Baxter International Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
April 28, 2022

Key Takeaways

  • Baxter reported 26% revenue growth in Q1 2022 on a reported basis, 29% at constant currency and 3% operationally, with adjusted EPS of $0.93 up 22% and exceeding guidance.
  • The company continues to face significant supply chain challenges, including backorders for raw materials and electromechanical components, intensified by the war in Ukraine and driving higher freight and oil costs.
  • FDA review of the Novum IQ infusion pump is on hold pending additional information, prompting Baxter to remove any related sales contribution in 2022 and plan a response by year-end.
  • Updated 2022 guidance now anticipates full-year sales growth of 23–24% (reported) and 3% operationally, with adjusted EPS lowered to $4.12–4.20 due to inflationary pressures, higher interest expense and the Novum delay.
  • The Hillrom acquisition is integrating well, contributing $755 million to Q1 sales, achieving cost synergies ahead of plan and driving expectations for future revenue synergies through expanded global reach and connected care offerings.
AI Generated. May Contain Errors.
Earnings Conference Call
Baxter International Q1 2022
00:00 / 00:00

There are 13 speakers on the call.

Operator

Morning, ladies and gentlemen, and welcome to Baxter International's First Quarter 2022 Earnings Conference Call. Your lines will remain in a listen only mode until the question and answer segment of today's call. 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 mode.

Operator

I would now like to turn the call over to Ms. Claire Trachtman, Vice President, Investor Relations at Baxter International. Ms. Texman, you may begin.

Speaker 1

Good morning, And welcome to our Q1 2022 earnings conference call. Joining me today are Joel Mehta, Baxter's Chairman and Chief Executive Officer Jay Zaccaro, Baxter's Chief Financial Officer Giuseppe Acoli, Baxter's Chief Operating Officer and Jim Borzey, Baxter's Chief Supply Chain Officer. On the call this morning, we will be discussing Baxter's Q1 2022 financial results mode and full year financial outlook for 2022. On the call this morning, we will be discussing Baxter's Q1 2022 financial results and full year 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 Q2 and full year 2022, The recent acquisition of Hill Rom, new product developments, business development and regulatory matters, including ones related to the A 10 ks review of the NovomyQ infusion platform contains forward looking statements that involve risks and uncertainties.

Speaker 1

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 mode. 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 On the call this morning, we will be discussing operational sales growth, which adjusts for the impact of foreign exchange and the acquisition of Hill Rom. Before I turn the call over to Joe, I wanted to let everyone know that the registration link for our 2022 investor conference, which is being held on Wednesday, May 25th in Glenview, Illinois, is now available on our website.

Speaker 1

Please visit the Investor Relations section of With that, I'll now turn the call over to Joe. Joe?

Speaker 2

Thank you, Claire. Good morning, everyone, and thank you for joining today's call. I will get started with an overview of first quarter performance, trajectory and a quick preview of what you can expect at our upcoming investor conference in May. Jay will take a closer look at our financials as well as our outlook for the current quarter and balance of the year. Then we will close with your questions.

Speaker 2

As you know, Q1 2022 represents our 1st full quarter since the close of Hurom acquisition. I'm pleased to report solid results for the combined Company on both the top and bottom line, reflecting the ongoing momentum of legacy Baxter businesses as well as the early promise mode. And potential of our Hurom integration. 1st quarter sales grew 26% on a reported basis and 29% at a constant currency, mode. With legacy Hurom sales contributing $755,000,000 to our total 3.7 $1,000,000,000 in reported sales for the quarter.

Speaker 2

Excluding the impact of Hiram and foreign exchange, 1st quarter sales rose 3% on an operational basis. On the bottom line, adjusted earnings per share of $0.93 increased 22%, exceeding our guidance of $0.79 to $0.82 Performance in the quarter reflects the contribution from Hill Rom. 1st quarter performance continued To reflect the ongoing erratic impact of the COVID-nineteen pandemic, which fueled demand in some of our businesses, while dragging performance in others. As ever, the diversity and durability of our portfolio in combination with our global footprint act as buffers to help us whether the extremes in these factors are only bolstered with the added scope And opportunity created through the addition of Hurom. We continue to see solid demand Across both legacy Baxter and Huron businesses, we are still experiencing pockets of backorders And backlogs due to the significant supply chain challenges that have made it increasingly difficult At times to access a range of raw materials and components, particularly electromechanical components.

Speaker 2

Which have only intensified in the wake of the war between Ukraine and Russia. Our focus on efficiency and disciplined expense management has gone a long way to partially offset these challenges. And I'm proud of our integrated supply chain team for its strategic moves in procurement and logistics. They're helping us meet the needs of patients and clinicians, while helping to support sustained value and growth of our shareholders. Taking a deeper dive by business, performance was led by biopharma solutions, which advanced to 21% at constant rates.

