Baxter International Q4 2021 Earnings Call Transcript

Participants

Corporate Executives

• Clare Trachtman, Vice President, Investor Relations
• Jose E. Almeida, Chairman, President and Chief Executive Officer
• James Saccaro, Chief Financial Officer
• Giuseppe Accogli, Chief Operating Officer

Analysts

• Robbie Marcus, JP Morgan Cazenove
• Vijay Kumar, Evercore ISI
• Pito Chickering, Deutsche Bank Aktiengesellschaft
• Lawrence Biegelsen, Wells Fargo & Company
• Joshua Jennings, Cowen Inc
• Matt Miksic, Credit Suisse Group AG
• Joanne Wuensch, Smith Barney Citigroup
• Matt Taylor, UBS Group AG

Presentation

[Operator]

Good morning, ladies and gentlemen, and welcome to Baxter International's Fourth Quarter 2021 Earnings Conference Call. [Operator Instructions] 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. Clare Trachtman, Vice President Investor Relations at Baxter International. Ms. Trachtman, you may begin.

[Clare Trachtman, Vice President, Investor Relations at Baxter International]

Good morning, and welcome to our fourth quarter 2021 earnings conference call. Joining me today are Joe Almeida, Baxter's Chairman and Chief Executive Officer; Jay Saccaro, Baxter's Chief Financial Officer; and Giuseppe Accogli, Baxter's Chief Operating Officer. On the call this morning, we will be discussing Baxter's fourth quarter and full-year 2021 financial results along with our financial outlook for 2022.

With that, let me start our prepared remarks by reminding everyone that this presentation, including comments regarding our financial outlook for the first quarter and full-year 2022, including the anticipated impact of COVID and inflationary pressures on this outlook. The recent acquisition of Hill-Rom, including anticipated cross synergies and future net leverage targets, new product developments or launches, business development and regulatory matters contains 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 Baxter's ongoing business performance. A reconciliation of the non-GAAP financial measures being discussed today to the comparable GAAP financial measures is included in our earnings release issued this morning and available on our website. As mentioned in our press release this morning, following Baxter's acquisition of Hill-Rom on December 13, 2021, Baxter's fourth quarter and full-year 2021 financial results includes Hill-Rom financial results for the last 19 days of the quarter ended December 31, 2021. Hill-Rom financial results for these periods are reported as a new operating segment in addition to Baxter's existing three geographic segments.

On the call this morning, we will be discussing operational sales growth, which for the fourth quarter and full-year of 2021 adjusted the impact of foreign exchange, the December 2021 acquisition of Hill-Rom, and the February 2021 acquisition of the rights to Caelyx and Doxil for specified territories outside of the U.S. Later in the call, Jay, will discuss our guidance for the first quarter and full-year 2022. Operational sales growth for 2022 will exclude the impact of foreign exchange and the acquisition of Hill-Rom, historical 2021 quarterly sales for Hill-Rom have been posted to the Investors section of our website.

Now, I'd like to turn the call over to Joe.

[Jose E. Almeida, Chairman, President and Chief Executive Officer at Baxter International]

Thank you, Clare. Good morning, everyone and thank you for joining today's call. As always, I hope that you and your loved ones are healthy and safe. I will start this morning with some perspective on our performance last year and future trajectory. Jay will take a closer look at the financials and share our outlook for the first quarter and full-year 2022, then we'll take your questions.

As you all know, this is our first earnings call since acquiring Hill-Rom the next inflection point in Baxter's multi-year transformation. The combination further extends our already diverse medtech portfolio and provides opportunities to broaden our reach, both geographically and across the care continuum. Importantly, it also unlocks exciting new possibilities for connected care innovation across our product lines with the potential to spark clinical insights, enhanced patient outcomes, and increase workflow efficiencies.

In short, it holds the promise of greater value for all of our stakeholders from patients and inclinations to our employees and investors. The deal closed on December 13th. So, our Q4 and full-year 2021 financials reflect 19 days of contribution from Hill-Rom. Looking at company-wide performance, Baxter delivered fourth-quarter 2021 sales growth of 10% on a reported basis, 12% at constant currency, and 4% at operational rates. Fourth-quarter adjusted earnings per share were $1.04, up 30% year-over-year.

Hill-Rom contributed $212 million in sales and $0.08 of adjusted earnings per share in the quarter. For full-year 2021, sales growth was 10% on a reported basis, 7% on a constant currency basis, and 5% on an operational basis. On the bottom line, adjusted earnings per share of $3.61 increased 17% year-over-year, which also reflects the contribution of Hill-Rom. Growth for both the quarter and year reflect the ongoing somewhat erratic impact of COVID-19, which negatively affected top line sales for certain businesses, while fueling demand for others, particularly later in the fourth quarter as the Omicron variant surged.

Our top line performance for the year continues to demonstrate the diversity and durability of our portfolio, which allowed us to deliver operational sales growth of 5% for the year. Demand across both our legacy Baxter and legacy Hill-Rom businesses is strong. During the fourth quarter and continuing through the start of this year, we have been experiencing a higher than normal rate of back orders due to certain supply chain limitations and staffing-related challenges in our plants resulting from high rates of absenteeism amid the rising cases of COVID. We are working expeditiously to address the situation and anticipate continued improvement in the coming weeks.

