Baxter International Q1 2022 Earnings Call Transcript

Participants

Corporate Executives

• Clare Trachtman, Vice President of Investor Relations
• Joe Almeida, Chairman & Chief Executive Officer
• Jay Saccaro, Chief Financial Officer
• Giuseppe Accogli, Chief Operating Officer

Analysts

• Travis Steed, Bank of America Co.
• Robbie Marcus, JP Morgan Cazenove
• Larry Biegelsen, Wells Fargo & Company
• Pito Chickering, Deutsche Bank Aktiengesellschaft
• Danielle Antalffy, SVB Leerink LLC
• Joanne Wuensch, Smith Barney Citigroup
• Drew Ranieri, Morgan Stanley
• Matt Miksic, Credit Suisse Group AG
• Vijay Kumar, Evercore ISI

Presentation

[Operator]

Good morning, ladies and gentlemen, and welcome to Baxter International's First Quarter 2022 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 pression. 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 of Investor Relations at Baxter International]

Good morning, and welcome to our first quarter 2022 earnings conference call. Joining me today are Joe Almeida, Baxter's Chairman and Chief Executive Officer; Jay Saccaro, Baxter's Chief Financial Officer; Giuseppe Accogli, Baxter's Chief Operating Officer; and Jim Borzi, Baxter's Chief Supply Chain Officer. On the call this morning, we will be discussing Baxter's first quarter 2022 financial results and full year financial outlook for 2022. On the call this morning, we will be discussing Baxter's first quarter 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 second quarter and full year 2022, the recent acquisition of Hillrom, new product development, business development and regulatory matters including ones related to the 510(k) review of the NOVUM IQ infusion platform 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.

On the call this morning, we will be discussing operational sales growth, which adjusts for the impact of foreign exchange and the acquisition of Hillrom. 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 25 in Glenview, Illinois is now available on our website. Please visit the Investor Relations section of Baxter's website to register for the event.

With that, I'll now turn the call over to Joe. Joe?

[Joe Almeida, Chairman & Chief Executive Officer at Baxter International]

Thank you, Clare. Good morning, everyone, and thank you for joining today's call. I will get started with an overview of our first quarter performance, trajectory and a quick preview of what you can expect 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.

As you know, first quarter 2022 represents our first full quarter since the close of Hillrom acquisition. I'm pleased to report solid results for the combined company on both the top and bond line, reflecting the ongoing momentum of legacy Baxter businesses as well as the early promise and potential of our Hero integration. First quarter sales grew 26% on a reported basis and 29% at constant currency. With legacy Hillrom sales contributing $755 million to our total $3.7 billion in reported sales for the quarter. Excluding the impact of Hillrom and foreign exchange, first 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 Hillrom. First quarter performance continued to reflect the ongoing erratic impact of the COVID-19 pandemic, which fueled demand in some of our businesses, while dragging on performance in others. As ever, the diversity and durability of our portfolio in combination with our global footprint, add as buffers that help us weather the extremes in these factors are only bolstered with at its scope and opportunity created through the addition of Hillrom. We continue to see solid demand across both legacy Baxter and Hillrom businesses. We are still experiencing pockets of back orders 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. Similarly, we continue to experience increased inflationary pressures and rising freight costs, 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 that are 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 21% at constant rates. This was driven by a favorable year-over-year comparison related to revenues from the manufacture of multiple COVID-19 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 those IT safety software, which has been under review by FDA. We received the letter from the agency last Friday with a request for additional information. As a result of the 510(k) review window has been placed on hold so that our team can address accordingly. 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 second quarter of 2022. I want to emphasize why we can speak for FDA or the eventual outcome of their review process. We are confident our leading-edge NOVUM IQ technology. We are committed to responding to FDA's request and to bringing the benefits of NOVUM IQ 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 following depressed rates due to the pandemic. Renal Care rose 1% at constant currency rates, with a mid-single-digit growth in the U.S., partially offset by a low single-digit decline internationally. Growth in the quarter was driven by global demand for our home peritoneal 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 patients diagnosis. We remain confident of renewed uptake in PD therapy 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.