Speaker 2

This was driven by a favorable year over year comparison Related to revenues from the manufacture of multiple COVID-nineteen vaccines. Our medication delivery business increased 10% at constant rates, driven by growth in IV therapies. As you saw in this morning's release, we shared a status update on our Novum IQ large volume infusion pump with Dose IQ's safety software, which has been under review by FDA. We received a letter from the agency last Friday with a request for additional information. As a result, the 510 review window has been placed on hold so that our team can address accordingly.

Speaker 2

Mode. The team currently plans to respond to FDA within the calendar year. We remain on track to submit responses On the Novum IQ syringe pump filing to FDA in the Q2 of 2022. I want to emphasize that why we Can't speak for FDA or the eventual outcome of their review process. We are confident in our leading edge NovoM IQ technology.

Speaker 2

We are committed to responding to FDA's request and to bringing the benefits of Novo MyQ to patients and clinicians in the U. S. And beyond. Advanced surgery performance was up 8% at constant rates driven by year over year improvement in the rate of surgical procedures mode following depressed rates due to the pandemic. Renal Care rose 1% at constant currency rates with a mid single digit growth in the U.

Speaker 2

S, Dialysis products partially offset by lower sales of dialyzers internationally. As we have discussed Previously, PD patient demand has been constrained due to the pandemic driven factors, including higher mortality rates for kidney disease patients and the lower rate of new patient diagnosis. We remain confident of renewed uptake in physiotherapy over the upcoming years as well as In the health and lifestyle factors that make home based therapy a compelling choice for patients and clinicians. Clinical Nutrition also grew 1% at constant currency, reflecting improving demand for selected parenteral nutrition products. Growth in the quarter was dampened by ongoing supply constraints for vitamins globally.

Speaker 2

Pharmaceuticals declined 2% at constant currency, reflecting continued increased competitive activity for certain U. S. Generics as well as the impact of supply constraints that impacted production volumes during the quarter. We continue to focus on launching new molecules in complex Formulations as well as embracing our international growth opportunities to help accelerate performance in the business moving forward. Finally, among our legacy business, acute therapies declined 7% at constant currency, reflecting a challenging year over year comparison due to the last year's surging demand for continuous renal replacement therapy mode.

Speaker 2

With the pandemic only further highlighting the vital role of CRRT products in the ICU. As I stated earlier, our newly acquired Huron Businesses contributed $755,000,000 to sales in the quarter. Our global integration is proceeding on course, and we are starting to seize key opportunities to expand global access to our growing portfolio as well as uniting our capabilities to expand our presence in connected care. Looking ahead, I want to note that our original outlook for 2022 did not anticipate the tragic outbreak of a war in Ukraine. And through our humanitarian aid partners.

Speaker 2

We are also like many other companies assessing our profile in Russia, although As a healthcare company, there are certain life sustaining products that we are continuing to make available to patients in line with current sanctions. In addition, given the current timeline Peter for Novo MyQ, we have made the decision to remove any related sales contribution in 2022. These factors, coupled with ongoing increased inflationary Pressures have resulted in adjustments to our guidance for the balance of the year. SJ will review in a moment. Our teams are working diligently to find potential offsets to these increased expenses.

Speaker 2

And as we mentioned Last quarter, we have identified opportunities where it may be possible to pass through some of these costs in select geographies. While the global macroeconomic landscape continues to present unique challenges, we are nonetheless Excited about our overall prospects, momentum and capacity to make a difference for our many stakeholders. We look forward To giving your deeper insights on our trajectory next month at our 2022 investor conference, we will share a broader look And our growth strategy, fueled by advances in Connected Care as well as our commitment to ongoing therapeutic innovation. We will also provide more detail on how expanded global We will highlight the rapid evolution of our integrated supply chain function as we work to address Today's operational challenges head on and continue to evolve for the future. You'll see Baxter's mode.

Speaker 2

Our first hand at our interactive innovation hall. And as always, we'll be including plenty of time for your Questions and informal networking with our senior leadership team. I look forward to seeing many of you in person and the event will This will be webcast for online viewing. Now I will pass it to Jay, who will take a closer look at our Q1 results and 20 2 outlook.

Speaker 3

Thanks, Joe, and good morning, everyone. As Joe mentioned, we're pleased with our Q1 performance, Especially in light of the geopolitical unrest and macroeconomic headwinds causing incremental supply chain challenges, Inflationary pressures and elevated freight costs. We're working through these headwinds with consistent focus on operational efficiency and disciplined expense management. Turning to our financial performance, Q1 2022 global sales $3,700,000,000 advanced 26% on a reported basis, 29% on a constant currency basis and 3% on an operational basis. Sales came in at the high end of our guidance range this quarter, With growth reflecting recovery in hospital admission rates and elective surgeries, the benefit from revenues With the manufacturing of COVID vaccines and strength in our medication delivery business, which benefited from growth of IV therapies as well as lower customer rebate costs during the quarter.