As we have discussed throughout the year, our cost structure has been negatively impacted by rising rates of inflation as well as an increasingly challenging supply chain network, which has at times resulted in expedited shipments and extraordinary steps to procure necessary components. While our teams have worked diligently to offset many of these pressures, our fourth-quarter results reflect higher than expected freight costs, given the critical and essential nature of our products. We made decisions to expedite product to our customers to ensure we stay true to our mission, which means prioritizing the needs of patients and clinicians who depend on steady access to our lifesaving products. We will never compromise on this commitment.

We are realistic about the supply chain challenges that continue to test the global industry as a whole and we are laser-focused on addressing them successfully now and going forward. We are in the process of implementing new measures in procurement and logistics, including evaluating opportunities to pass through certain costs in selected geographies that will enhance performance and deliver value to all stakeholders, both in the near-term and the long run.

We're focused on making sound choices to promote our long-term success as a viable growing enterprise. We are building off our solid foundation and remain focused on executing against our multi-year transformation. This transformation has bolstered our operational efficiency and given us the boost to navigate through these challenging times with the resilience and tenacity this team has demonstrated over the course of the last two years. Beyond this, the acquisition of Hill-Rom introduced crucial growth drivers across multiple fronts. The integration process is moving forward productively. We are already identifying opportunities for geographic expansion, as well as synergies to drive meaningful cost reduction and margin expansion and we are advancing connected care across our newly expanded capabilities.

As always we continue to evaluate our portfolio to ensure the businesses we operate are aligned with our long-term strategic objective to accelerate top-line growth and expanded margins. This commitment was clearly demonstrated with the Hill-Rom acquisition, which augmented and strengthened our underlying portfolio as part of this ongoing process to the extent we identify areas that do not align with our long-term objectives we will look to exit or divest these businesses, while also continuing to identify new opportunities to enhance future performance.

We recognize that innovation is at the core of any successful enterprise and we are focused on introducing new products that address the evolving needs of our customers and patients. Some of these include the anticipated U.S. launch of our Novum IQ smart pump this year as well as our TrueVue connected digital solutions for our PrisMax 2 continuous renal replacement therapy technology, which is in early-stage launch right now in the U.S. and Europe, Middle East, and Africa. Obviously, we assess our performance across multiple dimensions just as we must continually strengthen our performance as a thriving and resilient enterprise.

Our mission also demands our continued leadership as a corporate system. 2021 marked the launch of our 2030 Corporate Responsibility Commitment comprising 10 key goals for the next decade and beyond focused on three key action areas empower our patients, protect our planet, and champion our people and communities. We have also taken significant steps in the past year to advance or activating change today or act initiative to advance racial justice within Baxter and across the communities and markets we serve.

Our progress as both a business and as a corporate system is to entirely the commitment of our employees worldwide. This outstanding team has achieved so much in several years from building our transformation to stepping up tirelessly in the face of COVID-19. Now stage prepared our new chapter of momentum and growth with these teams proven track record, I'm confident in our ability to deliver on the opportunities we have worked so hard to create, we will be sharing much more about our strategic trajectory at our Investor Conference later this year.

Now, I will turn it over to Jay to share a closer look at our performance and outlook.

[James Saccaro, Chief Financial Officer at Baxter International]

Thanks, Joe, and good morning, everyone. As Joe mentioned, we're pleased with our fourth quarter results, particularly in light of ongoing pandemic and global supply chain disruptions that we experienced during the quarter. Fourth quarter 2021 global sales of $3.5 billion advanced 10% on a reported basis, 12% on a constant currency basis and 4% operationally. Sales came in at the high end of our guidance range, which is in line with commentary we shared in early January and underscores the essential nature and durability of our portfolio.

Sales growth this quarter reflects the benefits of revenues associated with the manufacturing of COVID vaccines, strength in medication delivery, renal care, OUS sales of Caelyx/Doxil, which totaled approximately $35 million in the quarter and a contribution of $212 million from Hill-Rom. On the bottom line, adjusted earnings increased 30% to $1.04 per share results in the quarter reflected a contribution of $0.08 per share from Hill-Rom inclusive of incremental interest expenses related to the transaction, as well as unplanned foreign exchange losses totaling $0.04 and higher than expected freight costs of $0.05. As Joe mentioned, we incurred significant expedited freight costs late in the quarter as cases of COVID-19 surged.

Now, I'll walk through performance by our regional segments and key product categories. Starting with sales by operating segment, sales in the Americas increased 5% on both at constant currency and operational basis. Sales in Europe, Middle East and Africa grew 5% on a constant currency basis and 1% operationally. And sales in our APAC region advanced 6% on a constant currency basis and 5% on an operational basis. As Clare mentioned Hill-Rom's financial results were reported as a new operating segment in addition to Baxter's existing three geographic segments.