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 surge in demand for continuous renal replacement therapy or CRRT products amid the pandemic. Underlying performance in this product category continues to build momentum with the pandemic only further highlighting the vital role of CRRT products in the ICU. As I stated earlier, our newly acquired Hillrom businesses contributed $755 million to sales in the quarter our global integration is proceeding on course, and we are starting to seize our 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 regional outlook for 2022 did not anticipate the tragic outbreak of a war in Ukraine. The conflict is partially disrupting our ability to serve patients locally, although we are working hard to serve Ukrainian patients and refugees directly and through our humanitarian aid partners. We are also, like many other companies, assessing our profile in Russia, although as a health care company, there are certain life-sustaining products that we are continuing to make available to patients in line with current sanctions. The conflict has also caused a ripple effect across the supply chain network globally resulting in rising oil prices, which we expect to negatively impact freight material and utility costs this year.

In addition, given the current time line anticipated for NOVUM IQ, 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 As Jay will review in a moment.

Our teams are working diligently to find potential offsets to these increased expenses. 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 at 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 access and uncompromising portfolio management should contribute to profitable growth.

In addition, 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 health care innovations 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 in the event will also be webcast for online viewing.

Now, I will pass it to Jay who will take a closer look at our first quarter results and '22 outlook.

[Jay Saccaro, Chief Financial Officer at Baxter International]

Thanks, Joe, and good morning, everyone. As Joe mentioned, we're pleased with our first quarter 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. First quarter 2022 global sales of $3.7 billion 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 associated 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. On the bottom line, adjusted earnings increased 22% 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 in key product categories. Note that constant currency growth is equal to operational sales growth for all global businesses and Baxter's 3 legacy geographic regions. 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 are 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. Global sales for Renal Care were $894 million, increasing 1% on a constant currency basis. Performance in the quarter was driven by growth in our PD 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. Sales in Medication Delivery of $706 million increased 10% on a constant currency basis.

Strong U.S. 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 U.S. hospital admissions were down low single digits compared to pre-COVID levels. Pharmaceutical sales of $521 million declined 2% on a constant currency basis. Performance in the quarter was negatively impacted by increased competition for select molecules in our U.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 million, 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 million, advancing 8% on a constant currency basis. Growth in the quarter reflected elective procedure recovery in the U.S. and Europe. We've seen recovery stall in our Asia Pacific region with Australia, Korea, Japan and Taiwan experiencing somewhat depressed levels of surgical volumes. In the U.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 and March.

Our current assumption is for U.S. surgical procedures in the U.S. to remain above pre-COVID levels for the remainder of the year. Sales in our Acute Therapies business were $188 million, declining 7% on a constant currency basis and reflecting a difficult comparison to the first quarter of 2021 when we experienced heightened demand for CRRT given the rise in COVID cases. BioPharma Solutions sales in the quarter were $156 million, representing growth of 21% on a constant currency basis, reflecting incremental sales related to the manufacturing of COVID vaccines, which totaled approximately $45 million in the quarter. For the remainder of the year, vaccine sales are forecasted to be approximately $60 million lower than prior year sales. Hillrom contributed $755 million in sales for the quarter, which included $383 million of sales and patient support services $294 million of sales in Frontline Care and $78 million of sales in Global Surgical Solutions.

On a constant currency basis as compared to Q1 2021, when Hillrom was a stand-alone company, its sales were flat year-over-year, reflecting a challenging comparison as sales in the first quarter of 2021 benefited from COVID-related sales of approximately $40 million.