Speaker 3

On the bottom line, Adjusted earnings increased 22 percent to $0.93 per share. This compared favorably to our guidance of $0.79 to $0.82 Per share driven by better than expected gross margins, which was driven by product mix as well as disciplined execution on cost synergies associated with the acquisition. Now, I'll walk through performance by our regional segments and key product categories. Mode. Note that constant currency growth is equal to operational sales growth for all global businesses and Baxter's 3 legacy geographic regions.

Speaker 3

Starting with sales by operating segment, sales in the Americas increased 5% on a constant currency basis. Sales in Europe, Middle East and Africa grew 2% on a constant currency basis and sales in our APAC region were flat on a constant currency basis. Sales in our APAC region were negatively impacted in the quarter by the resurgence of COVID cases in the region, particularly in China. We're continuing to monitor the situation in China and the potential impact on our operations from further lockdowns. Moving on to performance by key product category.

Speaker 3

Global sales for Renal Care were $894,000,000 Increasing 1% on a constant currency basis. Performance in the quarter was driven by growth in our TD business as global patient volumes increased on a year over year basis despite persistent pressures from increased mortality rates in ESRD patients, delays in new patient diagnoses and market wide staffing shortages. This growth was offset by lower dialyzer sales in our international in center HD business. Shales and medication delivery of $706,000,000 increased 10% on a constant currency basis. Strong U.

Speaker 3

This growth in this business reflects continued recovery in the pace of hospital admissions compared to pre COVID levels as well as increased Demand for IV administration sets and solutions. Sales also benefited from lower customer rebates in the quarter. For the quarter, we estimate that Total admissions were down low single digits compared to pre COVID levels. Pharmaceutical sales of 521,000,000 Declined 2% on a constant currency basis. Performance in the quarter was negatively impacted by increased competition for select molecules in our U.

Speaker 3

S. Generic injectables Portfolio, lower sales of inhaled anesthetic and pandemic related supply constraints, driven in part by labor shortages at certain of our manufacturing facilities. Moving to Clinical Nutrition, total sales were $227,000,000 increasing 1% 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 $228,000,000 advancing 8% on a constant currency basis. Growth in the quarter reflected Elective procedure recovery in the U.

Speaker 3

S. And Europe. We've seen recovery stall in our Asia Pacific region with Australia, Korea, Japan and Taiwan mode. Experiencing somewhat depressed levels of surgical volumes. In the U.

Speaker 3

S, we saw surgical procedures come under pressure in January As a result of the omicron variant, but the impact on volumes was short lived with procedural volumes improving into February March. Our current assumption is for U. S. Surgical procedures in the U. S.

Speaker 3

To remain above pre COVID levels for the remainder of the year. Mode. Sales in our acute therapies business were $188,000,000 declining 7% on a constant currency basis and reflecting a difficult

Speaker 4

comparison to the

Speaker 3

Q1 of 2021 when we to the Q1 of 2021, when we experienced heightened demand for CRRT given the rise in COVID cases. Mode. Biopharma Solutions sales in the quarter were $156,000,000 representing growth of 21% on a constant currency basis, reflecting incremental sales related to the manufacturing of COVID vaccines, which totaled approximately $45,000,000 in the quarter. For the remainder of the year, vaccine sales are forecasted to be approximately $60,000,000 lower than prior year sales. Mode.

Speaker 3

Hillron contributed $755,000,000 in sales to the quarter, which included $383,000,000 of sales in patient support services, $294,000,000 of sales in Front Line Care and $78,000,000 of sales in Global Surgical Solutions. On a constant currency basis as compared to Q1 2021, when Hill Run was a standalone company, its sales were flat year over year, reflecting a challenging comparison as sales in the Q1 of 2021 benefited from COVID related sales of approximately $40,000,000 Moving through the rest of the P and L, our adjusted gross margin of 45% increased by 300 basis points For the prior year, reflecting the contribution of Hill Rom within the quarter and lower rebate costs. Adjusted SG and A of 855 dollars representing $23,100,000 as a percentage of sales, an increase of 2 40 basis points versus prior year, driven by the addition of Hill Rom as well as higher freight expenses. Adjusted R and D spending in the quarter of $149,000,000 represented 4 As a percentage of sales, a decrease of 30 basis points versus prior year. Increased levels of SG and A and R and D spend A contribution from Hillron.

Speaker 3

We're on track with our cost synergies target for the year and we're able to pull forward certain initiatives resulting in a benefit to operating Adjusted operating margin in the Q1 was 18%, an increase of 100 basis points versus the prior year, reflecting the various factors I just discussed. Adjusted net interest expense totaled $85,000,000 in the quarter, An increase of $51,000,000 versus the prior year, driven by higher outstanding debt balances related to the acquisition of Hill Rom. Given the current interest rate environment, we now expect net interest expense to be higher than we had previously forecasted. Other non operating income totaled $16,000,000 in the quarter, an increase of $21,000,000 compared to the prior year period, Driven by foreign exchange gains and amortization of pension benefits, the adjusted tax rate in the quarter was 20.8% as compared to 16% in the prior period. The year over year increase was driven by the addition of Hill Rom as well as the prior year tax The tax rate reflected a discrete benefit.