Moving onto performance by key product category note that for this quarter, constant currency growth is equal to operational sales growth for all global businesses except for our pharmaceuticals business, for which we will provide both constant currency and operational growth, adjusting for the acquisition of rights in select territories outside the U.S. for Caelyx/Doxil. Global sales for renal care were $1 billion, increasing 4% on a constant currency basis. Performance in the quarter was driven by global growth in both our HD and PD businesses. PD benefited from year-over-year improvement in global patient volumes despite persistent pressures from increased mortality rates in ESRD patients, delays in new patient diagnoses and market-wide staffing shortages. Patient growth improved sequentially throughout the year, with Q4 representing the highest patient growth in 2021.

Renal Care sales in the quarter also benefited from mid single-digit growth in our HD business, primarily driven by increased international sales of dialyzers. We expect a higher mortality rate and delays in new patient diagnoses resulting from the pandemic will continue to somewhat dampen the rate of new patient growth in 2022, although we do anticipate these rates to improve from 2021 levels. Sales in medication delivery of $784 million increased 6% on a constant currency basis. Strong global growth in this business reflects continued recovery in the pace of hospital admissions compared to pre-COVID levels as well as increased demand for large volume infusion pumps and small volume parenterals.

For the year, we estimate that U.S. hospital admissions were down mid-single-digits compared to pre-COVID levels. Pharmaceutical sales of $604 million advanced 8% on a constant currency basis and 2% operationally. Performance in the quarter was driven by demand for our international pharmacy compounding business, growth in anaesthesia as our international markets continue to recover from COVID-19 and the contribution from OUS sales of Caelyx/Doxil. This growth was partially offset by declines in our U.S. generic injectables portfolio business related to lower surgical procedures and increased competitive activity for certain molecules.

Moving to clinical nutrition, total sales of $249 million increasing 4% on a constant currency basis. Performance in the quarter was driven by the benefit of new product launches within our broad multi-chamber product offering. Sales in advanced surgery were $255 million or flat on a constant currency basis. Within the quarter, we saw strong growth in some of our international businesses, but this was offset by performance in the U.S. as surgical procedures, particularly in the second half of December came in below our expectations due to the impact from pandemic along with staffing shortages.

Sales in our acute therapies business were $202 million declined 7% on a constant currency basis, reflecting a challenging year-over-year comparison. Despite this, performance in the quarter did exceed our expectations as we continue to see elevated demand for CRRT given the rise in COVID cases associated with new variant. BioPharma solutions sales in the quarter were $145 million, representing growth of 30% on a constant currency basis, reflecting incremental sales related to the manufacturing of COVID vaccines, which totaled approximately $50 million in the quarter, while our results only include Hill-Rom's financial results for the final 19 days of the quarter for transparency and completeness we're providing some sales commentary for Hill-Rom's full quarter ended December 31, which would have represented there first quarter of fiscal year 2022.

Unaudited Hill-Rom sales for the full quarter were $724 million. Sales in the quarter reflect a difficult comparison from prior-year period following the exit of the international surgical OEM business as well as significant supply constraints, which impacted Hill-Rom's ability to ship products within the quarter. Moving to the rest of the P&L, our adjusted gross margin of 44.3% increased by 290 basis points over the prior year, reflecting the favorable product mix, operational improvements in manufacturing and the contribution from Hill-Rom to our financial results. Adjusted SG&A of $710 million increased 14% as compared to the prior year and represented 20.2% as a percentage of sales. Adjusted R&D spending in the quarter of $133 million increased 1% versus the prior year and represented 3.8% as a percent of sales. Adjusted SG&A and R&D spend both include the incremental contribution from Hill-Rom.

In addition, adjusted SG&A expense in the quarter reflects the higher freight expenses we absorbed in the quarter as well as higher bonus accruals compared to the prior year under our annual employee incentive compensation plan. Adjusted operating margin in the quarter was 20.3%, an increase of 260 basis points versus the prior year, reflecting the factors I just mentioned. Adjusted net interest expense totaled $44 million in the quarter, an increase of $6 million versus prior year, driven by higher outstanding debt balances related to the financing of the Hill-Rom acquisition.

Other non-operating expense totaled $21 million in the quarter compared to $5 million in the prior year period. Fourth quarter 2021 reflects unplanned expenses related to foreign exchange losses from our subsidiary in Turkey as a result of the devaluation of the Turkish lira as well as an unrealized loss on an equity investment. The adjusted tax rate in the quarter was 18.5% above our expectations, driven primarily by the mix of earnings in the quarter. The tax rate in the quarter also reflects the inclusion of Hill-Rom income, which carry the higher tax rate than legacy Baxter. And as previously mentioned, adjusted earnings of $1.04 per share advanced 30% versus the prior year period.

Turning to full-year 2021, sales of $12.28 billion increased by 10% on a reported basis, 7% on a constant currency basis and 5% operationally. On the bottom line, adjusted earnings increased 17%, $3.61 per diluted share. On a full-year basis, we generated operating cash flow from continuing operations of $2.2 billion and free cash flow of approximately $1.5 billion.

