigh the puts and takes on some of that kind of stuff, obviously, you know, all of the evaluations being equal, so to speak, you know, there's certain advantages of the sale from the perspective of, you know, more, you know, cash earlier, from the perspective of valuation, certainly, etc., But obviously there's lots of parts to play in that. And then from a tax perspective, I guess, to answer your final question, you know, I think I look at that as a part of the overall economics of what we're going to do. I think there's been a lot of questions on tax leakage, et cetera, et cetera, et cetera. But in the end, it really is about economics in terms of what we end up with from a net tax proceeds and, again, what maximizes shareholder value.

All right. I'll leave it at that. Thanks for taking the question, guys. 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, I just want to go back on the fourth quarter, you know, implied sort of 1% organic. And if I... I heard you correctly. Is the only thing that's changing is that drug compounding, so should the exit rates for MPD, HST, kidney code, they should all be in that sort of annual range, right, in the low to mid singles for MPD, HST, kidney code in the 1% to 2%? And the only thing that changes for Q4 is drug compounding. Is that correct?

It's primarily that and some kidney. Okay. But I think the drug compounding is the main part of it. We have talked about the fact that there are ex-kidney exit rates. For the year, it'll be in the 4% to 5% range. But yeah, it's primarily compounding and then some slowdown in kidney.

So Vijay, the kidney part is primarily driven by value-based procurement in that specific business. So as we await the inclusion or not, we look at our forecast and we look at that is the biggest impact that we're going to have in kidney is VBP. Of course, that associated with compounding have muted the good growth and results of the rest of the businesses of Baxter.

Understood, Joe. And maybe, Joe, a bigger picture question for you. If I just go back the last, you know, 18 months, it's been a lot of moving parts, challenges, a lot of questions raised on is Baxter losing share? When I look at your order commentary within HSNT in some of the performance in core business, it looks like we're back to four plus. You know, when we look at the sort of the forward trajectory here, right, the implied exit rate, is that 4% plus? Organic, sustainable, any one-offs, you know, we should be aware of. I know this year we had China VBP and some product exits. Any other noise factors that we need to be aware of as you look at the outlook and, you know, your comments on share losses?

Let me start from the end of your question. On VBP, VBP is a factor in kidney care. It is a very... muted factor in the rest of Baxter because our presence in China is quite different. Kidney holds the vast majority of profitability in China for Baxter and the product offering as well. So put that aside now. So VPP Baxter X kidney is a non-event at the moment. Moving to share. We had a tough first quarter for HSD. And that greatly was self-inflicted. We had execution issues, which are behind us, as you could see. We had really good performance in PSS. Our orders are significantly up, and we're back on the saddle on that without any hesitation. I see us moving forward into Q3 and Q4 with possibility of share gains in that space due to our offering and our ability to bring Baxter together. Okay, we have a great offering that actually underscore our mission to save and sustain lives and that is becoming more clear to hospital customers and IDNs when we present that and we've seen a movement towards Baxter, what are called the Baxter accounts. The other portion of the market share, which has been spoken as of lately in some of the other calls, is on the pump. Baxter will continue to gain 1% plus the Novum can get up to 2% of market share points on a yearly basis and hopefully more as we continue to see great opportunities. Baxter has converted some really large and important accounts from the competition with our Novum pump. So I want to make sure that we are a really strong company competing in the marketplace and we're having some successes as you can see by our guidance going into Q3 and Q4. And the Q4, just to close the loop on that, is depressed primarily by kidney care going into negative growth territory for cells and the reduction into compounding cells.

Fantastic. Thanks, guys, and congrats on the execution. Thank you.

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

hey good morning everyone thank you so much for taking the question congrats on a on a good quarter here um joe i wanted to ask a high level question and that was really you know you've been undertaking a sort of a restructuring over the last few quarters here i'm just curious about joe where you think you guys are have you completely turned the corner this is obviously quite a good quarter relatively speaking, and even not, you know, on an absolute basis. So, have you guys turned the corner? Where are there still more areas for improving execution that you see going forward, or are we more consistent improvement from here? And I'll leave it at that. Thanks so much.