Speaker 3

The tax rate in the quarter was unfavorable to our expectations due to the mix of earnings within the quarter. And as previously mentioned, adjusted earnings of $0.93 per diluted share advanced 22% versus the prior year period. Let me conclude my comments by discussing our outlook for the Q2 and full year 2022, including certain key assumptions around phasing for the year. As Joe mentioned earlier, we have made the decision to remove any Novum IQ infusion system sales in 2022, which is reflected in our updated sales outlook. At this time, we are not able to offset the expected Novum sales with Spectrum as we are supply constrained on certain electromechanical parts for the Spectrum pump.

Speaker 3

In addition, the global macro Emerging from new COVID outbreaks in China, the war between Russia and Ukraine and continued supply chain constraints across our network mode. Have created challenges to our ongoing operations. While we continue to evaluate opportunities to drive better efficiency on our integrated supply chain as well as pass Through some of these costs to our customers, these factors have resulted in increased expenses, which are expected to negatively impact our results throughout the remainder of the year. These incremental expenses, which are primarily related to higher oil prices and increased inflationary mode. Pressures are reflected in our updated financial outlook.

Speaker 3

For the Q2 of 2022, we expect global sales growth Approximately 26% on a reported basis, 29% to 30% on a constant currency basis and approximately 4% operationally. And we expect adjusted earnings excluding special items of $0.86 to $0.89 per diluted share. For full year 2022, we now expect global sales growth of 23% to 24% on a reported basis, mode. 25% to 26% on a constant currency basis and approximately 3% on an operational basis. As mentioned earlier, operational growth for Baxter excludes the impact of foreign exchange and Hill Run.

Speaker 3

Moving down the P and L, we expect full year adjusted operating margin to be similar to the prior year period. For the full year, we now expect interest expense to total Approximately $375,000,000 and adjusted tax rate of 19% to 19.5% and a diluted average share count of 508000000 to 510,000,000 shares. Based on these factors, we now Expect 2022 adjusted earnings excluding special items of $4.12 to $4.20

Operator

mode. Mode. 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 Web mode for 60 days at www.baxter.com.

Operator

Our first question comes from Travis Steed at Bank of America securities.

Speaker 5

Hi, good morning everybody. Jay, I'd love just to get a bit more of a bridge John, on the guidance changes here for the full year, both in the top line and the bottom line, looks like a 1 point reduction in the revenue guidance. I'm Curious how much of that's in my queue, how much of it's supply shortages and the same thing on the bottom line as well. It looks like $0.25 difference If you account for the Q1 beat.

Speaker 3

Sure. From a revenue standpoint, Really, the entirety of the reduction relates to Novum. We've taken out roughly $100,000,000 in sales. Our previous guidance was roughly 4% operational. Now we're approximately 3%.

Speaker 3

Of course, there's always puts and takes as we put together our forecast, But we thought it was prudent under the circumstances to remove Novum from the guidance and so you see that reduction. As As far as the forecast period goes, we did make some more significant adjustments to the bottom line in light of the circumstances we are currently faced with. Mode. Oil is one primary driver that's roughly an $0.11 impact. We have freight headwinds, mode.

Speaker 3

Excluding the impact of oil of roughly $0.11 And what this really comes down to is it's an incredibly tumultuous supply chain And as the company looks to fulfill our mission to save and sustain lives, moving product around the world is increasingly complicated at the moment. And so the result of that is roughly $0.11 of incremental headwind from Q2 to Q4, outside of the oil impact that I just described. Mode. And then finally, securing parts and securing raw materials is also very, very challenging. Mode.

Speaker 3

Roughly, we're experiencing roughly $0.08 of material inflation. You add to that the Novum impact and you offset that by certain pricing actions we're taking along with manufacturing optimization and improvements. And that really what is what describes the change in guidance to the back portion of the year.

Speaker 5

That's great. I'd love to hear a little bit more color on some of the pricing actions that you're taking that you just mentioned and kind of where in the portfolio You're doing that and there's more shipping and freight costs that you're charging customers or actual price increases?

Speaker 2

We have taken pricing actions to customers in different geographies where we can. Mode. But we don't go into specifics where we did, how much and what customer, but we have taken pricing actions.

Speaker 3

Thanks, Travis.

Operator

We'll move next to Robbie Marcus at JPMorgan.

Speaker 6

Mode. Hi, thanks for taking the questions. Maybe to start, Jay, to follow-up on that, I think, and Joe, for you as well. A lot of investors are trying to sift through the moving parts. There's a lot Going on both on the top line and the bottom line.

Speaker 6

At the same time, there's a big integration going on. So maybe you could just step back and walk us through mode. How you feel about, let's call it, the underlying end market fundamentals versus transitory

Speaker 3

mode. So Robbie, thanks for the question. Overall, We feel very good about the durability of the business, the long term potential to outgrow our markets. Mode. If you think about the Q1 performance, that really is a classic illustration of how we perform, right?