Throughout 2021, we remain focused on strategically redeploying capital to advance our performance and position Baxter for future success. We returned approximately $1.1 billion to shareholders through dividends and share repurchases and deployed over $12 billion to inorganic investments to fuel growth, including our acquisition of Hill-Rom. With the acquisition now closed our capital allocation priority will be to aggressively de-lever through the next two years to reach our net leverage target of 2.75 times by year two close close.

Let me conclude my comments by discussing our outlook for the first quarter and full-year 2022, including some key assumptions around phasing for the year. We currently anticipate that many of the factors that impacted our fourth-quarter results, including increased inflationary pressures, supply chain disruptions, staffing challenges across our manufacturing network and ongoing impact of the pandemic will continue to weigh on performance with the anticipated impact expected to be most pronounced in the first quarter.

We're working expeditiously to address order backlog and anticipate a strong ramp in sales into second quarter and the remainder of 2022, driven by new product launches and easing of COVID-19 dynamics globally. In addition, we're continuing to implement actions to increase operational effectiveness within our integrated supply chain networks as well as evaluating opportunities to pass through certain costs in select geographies. We anticipate these actions, coupled with the improving sales performance will result in meaningful margin expansion and earnings growth for the company, particularly in the second half of the year as compared to the first half of 2022.

Given these dynamics for the first quarter of '22, we expect global sales growth of 24% to 25% on a reported basis, 27% to 28% on a constant currency basis, and low-single-digit revenue growth on an operational basis. And we expect adjusted earnings, excluding special items of $0.79 to $0.82 per diluted share. For full-year 2022, we expect global sales growth of 24% to 25% on a reported basis, 26% to 27% on a constant currency basis, and approximately 4% on an operational basis.

Moving down the P&L, we expect adjusted operating margin for the year of approximately 19% with first-half margins below this estimate and second-half margins above, as we expect performance to significantly improve throughout the year. For the year, we expect an adjusted tax rate of approximately 19% and we expect diluted average share count to stay consistent with 508 million shares, exiting 2021. Based on these factors, we expect 2022 adjusted earnings, excluding special items of $4.25 to $4.35 per diluted share.

With that, we can now open the call up for Q&A.

Questions and Answers

[Operator]

[Operator Instructions] Our first question comes from Robbie Marcus of JP Morgan. Your question please.

[Robbie Marcus, Analyst at JP Morgan Cazenove]

Hello. Thanks. Good morning, everyone.

[Jose E. Almeida, Chairman, President and Chief Executive Officer at Baxter International]

Good morning, Robbie.

[James Saccaro, Chief Financial Officer at Baxter International]

Good morning.

[Robbie Marcus, Analyst at JP Morgan Cazenove]

Maybe to start if I use the low-teens accretion, you've talked about for Hill-Rom, it gets me to somewhere around 7% EPS growth for base Baxter, which is below the LRP. So, maybe first start off with what's driving it? You touched on supply chain issues and inflation, but I think it'd be important to put a finer point on it. And then I'll just ask the second question upfront as well. The first quarter is coming in a good clip below where the sell side is sitting coming into today. What gives you the confidence that supply chain issues will resolve in second quarter and you could see the acceleration and the drivers for the big discrepancy? Thanks.

[James Saccaro, Chief Financial Officer at Baxter International]

Thanks. Sure. Robbie, there are a few impact that we're seeing in 2022 relative to previous LRP expectations. The good news from my perspective is a lot of these issues are short-term in nature. Many of them related to the Omicron variant and some of the challenges that's created in our manufacturing facilities and supply chain. So if we think about it over the last six weeks, we've seen increases in our expectations around expedited freight. We've seen some increases in expectations related to supply chain, labor costs in part related to absenteeism in the plants. We've also seen a bit more inflation. And then finally, we've had a back order situation that really is some of the highest levels of back orders, both on the Baxter side and Hill-Rom side that we've ever seen.

So, from my standpoint we have weather a very challenging short-term environment, some of that featured in our Q4 results, but it clearly impacts our Q1 and as a result the full expectations for 2022. And so what's interesting is we are seeing improvements in absentee levels at our plants, we are also seeing supply chain situation improve as we speak. So, all of these things we believe are short-term in nature, but they definitely impact the first quarter and then also the second quarter from a margin standpoint before we get back to a trajectory, which is much more normal and much more in line with our expectations in the third and fourth quarter.

And I think as we take a step back, look we acknowledge there is some disruption in the short-term. But really, really like the durability of the business along with the pathway we have going forward over the course of this year and in the future years. So really that -- and then as it relates to Q1, the issues are most pronounced and really centered on Q1. We won't resolve the back order until the -- until at some point in Q2. Furthermore, we won't get out of an expedited freight situation for a few more months here. So, that's really why Q1 is where it is and then we start to see improvements as we move forward.

[Robbie Marcus, Analyst at JP Morgan Cazenove]

Great, thanks a lot.

[James Saccaro, Chief Financial Officer at Baxter International]

Thank you.

[Clare Trachtman, Vice President, Investor Relations at Baxter International]

We can take our next question.