Moving through the rest of the P&L. Our adjusted gross margin of 45% increased by 300 basis points over the prior year, reflecting the contribution of Hillrom within the quarter and lower rebate costs. Adjusted SG&A of $855 million, representing $23.1 million as a percentage of sales, an increase of 240 basis points versus prior year, driven by the addition of Hillrom as well as higher freight expenses. Adjusted R&D spending in the quarter of $149 million represented 4% as a percentage of sales, a decrease of 30 basis points versus prior year.

Increased levels of SG&A and R&D spend reflect the contribution from Hillrom. 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 expenses in the first quarter. Adjusted operating margin in the first quarter 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 million in the quarter, an increase of $51 million versus the prior year, driven by higher outstanding debt balances related to the acquisition of Hillrom. Given the current interest rate environment, we now expect net interest expense to be higher than we had previously forecasted. Other nonoperating income totaled $16 million in the quarter, an increase of $21 million 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 Hillrom as well as the prior year tax rate reflected a discrete benefit. 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 second quarter 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. In addition, the global macro disruptions emerging from new COVID outbreaks in China, the war between Russia and Ukraine and continued supply chain constraints across our network have created challenges to our ongoing operations. While we continue to evaluate opportunities to drive better efficiency in 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 pressures are reflected in our updated financial outlook.

For the second quarter of 2022, we expect global sales growth of 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, 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 Hillrom.

Moving down the P&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 million and adjusted tax rate of 19% to 19.5% and a diluted average share count of 508 million to 510 million shares. Based on these factors, we now expect 2022 adjusted earnings, excluding special items, of $4.12 to $4.20 per diluted share.

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

Questions and Answers

[Operator]

[Operator Instructions] Our first question comes from Travis Steed at Bank of America Securities.

[Travis Steed, Analyst at Bank of America]

Jay, I'd love just to get a bit more of a bridge on the guidance changes here for the full year, both on the top line and the bottom line. It looks like a 1 point reduction in the revenue guidance. I'm just curious how much that's NOVUM IQ, 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?

[Jay Saccaro, Chief Financial Officer at Baxter International]

Sure. If -- from a revenue standpoint, really the entirety of the reduction relates to NOVUM we've taken out roughly $100 million in sales. Previous guidance was roughly 4% operational. Now we're approximately 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 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. Oil is 1 primary driver. That's roughly an $0.11 impact. We have freight headwinds, excluding the impact of oil of roughly $0.11. And what this really comes down to is it's an incredibly tumultuous supply chain environment today. 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.

And then finally, securing parts and securing raw materials is also very, very challenging. And 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 is what describes the change in guidance to the back portion of the year.

[Travis Steed, Analyst at Bank of America]

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 more shipping and freight cost that you're charging customers or actual price increases?

[Joe Almeida, Chairman & Chief Executive Officer at Baxter International]

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

[Operator]

We'll move next to Robbie Marcus at JP Morgan.

[Robbie Marcus, Analyst at JP Morgan Cazenove]

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. At the same time, there's a big integration going on. So maybe you could just step back and walk us through, how you feel about, let's call it, the underlying end market fundamentals versus transitory headwinds and all while doing the integration, how do you feel basically about the health of the markets and how Baxter is performing relative to them?

[Jay Saccaro, Chief Financial Officer at Baxter International]

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. If you think about the first quarter performance, that really is a classic illustration of how we perform, right? We delivered solid sales growth 3%. We were able to deliver ahead of our expectations on the bottom line, which was great. All the while, continue to pursue the integration, which as Joe described, and we -- I'm sure we'll get into later, is going quite well. Very happy with the acquisition of Hillrom, very happy with the opportunities that it opens up to us in terms of 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 1 of the most complicated supply chain environments, I have personally seen the war in Ukraine, coupled with an already fraught supply chain creates very significant 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.

I think over time, we'll see oil prices eased. I think over time, the complexity of moving product 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. Joe, I don't know if you want to add anything to that.