Speaker 3

We delivered Solid sales growth, 3%. We were able to deliver ahead of our expectations on the bottom line, which was great. Mode. All the while, continue to pursue the integration, which as Joe described, and we can I'm sure we'll get into later, is going quite well. Very happy with the acquisition of Hill Rom, very happy with the opportunities that it opens up to us in terms of mode.

Speaker 3

Synergies and some of the end markets that it exposes us to. So all of that is really a nice story. We are faced with one of the most complicated supply chain environments I have personally seen. Mode. The war in Ukraine, coupled with an already fraught supply chain creates very significant mode.

Speaker 3

Short term factors impacting our performance. Do I think we'll be talking about supply chain in 2 years? I certainly hope not, nor do I Expect that that will be the case. But at least for the next 9 months as we see it, there will be continued pressure on the supply chain. And if you think about our mission, that's our primary focus, but it's more costly to do that in the short term.

Speaker 3

I think over time, we'll see oil prices ease. I think over time, the complexity of moving product mode. Around the world will decrease and all of those things will accrue to the benefit of the long term story for Baxter. Right now, It's some choppy waters that we're navigating. And I think all of the teams, including in particular, our supply chain team Are doing a tremendous job working through all of that.

Speaker 3

Joe, I don't know if you want to add anything to that.

Speaker 2

I would add that we see our demand, mode. Our top line back order, our backlog very healthy. Our back order is all time high, mode. Meaning that we have strong demand. We are sometimes struggling to fulfill all the demand because the shortage of chips mode.

Speaker 2

And microprocessors and other electronics, as a matter of fact, that has consumed our top executives great mode. Of their time either by speaking to company CEOs in this area or trying to get product shipped more often to our factories. So This is not a unique problem to Baxter, but it shows that the top line when I see their level of demand, it seems that our business has a resilience that Jay just outlined. So I don't see a problem with the market dynamics. I see underlying issues that Jay outlined.

Speaker 2

They are Somehow not short term temporary will be with us throughout this year. And I said that in the previous call that this will take mode. Quarters to be fixed and we think towards the end of the year we may see some progress in that area. We also are redesigning some of our boards. We're trying we're getting secondary raw material suppliers in place.

Speaker 2

Mode. So there's a significant amount of work to shore up the company, not only for the short term, but also for the long term and create a Yes. They will be with us for a long time.

Speaker 6

Great. And maybe one more To follow-up on pricing, this is your business has a lot of different products that go through a lot of different channels and contracts. Historically, this has been a very difficult market to take pricing in. But given mode. The inflation, the shipping, etcetera, what's the ability by each of the different businesses you participate in to

Speaker 2

Clearly, the inflationary pressures on Baxter are very clear displayed here, and we have taken price And actions in selected markets. Why do I say selected markets? Because some markets we have contracts that are long term that to take price action. Sometimes you have to break the contracts and we evaluate case by case. This is not a blanket.

Speaker 2

We are not a consumer company, neither we are selling mode. Staple products are known to direct to consumer. So we can't just blanket raise prices everywhere. What we do is we mode. And legally possible.

Speaker 2

So there's all those considerations that we put in place. It is a tough market at the moment And it's a tough market for everyone. So we do what we can and we're taking pricing where it's possible.

Speaker 7

Great. Thanks, guys.

Operator

Mode. Larry Biegelsen with Wells Fargo has our next question. Please go ahead.

Speaker 8

Mode. Good morning. Thanks for taking the question. Just one on the margins this year and one on excuse me, to the upcoming analyst meeting. Jay, on the margins, it's still it looks like the guidance implies 2nd quarter margins down sequentially.

Speaker 8

And then to get to the full year guidance, it implies kind of a ramp in the second half. So what drives that ramp? And are we thinking about the cadence Correctly, and I had one follow-up.

Speaker 3

Larry, you are thinking about the cadence of margins correctly. And if you think about Baxter overall, historically, we see first half margins lower than second half margins. Looking at 2021, the margin went from 17% first half to 20% second half despite Some significant issues with respect to inflation that impacted the second half of last year. And a lot of that comes down to Significant incremental revenue that we see in the second half of the year. So as we fast forward to 2022, You're right.

Speaker 3

We'll see several 100 basis points step up from first half to second half. And there's really a few contributing factors. 1, The revenue step up that we anticipate seeing in the second half. 2nd, incremental synergy capture that Cruise to the benefit of the second half. And then finally, our manufacturing team is hard at work accelerating the pace of what we call VIP programs, but what are really about is increasing the efficiency of our manufacturing facilities.

Speaker 3

Mode. And really, we'll see some of those benefit more the second half than the first half. So you add those three factors together and the cadence of margin, As you correctly point out, will be similar to what it's been in past years.