[Operator]

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

[Vijay Kumar, Analyst at Evercore ISI]

Good morning, Joe and Jay, thanks for taking my question. Maybe one on the revenue guidance here. Perhaps we're -- Jay I'm not sure if I'm doing the math right, the implied Hill-Rom revenues, it seems to be perhaps down year-on-year because if I look at your operational growth for standalone Baxter and then look at implied Hill-Rom, are there any -- can you just, one, remind us has any assumptions on these two businesses for Hillrom with 5% plus, Baxter, clearly you guided to 4% plus? Are there any COVID headwinds tailwinds we need to be aware of when I'm doing this half year-on-year math?

[James Saccaro, Chief Financial Officer at Baxter International]

Sure. Good question, Vijay. The Hill-Rom business, our expectation is mid-single-digit constant currency growth. As I said in my prepared remarks, Baxter is approximately 4% operational growth with the real -- and it's not a demand-related item, it really is related to back orders in the first and second quarter and as I say, we hope to resolve those throughout the year. So, the Baxter side, we're talking about approximately 4%, Hill-Rom is mid-single-digit constant currency and then the reported growth, I think, that there is some rounding going on on both the Baxter side and the overall reported revenue growth side that leads you to the numbers that you're looking at. But as we look at it, we see Hill-Rom in the mid-single-digits.

[Vijay Kumar, Analyst at Evercore ISI]

And then my follow-up, sorry, are there any cooling down headwinds? And I think one of your -- when the deal was announced, a lot of questions around the strategic rationale. And now, one of your peers just did a connected care or communications deal. So, maybe elaborate perhaps for Joe on the strategic rationale connected care, how big of a deal is this as you look at the next three to five years?

[Jose E. Almeida, Chairman, President and Chief Executive Officer at Baxter International]

Vijay, good morning. We are working on those opportunities and we'll have more on that when we speak to the -- to our investors on our Investor Day. But let me give you three different examples. The first one is a short-term opportunity that we have is our home peritoneal dialysis and well challenge [Phonetic] remote monitoring, bringing them together is a very short-term opportunity that we have. Will give us insight into fluid overload and also the workflow of current PD patients and allows us to do bluetooth-enabled wireless in analytics, integrated with the share source reducing down the potential burden for patients and more proactive and accurate management of patient. This is the very short-term.

The Voalte system, the Voalte alarm systems mid-term wanted two years bringing together delivery of visualization of alarms from the Baxter infusion pumps, CRT devices and Starling is our monitoring platform to both, bringing them together and prudently workflow in that search for instance, ICU, pharmacy and other parts of the hospital. Just some benefits would be alarm fatigue reduction, transition from reaction to proactive shiftings ahead of time creates a much better environment for the nursing staff who will be focused on what actually matters versus alarm overload. So, we think that is a good opportunity bring together Voalte platforms and Voalte is a very important part of the platform that Hill-Rom has.

And then on the long term, we're going to close the fluid management system, which is how do you actually monitor from a series of imports, including all the way through urine output to the infusion pumps output and alarms and types of drugs bring our monitoring to get ahead in all the information that comes out of the smart bed, how do we create an environment that reduces significant load to the clinician and alarms to the clinicians where problems are really in preventing -- eventually preventing some of the bad outcomes to happen. So, those are just three examples of things that we are working on and there is much more than we had a significant amount of workshops for one specific with a significant amount of ideas. So, I'm very excited about that.

[Giuseppe Accogli, Chief Operating Officer at Baxter International]

And maybe -- hi, Vijay, this is Giuseppe. Maybe I will add couple of other -- or probably another angle to that the site of care, there is a lot that we can do, adding 2 million connected devices or connectable devices in the field of the two companies together. So, there is a lot that we can do in the acute environment, but there is a lot that we can do in the home care environment. Thought that's based on the Voalte and care communication think about the PD patients now at home with hypertension. We can monitor them in a better way and we can communicate to them, we can add more critical vital signs collection together with the cycler and we can involve with both family, we can involve the family in the treatment of the patients which is very, very important.

[James Saccaro, Chief Financial Officer at Baxter International]

Yes. Vijay just to close out on your question, we have roughly year-over-year $50 million worth of headwind in our DTS business related to vaccines. And then, as we look at admissions and procedures we expect those to normalize throughout the year. But in the first quarter, they are down a bit low perhaps mid -- low mid single-digit impact in the first quarter of the years. So down approximately 4% as we see it today. Now from a COVID impact on the standpoint, I'm not speaking to the back order situation and the situation that we've seen in the plants. That's -- I'm treating -- I'm viewing that separately. It's more of a supply chain-related issue, but from a demand standpoint those are the key items impacting sales in 2022.

[Vijay Kumar, Analyst at Evercore ISI]

Understood. Thanks, guys.

[James Saccaro, Chief Financial Officer at Baxter International]

Thank you.

[Operator]

Pito Chickering of Deutsche Bank is online with the question. Please ask your question.

[Pito Chickering, Analyst at Deutsche Bank Aktiengesellschaft]

Hey, good morning, guys. Thanks for taking my questions. The first one is actually a bridge, can you help us to bridge the midpoint of the 1Q guidance of $0.81 versus last year's $0.76. What's the contribution from Hill-Rom within the first-quarter guidance? I was trying to understand the cost and backlog pressures on sort of core Baxter? And can you quantify the backlog you're assuming in the first quarter and in 2Q?