[Joe Almeida, Chairman & Chief Executive Officer at Baxter International]

Would add that we see our demand, our top line back order, our backlog, very healthy, backlog, very healthy. Our back order is all-time high, meaning that we have strong demand, we are sometimes struggling to fulfill all the demand because the shortage of chips and microprocessors and Northern Electronics. As a matter of fact, that has consume our top executives, a great deal 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 that level of demand, you see 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. 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 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. 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 resilience that will be with us for a long time.

[Robbie Marcus, Analyst at JP Morgan Cazenove]

Great. And maybe 1 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. Some are capital items, some are drugs. Some are more supplies historically, this has been a very difficult market to take pricing in. But given the inflation, the shipping, et cetera. What's the ability by each of the different businesses you participate into put through pricing? And is there any -- do you foresee any change in the go-forward pricing environment due to this?

[Joe Almeida, Chairman & Chief Executive Officer at Baxter International]

Clearly, the inflationary pressures on Baxter, a very clear display here, and we have taken pricing actions in selected markets. Why do I say selective markets because some markets, we have contracts that are long term, that to take price actions? Sometimes you have to break the contracts. And we evaluate case-by-case -- this is not a blanket. We're not a consumer company, neither we are selling staple products out in known-to-direct-to consumer. So we can't just blanket raise prices everywhere. What we do is we raise prices where we think is just and fair. And we try to do it in a way that is that is also considered to the customer and legally possible. 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.

[Operator]

Larry Biegelsen with Wells Fargo has our next question.

[Larry Biegelsen, Analyst at Wells Fargo & Company]

Just 1 on the margins this year and 1 on kind of the upcoming analyst meeting. Jay, on the margins, it's still -- it looks like the guidance implies second quarter margins down sequentially. 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 have 1 follow-up.

[Jay Saccaro, Chief Financial Officer at Baxter International]

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, we'll see a several hundred basis point step-up from first half to second half. And there's really a few contributing factors. One, the revenue step-up that we anticipate seeing in the second half. Second, incremental synergy capture that accrues 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. And really, we'll see some of those benefit more in the second half than the first half. So you add those 3 factors together, and the cadence of margin as you correctly point out, will be similar to what it's been in past years.

[Larry Biegelsen, Analyst at Wells Fargo & Company]

That's helpful. And then on the upcoming analyst meeting. My question is, one, it's a volatile environment. So how are you going to factor that in and what -- when you did the Hillrom deal, you guided to Baxter stand-alone sales CAGR of 4% to 5%, a 300 basis point margin expansion. And obviously, we know that Hillrom synergies you've assumed 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.

[Joe Almeida, Chairman & Chief Executive Officer at Baxter International]

Sure. I can start, Jay, and you can please come in. We have a long-range plan in the company that is drawn and takes into account several different factors, including the short-term disruptions that affect in 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. So what we present, you have all the all the numbers, we have a footing on what are the assumptions that we are making in this world today in terms of 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, game.

[Jay Saccaro, Chief Financial Officer at Baxter International]

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. As far as what's changed, really, the integrity of the businesses that we have and acquired that's fully intact, and we feel very good about the long-term potential of both platforms, and I should say, the combined platform. 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 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. 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.

[Operator]

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

[Pito Chickering, Analyst at Deutsche Bank Aktiengesellschaft]

Just sort of going back to the question on the impact from oil, you quantify lens of oil lenses of freight 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 some updated guidance and your relief sort of in the back half of the year versus the prices we're seeing today?

[Jay Saccaro, Chief Financial Officer at Baxter International]

We really have not forecasted 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 challenges procuring components and raw materials for the balance of the year. The way we see it, there could be some easing of oil prices over time, but we think probably that benefits more 2023 than 2022. The other fact that you have to keep in mind is there is a lag between alleviation of oil price and when we see that in the P&L.

Said another way, our Q1 -- 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 towards the end of '22 and into '23, but we're cautious about that.