Speaker 8

That's helpful. And then on the upcoming analyst meeting, mode. My question is, 1, it's a volatile environment. So how are you going to factor that in? And mode.

Speaker 8

When you did the Hill Rom deal, you guided to Baxter standalone sales CAGR of 4% to 5%, 300 basis point margin expansion. And And obviously, we know the Hill Rom synergies you've assumed. So my question is kind of what has changed, Jay or Joe, that you can share with us today To just help us calibrate going into that meeting and how are you going to approach kind of the long term outlook given the volatile environment that we're in? Thanks for taking the question.

Speaker 2

Sure. I can start, Jay, and you can please come in. They're affecting 2022 in terms of supply chain. We have a forecast that we're going to tell you what our assumptions are going into the meeting. We're going to tell, this is what we're assuming things are happening.

Speaker 2

So what we present to you has mode. All the numbers will have a footing on what are the assumptions that we are making in this world today in terms of mode. Supply, demand, pricing and other things, including commodities and other things. So We will be prepared to disclose that at the time of the meeting, Gabe.

Speaker 3

No, that's Exactly right, Joe. And I think we're going to try to put forth conservative assumptions. But what we see today is an incredibly volatile world. And to that effect, We'll want to share some details around what are we assuming around the price of oil over the years, and we're going to try to have the best intelligence around that assumption as possible. Mode.

Speaker 3

As far as what's changed, really the integrity of the businesses that we have and acquired, mode. We look to feature that and we're very excited to share our perspective on that when we sit down. In the short term, we've seen massive this Supply chain disruption, that really is the most significant factor that is different from September to today. Things like oil price, Things like freight and logistics challenges, the global supply chain, really those are the issues that we're contending with at this point. And we'll try to have a point of view on that as well.

Speaker 3

So really that's the approach that we're going to take, Larry, and we look forward to seeing you in Chicago in a month.

Speaker 8

Mode. Thanks for taking the question.

Operator

We'll go next to Pito Chickering with Deutsche Bank.

Speaker 7

Mode. Hey, good morning guys. Thanks for

Speaker 5

taking my questions. Just sort

Speaker 7

of going back to the question on the impact from oil, you quantify $0.01 Of oil, lenses and freight, dollars 0.08 of material pressures. Just can you sort of give us some more color on sort of the cadence of the timing throughout the year And do you see any updated guidance and your relief serve in the back half of the year versus the prices we're seeing today?

Speaker 3

We really have not forecasted mode. Relief this year, we've taken roughly $100 barrel of oil and are looking at that through the rest of the year. And we're also anticipating some level of complexity with respect to the supply chain, along with mode. Challenges procuring components and raw materials for the balance of the year. The way we see it, there could be some easing mode of oil prices over time, but we think probably that benefits more 2023 mode.

Speaker 3

In 2022, the other fact that you have to keep in mind is there is a lag between mode. Alleviation of oil price and when we see that in the P and L. Said another way, our Q1 was not that negatively impacted By the movement in oil price that occurred during Q1, that really impacts the period from Q2 to Q4. So I think the way we see it, Pito, we're going to assume challenging levels for the balance of the year. And then we're optimistic that this sorts itself out mode towards the end of 2022 and into 2023, but we're cautious about that.

Speaker 7

Okay. And then for a follow-up, again, like you talked about mode. Can you sort of size up the size of the backlog? Has it gotten bigger in April? What do you see in the guidance in terms of working down that backlog?

Speaker 7

And then any color that you can give us on China on both revenues and manufacturing

Speaker 3

mode. Sure. We don't really get into backlog by specific Product area, what I can tell you and nor do we get into product line availability and components mode. Impacting specific product lines. What I will tell you is, we're very tight in terms of spectrum parts, as I commented mode.

Speaker 3

Within my prepared remarks and as a result of that, we're not able to see some of the offsets that perhaps we've seen in the past mode. With respect to Novum delay, so that's one factor. In the Q1, we did have some backlog with respect To the Hill Rom products, we expect those things to sort out over the course of the coming months. But again, with availability of Ability of product, we're always careful and cautious about watching this closely. As it relates to China, mode.

Speaker 3

The big the lockdowns that we've seen there, we expect roughly a $15,000,000 to $20,000,000 impact to sales. Mode. Obviously, our hearts go out to all of our employees in China who are really doing yeoman's work, trying to ensure that we get Product out of the manufacturing facilities, and we have folks that are staying in plants overnight, so that they can secure product and get product out. But from a demand standpoint and a supply impact, we're seeing roughly $15,000,000 perhaps $20,000,000 in impact as it relates to Those measures, we expect those some of that occurred in Q1. We expect some more of that to impact Q2.

Speaker 3

And then we are expecting that to alleviate later in the year. That's really the story on China. Great.

Speaker 7

Thanks so much.

Speaker 3

Thanks, Guido.

Operator

Mode. We'll move next to Danielle Antalffy at SVB Leerink.