[James Saccaro, Chief Financial Officer at Baxter International]

Sure. From EPS standpoint, there is definitely a good contribution from Hill-Rom as we look at it year-over-year and think about 2021 Q1 actual $0.76, but really between some price impact, some inflationary impact, and freight, we're talking about roughly $0.15 above of negative impact and what we would normally expect to see on the Baxter side is really substantial organic volume growth to offset that we see some of that, but it's not sufficient enough to really carrying the day in terms of driving the normalized levels of earnings growth and power that we expect from the business. So, we're not seeing that organic volume pickup in part because of this supply chain situation, which as I said, should normalize throughout the year. And then the Hill-Rom is north of $0.10 in terms of contribution in the quarter, which is something that is -- it's a great add the business is impacted as well though by some of these supply chain issues. And so Hill-Rom's growth accelerated throughout the year as well.

[Pito Chickering, Analyst at Deutsche Bank Aktiengesellschaft]

Great. And then a follow-up question, so you talked about passing on some of the inflationary costs to customers in some geographies. Can you expand on which product lines and geographies you can pass-through this cost? As I think about sort of global revenues any ballpark to sort of what percentage of those can you pass-through and sort of what pricing you can get on that?

[Jose E. Almeida, Chairman, President and Chief Executive Officer at Baxter International]

Pito, this is something that we comment very little. Our pricing is a strategy that the company has, we have pricing built into our contracts. What we're looking at here is an exceptional amount of extra cost the company has to book -- has to carry on the expedite freights. The ability to get components in the door, inflation in labor as well as the components that are coming in. So, we will selectively decide where we are putting those costs -- those price increases. They will come in different forms, but we're not going to specifically speak about geography. We know that we have put them in our plan and we'll be executing on to them.

[Pito Chickering, Analyst at Deutsche Bank Aktiengesellschaft]

Great, thanks so much.

[Operator]

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

[Lawrence Biegelsen, Analyst at Wells Fargo & Company]

Good morning, thanks for taking the question, guys. Just first on Novum IQ, Joe, I heard your comments upfront about expecting approval this year in the U.S., I believe, I think, at JP Morgan earlier this year you talked about some cyber security issues that you were, I think, re-filing on or submitting additional information on, could you please update us on the timing -- a little bit more detail on the timing there on Novum IQ and with your confidence in approval this year? And I have one follow-up.

[Jose E. Almeida, Chairman, President and Chief Executive Officer at Baxter International]

Larry, good morning. We want to file this last set of documentations, which you know the FDA will have 31 days to provide a response to us. Okay. So, this is not the beginning of the application, this is the end. So to that end, we want to make sure we have some new set of eyes looked at the whole application, it looks really good, but there are areas that we think we could do better. Cyber security is one of them that we want to be always top decile when it comes to that. So we went back and made some adjustments and improvements and that took time.

So, we will be filing with the FDA hopefully soon. And we're expecting that to be 31 days after that we will have the answer on our large volume potential LVP pump and then following that we're going to apply the same 31 days at the end of that for the syringe pump and related software that will be our enterprise software as well as the software that controls the pumps, the way they work with the networks. So that's pretty straightforward. We are doing the best we can to get the best chance to get this product. But I don't speak on behalf of the FDA I never do, I don't have any control on the internal process. One thing that we can control is the quality of the application that we have. And to that end, we want to make sure that we increase our probability for the highest possible before it goes into those 31 days.

[Lawrence Biegelsen, Analyst at Wells Fargo & Company]

Thanks for that, Joe. And one other thing you talked about in your prepared remarks was about evaluating the portfolio and potentially exiting or divesting, I think, non-core businesses. How long will that process take and when do you think we'll hear more about it? Thanks for taking the questions.

[Jose E. Almeida, Chairman, President and Chief Executive Officer at Baxter International]

Larry, we -- when we started the transformation of Baxter, we had three very specific areas of improvement. I would say four, not three, four. First is to bring the company into profitability state that will put us with close to our peers and it transform the company's ability to generate free cash flow. The second was most importantly, culture of the company bringing the right talent to get the culture going. The third was innovation, we just spoke about it getting a pump with the FDA that was unthinkable when I first got here, because we did not have any internal programs for any devices within the company other than few that we acquired through Gambro.

And the fourth piece was the one that we haven't touched much. We did some tuck-in acquisitions and then we thought about how do we transform the portfolio, the company, change the CAGR, the direction, the innovation go where the puck is going, that was the acquisition of Hill-Rom brings that puck into Baxter. Conversely, we do have a couple of areas that we don't believe are the right businesses for Baxter to own. And to that end, we are in the middle of analysis and we should have more in that area either by May or a little later than that in how we're going to adjust our portfolio.

What we want to do is always look at the portfolio in a way that it can increase the CAGR of the markets we serve, increase the profitability of the company and we move businesses there have been some times legacy businesses, they are sitting here with probably not right capital allocation and bring that to people who can bring that capital allocation to them freeing up that cash flow for Baxter to invest in what really we want to invest, which is in our connected care digital health. And then double down on parts of Hill-Rom they're doing so well.