Thank you, Danielle. Listen, one of the things I want to underscore has been Baxter's capability bringing together a lifesaving portfolio of products. And we have made significant progress in the last two years in our enterprise accounts and how Baxter connected products now are starting to show to our customers and how interested they are. So I feel that commercial execution, not by segment or division, only, but as a company has been very successful as of late, and we're starting to see that coming around. Second thing is now moving down from the sales into the ISC, we have turned a corner. Our colleagues in supply chain and our presidents of the segments have worked very, very closely and have devised and are implementing and executing really good plans in terms of cost optimization. And we can see that in our margins is starting to turn the corner, and we have made great changes to accomplish that. Going down one level as GNA is all about what Joel spoke about, is our stranded cost associated with other efficiencies, primarily in GNA. This is where the recipe is for the next 12 to 24 months, is to optimize the Baxter share services organization even further, and there's great opportunity there, as well as contain and offset the strength of cost so we can show progressively in the next year, two, three, consistent improvements in operating income margins.

Thank you. Matt Mexic of Barclays is on the line with a question. Please state your question.

Hey, thanks so much. And congrats on a really strong quarter here. I wanted to just touch on a couple of things that I don't know were framed out yet in the call. One was just, you know, where you are in terms of the pricing sort of resets that you talked about a fair amount. And then also, you know, just any sense that you can get from the sort of patient support side of the business or, you know, call it the capital equipment side of the business that maybe speaks to, you know, overall demand in the market that you're seeing around investment in infrastructure and capacity as that's come up a few times in Cerny's cycle. And again, congrats and thanks so much for taking the questions.

Thank you. As we had previously disclosed, we have negotiated two very large GPO agreements and conversations now have moved to the IDN level. As expected, customers are being thoughtful and thorough about evaluating their options. We believe now with the novel launch in our ability to provide product, our supply chain resilience, by the way, is second to none. We have proven that over the years and that resonates with our customers tremendously. The association of that and the ability to have a large volume parenteral pump as well as a syringe pump on a novel platform on the market makes a huge difference. So I feel optimistic that we're gonna close those negotiations in the next four months. and be able to move on on 2025 with these things behind us. Oh, and by the way, pricing has been a contributor to Baxter in Q2 2024, was about 100 basis points, and expect to be roughly 100 basis points for the full year.

Yeah, and then I'll just take that from a capital perspective. You'd asked about investments in capacity and other types of things. I mean, I think the way I think about this, obviously, is as we contemplate our world of post-separation, this certainly is an opportunity to re-evaluate our, I guess I'll call it our overall network. There's a lot of things that are intertwined. While Kidney is part of our company, and the ability to actually really reevaluate that once the separation does happen is really going to be a key driver of how we think about our network, how we think about our manufacturing, how we think about our distribution network, et cetera. So, you know, again, as we think about our capital spend moving forward, and again, with now the ability to allocate capital, if you will, in a way that's really focused on It allows both companies, too, to where both companies can really focus their capital on their highest priorities. Again, that's really how we're going to think about the way we evaluate our capital investments and our infrastructure moving forward.

Rick Wise of Stifel is on the line with a question. Please state your question.

Good morning to you both. Joe, I was just hoping you would expand on your Novum comments. Where are we in the rollout? You talked about the positives about high customer interest and the healthy backlog or funnel of orders. Does adoption, does growth accelerate in the second half and into 25? Is that the right way to think about it? And are you seeing more orders than you were expecting last quarter or sort of in line?

Rick, good morning. We found, as a matter of fact, we have sales of Novum in the second quarter, which we did not expect to have, but we're a little faster in having the product ready for the market. What we're seeing is great interest. It plays well for our ability to compete. As you know, Spectrum is a great product. but it does not have a syringe pump, and having a syringe pump makes a huge difference. So we're very happy with the momentum that we're getting in November. We've been showing that to very large hospital systems and small as well. Our team is very hard at work, and we feel confident in the technology, so we have the ability to take market share. I think that is an important thing. You know, this is about providing our patients and our customers with the best technology on the market, not a re-engineered technology from many, many years ago.

Gotcha. And Joel, maybe just one for you. You obviously, you and Joe highlighted multiple times in multiple ways, frontline care and your optimism that things improve from here. And I was hoping you'd just dig in a little deeper on the turnaround. So will patient care and government, is that potentially going to get better? And maybe talk about that transition to cardiology and acute. I think those are two areas you mentioned. What do you need to do to get there? And how soon can it have a positive impact? Thank you both.