Speaker 1

Hey, good morning, everyone. Thank you so much Thank you for taking the question. Just one question on the Novum platform. I'm just curious, Joe, if you this mode. Delay here, if that changes your view of the potential longer term or even in the mid term once the platform does launch in the market share mode.

Speaker 1

And then I have one follow-up.

Speaker 2

Danielle, good morning. We have received the letter. We understand what needs to be addressed and we plan to address towards the end of the year like we mode. Addressing the request Does not change the fate I have in the product line. We have this product currently working in Canada mode.

Speaker 2

And is, from my perspective, a great product. We have tremendous respect for what the agency And I don't speak on behalf of the FDA. So we're working very closely to make sure that we can mode. Address the outstanding main issue as soon as we can and that's towards the end of the year. Mode.

Speaker 2

I have faith in the platform. We designed that from scratch. It was the 1st product, electromechanical product designed mode. From scratch we put the resources in place and we're still very optimistic about mode. What it can do in the marketplace.

Speaker 2

So it's a great technology and but this is my opinion and I hope that we can get this clear towards the end of the mode.

Speaker 1

Okay, got it. That's good to hear. And then just on Hill Rom, I was wondering if you could touch a little bit more, I know it's early days still, but how it's been from a sales synergy side or maybe how you guys

Speaker 3

Great. Danielle, thanks for the question. We're really pleased with how things are going with respect to Hill Rom. I think what we're finding is a company whose culture aligns very well with Baxter. As we explore the products more, We're increasingly excited about the product line and portfolio that they have, some of the innovation that they're undertaking.

Speaker 3

Mode. As we think about our ability to commercialize their products and drive things like synergies, we're also really excited about those kinds of opportunities. And then finally, from a cost synergy standpoint, things are going as well or better than we originally anticipated. So from our standpoint, All signs are up with respect to Hill Rom, and we feel very excited about the deal that we put in place. As far as revenue synergies go, I think we'll outline when we see you in May a few categories that we're increasingly excited about.

Speaker 3

Things like geographic expansion, things like product synergies, some of the promotional opportunities that we see, mode. Some of the new products that we can develop, there's a number of categories that we'll outline for all of you at our Investor Day, but it's safe To say that there's real opportunity. And I just recently spent some time with some of our international teams talking about the distribution opportunities that exist. Mode. And the reality is they're there.

Speaker 3

We have a global footprint. We sell products around the world in over 100 countries with direct Presence in most of those countries, Hill Rom doesn't have that level of footprint in place. And there are select products that can really benefit mode from that kind of promotional effort. So, we're excited about it. I hope to see you In May, again, we'll talk about all of these categories in more detail.

Speaker 3

But I think it's a really nice long term story that we're putting together here.

Speaker 1

Thanks, Paul.

Speaker 3

Thanks, Danielle.

Operator

Joanne Wuensch with Citi has our next question. Please go ahead. Mode.

Speaker 9

Good morning and thank you for taking the question. I actually have 2. I'm curious about your thoughts on the pathway for the renal recovery. It It sounds like you do expect it to come, but over time, and I'd love to know how you plan to get there.

Speaker 2

Mode. Joanne, how are you?

Speaker 1

I'm well.

Speaker 2

We are experiencing a moment of Reduction in the patients in renal due to the 2 years mode. For ESRD patients or potential patients. So we're starting to see the pickup of the patients in PD at the moment. We see that continue on primarily in the U. S.

Speaker 2

And Americas. We still need to see that coming in through Europe. Mode. The HD patients, we see that more as a more lingering effect mode. Of the pandemic, so PD, separate PD from HD or peritoneal dialysis From hemodialysis, we see PD recovering throughout this year and picking up full momentum probably in 2023.

Speaker 9

But volumes for the remainder of the year.

Speaker 2

We see that recovery coming in and there's Be a rebound. So we project to see a rebound in surgical volumes and hospital volumes in mode. Most places that we do business today, ex Asia, I think in China, we need to watch what's Happening in terms of their lockdown and how we're able to react to that as well as in Again, but ex those 2 large markets, we see other markets picking up momentum and the demand It was suppressed coming back up with volumes above last year and Probably at or above pre COVID times.

Speaker 9

Thank you very much.

Speaker 2

Thank you.

Operator

We'll move next to Drew Ranieri at Morgan Stanley.

Speaker 10

Hi, Joe and Jay. Thanks for taking the question. Just to go back on Hill Rom for a 2nd, if you adjust out for the COVID benefit, it's 5% growth. And even in the Patient Support Systems business, it looks like it was closer to 7 And growth, so kind of better than expected. But within PSS, can you maybe go into some detail about what you're seeing from the hospital bed component mode.

Speaker 10

And the Connected Care component as well, just kind of given the light that some hospitals might be pulling back on capital expenditures, Just kind of curious what you're seeing in this quarter and kind of what you're expecting for the remainder of the year in those franchises?

Speaker 2

We're going to ask Giuseppe to answer that.