[Lawrence Biegelsen, Analyst at Wells Fargo & Company]

Thank you.

[Operator]

Joshua Jennings of Cowen is on the line with a question. Please state your question.

[Joshua Jennings, Analyst at Cowen]

Hi, good morning, and thanks for taking the questions. I wanted to just ask, it sounds like from your commentary Joe and Jay clear that there are potential revenue synergies. With this combination, I was wondering if there are any sale synergies baked into 2022 guidance? And then just when we will communicate fully the level of sales revenue synergies? And then the follow-up is just, any change to the outlook in terms of the potential for the combined business to accelerate organic revenue growth as we move through 2022 and some of the challenges that are present throughout the med device industry, and into 2023 and beyond? Thanks for taking the questions.

[James Saccaro, Chief Financial Officer at Baxter International]

Sure. As far as revenue synergies go, we have included none in our numbers for 2022. So, there is no revenue synergies. Now having said that, we're incredibly excited and Joe highlighted some of the work and I'll let Giuseppe talk in a second about some of the progress that we're making, because we're really excited about the opportunity for revenue synergies long-term. And, I think, as we learn more about the Hill-Rom business and then, we also see how the Baxter business has weathered a very volatile environment. I think, we're very confident about our long-term ability to drive growth across this combined platform. So, Giuseppe, why don't you talk about some of the revenue synergy ideas and some of the excitement we're generating there?

[Giuseppe Accogli, Chief Operating Officer at Baxter International]

Sure, Jay. So, the teams both the regional teams and the GBU team work diligently on understanding which are the themes and the drivers of sale synergies. And we see few of them a very clear view. First one, geo expansion and channel optimization. It's clear that Baxter's presence outside of U.S. is much stronger than legacy Europe presence and that will end up to good sale synergies there. But there are also synergies in connected care, analytics, and services. There are synergies in strengthening our position in alternate care and synergies in strengthening our position at home as well. Don't forget that before the Hill-Rom acquisition home for Baxter was mainly [indecipherable] this is now we have new therapies like respiratory, like monitoring -- cardiology monitoring, which -- and breast therapy, of course, that are very, very interesting to us. So, we have a more comprehensive offer as well, at all. So just to recap, geographic expansion, connected care, alternate care, and home are the main drivers of synergies.

[James Saccaro, Chief Financial Officer at Baxter International]

We will have the opportunity to share more about this at the upcoming Investor Day, including some quantification of revenue potential and some refreshment of the financial long-term outlook for the combined company.

[Joshua Jennings, Analyst at Cowen]

Great, thank you.

[Operator]

Matt Miksic of Credit Suisse is on the line with the question. Please state your question.

[Matt Miksic, Analyst at Credit Suisse Group]

Hi, thanks so much for taking the question. Actually one follow-up on this -- the topic of synergies. If I could. And then on supply chain and staffing. So, appreciate the color on the revenue synergies, you were just describing, can you maybe talk a little bit about what you've seen so far in terms of the cost side logistics and operations, integration that have begun both on the positive side, and any risks you're building into your outlook in terms of dissynergies as you bring these organizations together here in the near-term?

[James Saccaro, Chief Financial Officer at Baxter International]

So, on the cost side we previously shared $250 million in expectations by year three and as part of really focusing on certain G&A areas and procurement opportunities and so on. And what I will tell you is we are very comfortable with that number and as we learn more, we're getting increasingly comfortable. There have been no negative surprises as we think about on the cost synergy opportunity. So, this one has been very much according to plan. I think, we've been really pleased with the talent that we've seen at Hill-Rom the processes. So, there's a lot of great opportunity there and thoughts that we can leverage, but as far as the cost synergy goes it's right in line with where we hope it would be if not trending even more positive.

[Matt Miksic, Analyst at Credit Suisse Group]

That's great. And then on supply chain, there has been a couple of questions, but you made a comment and I think some other companies presenting Q4 earnings and talking about outlook have made similar comments about this idea of improvements in the back half and we've been talking about supply chain and input costs for over a year now I think. And I guess the visibility just it's been a stake in the ground and saying we do expect these things to improve both in terms of staffing and inflationary cost and backlog and things like that. Can you maybe just to give some sense as to your confidence and the visibility would be appreciated.

[Jose E. Almeida, Chairman, President and Chief Executive Officer at Baxter International]

Matt, I will start, I want Jay to actually also supplement my answer. I see using two different buckets. I see the short-term or the COVID impact and then what is the long-lasting effect of having those inflationary costs. So, the first is labor availability created by Omicron was significant, didn't take much, you could read the news and how it affects the country and the curve, an acceleration of that infection took a lot of people from our plants. They were either infected or have contact with people who infected were very much and number one priority of the company is patient safety and as well as employee safety.