[Pito Chickering, Analyst at Deutsche Bank Aktiengesellschaft]

Okay. And then for a follow-up, like you talked about backlogs for sourcing Microchips and other products. Can you sort of size up the size of the backlog? Has it gotten bigger in April? What do you assume in guidance in terms of working down that backlog? And then any color that you can give us on China on both revenues and manufacturing in China with all the COVID lockdowns occurring there?

[Jay Saccaro, Chief Financial Officer at Baxter International]

Sure. We don't really get into backlog by specific product area. What I can tell you, and nor we get into product line availability and components impacting specific product lines. What I will tell you is we're very tight in terms of spectrum parts, as I commented in 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 with respect to NOVUM delay. So that's 1 factor. In the first quarter, we did have some backlog with respect to the Hillrom products. We expect those things to sort out over the course of the coming months. But again, with availability of product, we're always careful and cautious about watching this closely.

As it relates to China, the big -- the lockdowns that we've seen there, we expect roughly a $15 million to $20 million impact to sales. 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 plans 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 million, perhaps $20 million 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 and then we are expecting that to alleviate later in the year that's really the story on China.

[Operator]

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

[Danielle Antalffy, Analyst at SVB Leerink]

Hey, good morning, everyone. Just 1 question on the NOVUM platform. I'm just curious, Joe, if you -- this delay here, if that changes your view of the potential longer term or even in the midterm, once the platform does launch in the market share gains that Baxter should be able to get? And then I have 1 follow-up.

[Joe Almeida, Chairman & Chief Executive Officer at Baxter International]

Danielle, we have received the latter. We understand what needs to be addressed, and we plan to address towards the end of the year, like we just said in our prepared remarks. Addressing the request does not change the faith I have in the product line. We have this product currently working in Canada and is, from my perspective, a great product. We have tremendous respect for what the agency sells and I don't speak on behalf of the FDA. So we're working very closely to make sure that we can address the outstanding main issue as soon as we can in the stores at the end of the year. I have faith in the platform. We designed them from scratch. It was the first product electromechanical product designed by Baxter from scratch. We put the resources in place and we're still very optimistic about what we can do in the marketplace. 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 year.

[Danielle Antalffy, Analyst at SVB Leerink]

Okay, got it. That's good to hear. And then just on Hillrom, 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 are seeing any changes in the sales process with Hillrom as part of the product portfolio today, just broadly speaking?

[Jay Saccaro, Chief Financial Officer at Baxter International]

Great. Danielle, thanks for the question. We're really pleased with how things are going with respect to Hillrom. 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. 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 Hillrom, 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. Things like geographic expansion, things like product synergies some of the promotional opportunities that we see, 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. And the reality is they're there. We have a global footprint. We sell products around the world in over 100 countries with direct presence in most of those countries. Hillrom doesn't have that level of footprint in place, and there are select products that can really benefit from that kind of promotional effort. So we're excited about it. I hope to see you in in May, again. We'll talk about all of these categories in more detail, but I think it's a really nice long-term story that we're putting together here.

[Operator]

Joanne Wuensch, Citi has our next question.

[Joanne Wuensch, Analyst at Smith Barney Citigroup]

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

[Joe Almeida, Chairman & Chief Executive Officer at Baxter International]

Daniel -- Joanne, how are you?

[Joanne Wuensch, Analyst at Smith Barney Citigroup]

I'm well.

[Joe Almeida, Chairman & Chief Executive Officer at Baxter International]

We are experiencing a moment of reduction in the patients in renal due to the 2 years of COVID that affected the number of patients who died, who are at risk and for ESRD patients or potential patients. So we started to see the pickup of the patients in PD at the moment. We see that continue on primarily in the U.S. and Americas. We still need to see that coming in through Europe. The HD patients, we see that more as a more lingering effect of the pandemic. So PD separate PD from HD or peritoneal dialysis from hemodialysis we see PD recovering throughout this year and picking up for momentum probably in 2023.

[Joanne Wuensch, Analyst at Smith Barney Citigroup]

And as a follow-up, I'm curious what you're thinking about hospital volumes for the remainder of the year?