Speaker 11

Yes. So I think when it comes to PSS, what we see is mode. Continuous and strong demand

Speaker 2

on the

Speaker 11

Care Communication side. Care Communication is a very strong Platform with unique features that span from the Nurse Call system to the Vault system. So over there, we see a strong demand. This demand is difficult to implement. It's been difficult to implement due to the COVID mode.

Speaker 11

Impact. So our access to the hospital has been impacted by COVID, but what we see is a very healthy backlog when

Speaker 3

Okay. Thank you. Thanks Drew.

Operator

We'll move next to Matt Miksic at Credit Suisse. Mode.

Speaker 12

Great. Good morning. Thanks so much for taking the questions. Just a couple of follow ups If I could, Jay or Joe, on how you're thinking about some of these factors in your guidance. One is China.

Speaker 12

You talked about it a couple of times. If maybe you could mode. Give us a sense of how you're what assumptions you're baking into the sort of easing of the lockdowns there? Does that happen in the 2nd quarter? Is that Sort of happen in the back half by your estimation and guidance.

Speaker 12

And then the other is FX. We've seen significant moves in FX, mode. I expected some folks in our universe more than others and just would love to get a sense you have some other major moving parts that you described Jay that Make up the guide change, but maybe talk a little bit about how you're managing through or what the impact of changing FX has been? Thanks.

Speaker 3

Sure. As it relates to China, our expectation is that the situation improves not in the second quarter, mode. But into the 3rd and 4th quarters, obviously, it's a complicated situation that they're dealing with, Of the lockdown in Q2, we expect roughly around $10,000,000 and similar impact level in Q1. So We don't have any improvement baked in until later in the year. As it relates to foreign exchange, we are Expecting relative to prior year, we're talking about roughly 0 point 0 $0.05 $0.06 of impact, maybe a little bit more than that.

Speaker 3

Mode. And relative to our previous expectations, which we shared with you in February, we're off several cents from that. Now this is a very mode. Highly volatile situation. And even as of yesterday, we were seeing substantial movements in the euro.

Speaker 3

We'll watch this very closely. But right at this point, we have several sense of impact relative to the prior forecast. We'll continue to monitor this.

Speaker 12

Thanks so

Speaker 3

much.

Operator

And we'll take our final question from Vijay Kumar with Evercore ISI. Mode. Mr. Kumar, your line is open. You may be muted.

Speaker 4

Jay, I had a 2 part. Maybe I'll ask both of them in one go. When I look at the guidance here, first half is 3.5 percent operational, the annual implies 2.5 percent in the back half. Given that utilization is improving in the back Why is 2.5 the right number? And I understand no one was pulled out.

Speaker 4

But if we didn't have no in my queue in first half, so maybe talk about first half versus second half cadence. And On the supply chain cost, is there a simplistic way, JF, thinking about when I look at all the cumulative costs that Baxter has incurred mode. Over the course of the pandemic, is there a way to quantify the cost versus pre pandemic levels? And what are the different buckets that they went into, raw materials versus

Speaker 3

mode. Great. Thanks for the question, Vijay. Mode. As it relates to the second half versus first half sales guidance, what I will tell you is that the primary drivers With no offset, because if you think about last year, we had very strong spectrum sales in Q3 and Q4 of last year.

Speaker 3

Mode. And we don't have that available that lever available to us, as we look at the second half of this year, Which is why Joe's comments around our intense focus to get Novum approved. That's really a core focus of our Our organization and our R and D team. So those are really the drivers as far as changing of cadence. Mode.

Speaker 3

Most other factors, I would say, are kind of moving along similarly, although we did see some heightened level of medication delivery sales in the Q1 of this year. That was a bit anomalous and we do expect that to lower as we approach the back portion of the year. So really that's the story on the sales line. Mode. As it relates to supply chain costs that we're experiencing, inflationary Pressures that we're experiencing over the last several years from 2019 or 2020 through to today, Now we're talking about $500,000,000 of incremental costs that we're experiencing.

Speaker 3

And really, it's things like increased labor costs, Increased material costs and freight costs that is driving this substantial uptick. What's interesting mode. Despite that very significant number, we've been able to offset an enormous amount of that mode. Through manufacturing VIPs, as I described earlier, through operational performance, some of the pricing mode. Mechanisms that Joe described earlier.

Speaker 3

So this is Vijay, this is a really significant number that we're faced with. Mode. And frankly, what I am somewhat optimistic and even excited about is As those pressures alleviate, you'll get to see the momentum with respect to all of the Operational efficiencies and enhancements that we're undertaking without that offset. So that's what we're working towards. Mode.

Speaker 3

As Joe and I mentioned, I don't think I think we're going to contend with some of these pressures for the rest of the year. But I am hopeful that we start to see some benefit as we move to mode. So thank you very much for the question.

Speaker 4

That's extremely helpful, Jay. Thank you.

Operator

There are no further questions at this time. Ladies and gentlemen, this concludes today's conference call with Baxter International. Thank you for participating.

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