So, we do not allow people to come to work and we follow the guidelines of the CDC to that end, we end up with significant disruptions that cause all this air freight that we had to actually incur, which came actually towards the end of the fourth quarter as we will never let patients out of products as soon as we found that we start flying products despite the fact some of the products we in value of ships we were going in, because the rate and escalation of that. That problem of the labor availability and absenteeism is starting to subside. We have significant efforts in place and we're starting to see our plants filling up with people and the situation will be resolved.

Also part and parcel of that was the fact that you have to attract employees to your plant and there is an inflationary cost to the labor cost of the company and that is the one that we also are upping our salaries and making sure that we retain people those costs of inflation will go now on for a long time. You don't reverse salary increases, what you do actually is create more cost reductions and automation to offset that. And our supply chain has a pretty healthy cost reduction program in 2022 and beyond to offset these inflationary costs.

The component availability is nothing new, we've been signaling that for a long time. We are working very hard to get to our components buy in advance, by large loss and things like that we're managing that. And that is in Baxter being managed and we just acquiring Hill-Rom we had -- they had similar issues we are resolving those along the way. And we believe the alleviation of our back order in backlog will happen throughout 2022.

One last point I want to add is that the demand is very strong for our products from two different things, one is the Omicron variant itself, but also a lot of consumption of product that happened and shelves are empty. So we probably going to have replenishment of those products going out throughout the year. So, we don't see demand at this moment is from our vantage point abating. So, we have some short-term capacity issues that we're taken care by adding shifts and any other things that will alleviate that. So, we are doing everything we can, always the first thing in mind to serve the patient. Second to do it in a cost-effective manner.

So I think we have to manage this to the best of our ability and done pretty well based on our footprint and the size of our company going into 2022 we will alleviate this pressure throughout the year. And I think it's not an immediate solving the component issue is going to go through our second quarter and continues to improve throughout Q3 and Q4. And we want to make sure that our cost reduction and we just verify that is very healthy, it's a matter of fact, I would say, our cost reduction program for 2020 is the largest the company ever had in terms of integrated supply chain.

[Matt Miksic, Analyst at Credit Suisse Group]

Very helpful, thanks.

[Jose E. Almeida, Chairman, President and Chief Executive Officer at Baxter International]

Welcome.

[Operator]

Joanne Wuensch of Citi is on the line with a question. Please state your question.

[Joanne Wuensch, Analyst at Smith Barney Citigroup]

Good morning and thank you for taking the question. In your '22 guidance, could you share with us what your COVID vaccine revenue is?

[Clare Trachtman, Vice President, Investor Relations at Baxter International]

Sure. Julien, it's about $100 million, a little north of $100 million is what COVID vaccine revenues this year.

[Joanne Wuensch, Analyst at Smith Barney Citigroup]

Okay. And then also, historically, you've given us your thoughts on hospital census and returns to sort of, I'm not sure what we're calling normal anymore, but could you sort of give us a backdrop of how you're going about that in putting together the guidance?

[James Saccaro, Chief Financial Officer at Baxter International]

Sure. We have -- we're down roughly 4% on surgical procedures and admissions and then we have that improving throughout the year to be perhaps slightly below towards the end of the year and on a full-year basis relative to 2019 normalized levels. We're not banking on significant new variant. So that's a important assumption that underlies our guidance and we're not banking on that variant both from a revenue side and also from a supply chain disruption side. We don't have any line of sight that that's going to be a phenomenon that we have to deal with and we certainly hope we won't have to deal with that through the remainder of 2022. So, really the story is, down 4% a lot of that relates to Omicron and then it improves throughout the balance of the year.

[Clare Trachtman, Vice President, Investor Relations at Baxter International]

Yeah, and that's specific to surgical procedures, Joanne. So again, down kind of that mid-single digits going to grow single digits in the first quarter and improving throughout the rest of the year. With respect to admission, we kind of had planned versus kind of the pre-COVID level down kind of in that low-single-digits really kind of throughout the course of this year.

[Joanne Wuensch, Analyst at Smith Barney Citigroup]

Terrific, thank you so much.

[Clare Trachtman, Vice President, Investor Relations at Baxter International]

We have time for one more question.

[Operator]

Matt Taylor of UBS is on the line with the question. Please state your question.

[Matt Taylor, Analyst at UBS Group]

Hi, thank you for taking the question. I just wanted to clarify on the Novum pump, it doesn't sound like you're taking any revenue for that in the guidance, just wanted to clarify that. And then, previously you gave guidance in Q4 of '20 I think it was about 1% contribution, is that how you're still thinking about it once it gets launched or any other thoughts you could provide there?

[James Saccaro, Chief Financial Officer at Baxter International]

So, we've included guidance -- we included in our guidance revenues for Novum and really prominently in the second half of the year that reflects the successful launch of the product. As always if that changes, we'll -- we're happy to adjust that moving forward. As far as specific volumes, I don't know that I would get into too much detail on specific amounts. But to the extent that the pump is deferred we've been able to offset that either with sales of spectrum or other product sales. So it's definitely underline in our guidance.

[Matt Taylor, Analyst at UBS Group]

Thank you, Jay.

[James Saccaro, Chief Financial Officer at Baxter International]

Thanks, Matt.

[Operator]

[Operator Closing Remarks]