[Joe Almeida, Chairman & Chief Executive Officer at Baxter International]

We see the recovery coming in and it's going to be a rebound. So we project to see a rebound in surgical volumes and hospital volumes in 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 Japan. But ex those 2 large markets, we see other markets picking up momentum and the demand that was suppressed coming back up in -- with volumes above last year and probably at or above pre-COVID times.

[Operator]

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

[Drew Ranieri, Analyst at Morgan Stanley]

Just to go back on Hillrom for a second. If you adjust out for the COVID benefit, it's growth. And even in the Patient Support Systems business, it looks like it was closer to 7% 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 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?

[Joe Almeida, Chairman & Chief Executive Officer at Baxter International]

Yes. We're going to ask Giuseppe to answer that.

[Giuseppe Accogli, Chief Operating Officer at Baxter International]

Yes. So I think when it comes to BSS, what we see is continuous and strong amount on the care communications side. Care communication is a very strong platform with unique features that come from the nurse coal system to the bold system. So over there, we see a strong demand. This demand is difficult to implement being difficult to implement due to the COVID impact. So our access to the hospital has impacted that code -- but what we see is a very healthy backlog when it comes to care communication and to the overall PSS business.

[Operator]

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

[Matt Miksic, Analyst at Credit Suisse Group]

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, you talked about it a couple of times. So if maybe you could give us a sense of how your -- what assumptions you're baking into the sort of easing and lockdowns there? Does it happen in the second quarter? Or is that sort of happened in the back half by your estimation and guidance. And then the other is FX. We've seen significant moves in FX, 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?

[Jay Saccaro, Chief Financial Officer at Baxter International]

Sure. As it relates to China, our expectation is that the situation improves not in the second quarter, but into the third and fourth quarters. Obviously, it's a complicated situation that they're dealing with, and we do expect some improvement occurring later in the year, just for your benefit, on the impact of the lockdown in Q2, we expect roughly around $10 million 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 $0.05, $0.06 of impact, maybe a little bit more than that. 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 highly volatile situation. And even as of yesterday, we were seeing substantial movements in the euro we'll watch this very closely. But right at this point, we have several cents of impact relative to the prior forecast. We'll continue to monitor this.

[Operator]

And we'll take our final question from Vijay Kumar with Evercore ISI.

[Vijay Kumar, Analyst at Evercore ISI]

Thanks for squeezing me in here. Jay, I had a 2 part. Maybe I'll ask both of them -- when I look at the guidance here, first half is 3.5 operational, the annual implies 2.5 in the back half. given that utilization is improving in the back half, why is 2.5 the right number? And I understand none was pulled out. If we didn't have no IQ in first half, so maybe talk to at first half versus second half cadence? And then on the supply chain cost. Is there a simplistic part of thinking about when I look at all the cumulative cost that Baxter has incurred 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 any manufacturing investments versus transportation?

[Jay Saccaro, Chief Financial Officer at Baxter International]

Great. Thanks for the question, Vijay. The -- as it relates to the second half versus first half sales guidance, what I will tell you is that the primary drivers are a reduction in vaccine sales as anticipated, along with the removal of NOVUM with no offset because if you think about last year, we have very strong spectrum sales in Q3 and Q4 of last year. 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 organization and our R&D team. So those are really the drivers as far as changing of cadence.

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 first quarter 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. 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 '20 through to today. We're talking about $0.5 billion of incremental costs that we're experiencing. And really, it's things like increased labor costs, increased material costs and freight costs that is driving this substantial uptick.

What's interesting is, despite that very significant number, we've been able to offset an enormous amount of that through manufacturing VIPs, as I described earlier through operational performance, some of the pricing mechanisms that Joe described earlier. So this is -- Vijay, this is a really significant number that we're faced with 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.

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 next year. So, thank you very much for the question.

[Operator]

[Operator Closing Instructions]