You're welcome. So Rick, let me break up a little bit, break down FLC for our frontline care to all listening to the call. Primary care is one segment, one division of that business. We have other divisions such as cardiology and monitoring. Those are going very well. We have no issues in the acute care space. So let's focus on specific the primary care physician office. We believe this market has two dimensions. One is the amount of backlog we had in 2023 that we're able to catch up and ship and sell and fulfill orders that were outstanding. The second one is the slowdown and churn that we've seen due to several of these large primary care outfits exiting the market and moving. The demand is still there. Primary care demand is still there. We're number one shareholder, gaining its light share with 80 plus percent of market share already. So we see that coming back because the demand is not going anywhere. The demand is high. So is the churn due to the changes on the market, as well as what we saw last year we're catching up with the backlog. Government orders is a completely different thing altogether. So eventually, the government will need to buy the products that are needed for the government. And when that happens, we'll see the orders come in. We are a very large supplier of the government. And I feel comfortable that those problems that we've seen in 24 with the decline in primary care. This year, we'll turn the corner in 2025. The business has solid footing, good technology. On the other side of frontline care, we have technology that will be launched in mid-2025 to compete into monitoring, and we're very happy with new launches that will happen in the in the MedSearch monitoring products that we have coming out in mid-2025. So technology launches will fuel FLC in 2025, as well as the company between 2024 and 2025, a re-emerging of the primary care and probably resuming orders with the government.

That's a great overview. Thanks, Joe.

You're welcome.

Peter Chickering of Deutsche Bank is on the line with our final question. Please state your question.

Hey, good morning, guys. Nice quarter, and thanks for fitting in here. Looking at the infusion pumps, what do you think the market is growing in 2024, and are you guys picking up or losing share this year? With all the RFPs out for 2025 and beyond, do you guys see yourselves as market share gainers or market share And then on the strong pricing gains for infusion that you talked about, as you think about pricing in 2025, should we see an acceleration of this pricing for next year?

Peter, can you repeat the last part of your question on the pricing, please?

Yeah. So, like you talked about, you know, like one of our basic points of pricing sort of this quarter and that continuing into the back half year, shouldn't that be accelerating in 2025 as you think about the GPO contracts?

Yeah, so this is Joel. Let me take that. I think the way I would think about that is we talked about some pricing of maybe 100 basis points this year as part of the game that was, again, mostly outside the U.S., across our portfolio. We think about that same pricing bump for next year as we think about as we move into the GPL contracts that have come through, and again, that's primarily U.S. pricing. So I think that's the way I would interpret that. I don't know that I'd call it accelerating necessarily, but I would call it consistent with what our expectations were for this year heading into next year.

And, Peter, answering the question on the infusion pump, first of all, we are market chain gainers and have been for a long time, just about 100 basis points a year. This will accelerate, and it's accelerating with Novum. We're going to see Q3, Q4 into 2025. So we find that we have great interest in our pump. I think there is a natural churn of the market in terms of number of pumps that need to be replaced. And our objective is to be, you know, in every competitive account with our new technology.

And then a quick follow-up to David's question, you know, not asking for 2025, but, you know, the correction in the year with revenues growing under sort of, you know, 1% with compounding slowing due to competitors issues lapping, you know, how should we model revenue growth compounding in the fourth quarter and then what are the headwinds and tailwinds that we should be thinking about for 2025 revenues?

Can you just repeat that? So your phone was going in and out during that question. I apologize. Do you mind repeating that one more time, please?

Oh, yes. So apologies. So a follow-up to David's question just about the fourth quarter revenues. We're actually in the year growing less than 1% with compounding becoming a headwind in the fourth quarter. So I guess the question, number one, is how should we model compounding growth in the fourth quarter? And number two, with the compounding slowing, how should we think about headwinds and tailwinds for 2025 revenue growth?

Yeah, I mean, look, I think the main thing here is really we're going to continue to see, again, improvements in HST. So that's where I'm going to start with. In other words, we've seen that over the course of this year as that HST business has continued to accelerate. Again, we think there will be a strong exit rate for that business and that will continue to accelerate into 2025. You know, I think as we talked about from a farmer perspective, again, compounding is going to be a portion of that that's going to drag. I don't know that we've specifically guided the actual compounding business, but that is something that is, again, going to be continued. It's slowing, as Joe talked about, for various customer reasons that that's happened. From an NPT perspective, again, we continue to believe we've got some really solid momentum going into 2025, certainly coming out of 2024. And then, obviously, so just to kind of summarize all that, I think the, while there is a bit of a squeeze map from the, we talked about the kidney and the compounding, the reality of it is that we have a 4% to 5% growth of ex-kidney that we're heading into, exiting the year with and heading into next year. So that momentum is really strong in ex-kidney, and that's the part that we feel really excited about as we head into 2025.

Peter, just reinforcing and underscoring, our exit rate is 4% to 5%. If you're comfortable with that, that's where Baxter is taking into 2025. And we tend to think that our business and innovation can drive even further going into 26 and 27. Great. Thanks so much.

Thank you.

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