Baxter International Q1 2023 Earnings Call Transcript

Participants

Corporate Executives

• Clare Trachtman, Vice President of Investor Relations
• Jose Almeida, Chairman, President & Chief Executive Officer
• James Saccaro, Executive Vice President & Chief Financial Officer

Analysts

• Vijay Kumar, Evercore ISI
• Pito Chickering, Deutsche Bank Aktiengesellschaft
• Travis Steed, Bank of America Securities
• Robert Marcus, JPMorgan Chase & Co.
• Rick Wise, Stifel Nicolaus
• Matthew Miksic, Barclays PLC
• Joanne Wuensch, Smith Barney Citigroup
• Matthew Taylor, Jefferies Financial Group Inc.

Presentation

[Operator]

Good morning, ladies and gentlemen, and welcome to Baxter International's First Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded by Baxter and is copyrighted material. It cannot be recorded or rebroadcast without Baxter's permission. If you have any objections, please disconnect at this time.

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

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

Good morning, and welcome to our first quarter 2023 earnings conference call. Joining me today are Joe Almeida, Baxter's Chairman and Chief Executive Officer; and Jay Saccaro, Baxter's Chief Financial Officer. On the call this morning, we will be discussing Baxter's first quarter 2023 financial results, along with our financial outlook for the second quarter and full year 2023.

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 2023, new product development, the potential impact of our in-flight proposed strategic and pricing actions, business development, regulatory matters and the macroeconomic environment, including commentary on anticipated customer capital spending, contain forward-looking statements that involve risks and uncertainties. And of course, our actual results could differ materially from our current expectations. Please refer to today's press release and our SEC filings for more detail concerning factors that could cause actual results to differ materially. In addition, on today's call, non-GAAP financial measures will be used to help investors understand Baxter's ongoing business performance. A reconciliation of non-GAAP financial measures being discussed today to the comparable GAAP financial measures included in our earnings release issued this morning and available on our website.

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

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

Thank you, Clare, and good morning, everyone. We appreciate you taking the time to join today's call. I will begin with an overview of our first quarter performance and trajectory. Jay will follow with closer look at our financials as well as our outlook for Q2 and the remainder of 2023. After that, we will open up the lines for Q&A.

First quarter sales declined 2% year-over-year on a reported basis and rose 2% at a constant currency, exceeding our original outlook, driven primarily by better than expected sales in Renal Care, Pharmaceuticals and FrontLine Care.

On the bottom line, first quarter adjusted earnings per share of $0.59 also came in above our guidance range of $0.46 to $0.50 per share, again, driven primarily by operational performance in the quarter. Results in the quarter were impacted by expected declines of two of our legacy Baxter businesses. BioPharma Solutions and Acute Therapies, reflecting the tough comparisons to the prior year period due to COVID.

Looking at our legacy Hillrom businesses. Strength in Front Line Care and Global Surgical Solutions was offset by a decline in Patient Support Systems, or PSS performance. This reflects what we believe to be softness in certain hospital capital spending patterns in the current economic environment.

Following what I will candidly describe as a difficult 2022, we begin 2023 with a solid quarter and on a strong footing for future momentum. From a macroeconomic perspective, while the high rates of inflation we absorbed last year continued to impact our performance, most notably in the first half of the year, we are beginning to see more stability in the overall market. We are also starting to see improvements on the supply chain front which includes increased availability of electromechanical components, creating more predictability in our operations in a reduced need for premium cost purchasing.

Specifically, in terms of the healthcare marketplace, admissions and procedural volumes continue to recover from pandemic lows, contributing to positive demand. We also continue to see steady improvements in PD patient growth and many markets following several quarters of lower demand linked to pandemic related mortality issues. In another crucial signal, healthcare staffing levels have stabilized or are rising hospitals and other facilities following some concerning laws. That said, we believe, based on conversations with our U.S. customers, the hospital capital spendings been deprioritized for certain product areas which impacted near-term performance of our PSS business.

Our current expectation is that the situation starts to improve over the course of the year. We're nearing the launch of our next version of our market-leading ICU beds, Progressa+. Progressa+ is the only through ICU bed with new features to help clinical staff address complications and provide the best-in-care possible for patients. We are already seeing strong customer interest in the new solution and look forward to the anticipated launch this quarter.

Lastly, regarding this topic, I will highlight that we are not currently seeing the softness in capital spending extend to our other businesses, such as Infusion Systems or Front Line Care, where demand remains strong for the products. Alongside these trends, we are, of course, moving full speed ahead on the critical strategic initiatives I announced at the outset of the year, focused on enhancing our long-term shareholder value.

Our plan to spin off our Renal Care and Acute Therapies business into a standalone kidney care companies well underway. The standalone company will emerge as a leader in growing market segment with 2022 sales of approximately $4.5 billion and more than one million patients across more than 70 countries. It will hold leading positions across its portfolio and a well-established presence in homes, hospitals and clinics worldwide. Perhaps most importantly, as a standalone entity, it will benefit from increased management focus and the pursuit of its unique investment priorities, better positioned to accelerate growth and innovation, emphasizing its distinct market drivers. We are finalizing our search process to identify the future CEO of our spinoff company and hope to share more information on this front shortly.

We currently expect the spin-off Kidney Care to occur by July 2024 or earlier, and we'll continue to keep you informed of our progress. Last week marked the initial launch phase of the new operating model we previewed for you last quarter, realigning current portfolio of 10 businesses into four vertically integrated global businesses segment. Each segment is being led by an experienced, passionate senior executive with proven track-record of success and compelling visions for the future.

Medical Products and Therapies, led by Group President, Heather Knight, comprises our current Medication Delivery, Advanced Surgery and Clinical Nutrition portfolios. Healthcare Systems and Technologies led by Group President, Reaz Rasul, includes our legacy Hillrom businesses, including Patient Support Systems, Global Surgical Solutions and Front Line Care. Pharmaceuticals, led by Group President, Alok Soni [Phonetic] include our current Pharma portfolio, as well as our BioPharma Solutions business. And finally, Kidney Care comprises our Renal Care and Acute Therapies businesses. Each of these segments has global profit and loss accountability, dedicated commercial operations and fully aligned research and development, manufacturing, supply chain and functional support teams. Note that our global manufacturing sites are being aligned to each business to help fuel greater transparency, foresight and resilience across the supply chain.

While we are in the early stage of this implementation, our teams are moving fast, eager to capitalize on tighter alignments that can help fuel enhanced strategic clarity, agility and innovations. Even as we advance organizational and efficiency efforts, we also know that high-impact innovation is the critical factor to deliver accelerated growth among recent innovation milestones.

We're very pleased to share that we have resubmitted our leading-edge Novum IQ large volume pump for FDA 510(k) clearance. The Novum IQ syringe pump is now in use in United States. As a reminder, we have not included any U.S. sales for the Novum IQ LVP in our guidance. I'm also pleased to report that our newly launched Zosyn premix is experiencing solid uptake in the U.S. hospital pharma marketplace. Other recent launches include Baxter's new patient warming system which minimizes risk-associated with forced air warming, reduces noise and wastes in operating room and lessens the burden on clinician workflows.

Floseal + Recothrom, the first and only active fallible hemostat with a recombinant thrombin, resulting in 1.5x faster preparation ready-connect-system for Baxter's Centrella Smart+ Bed which delivers reliable cable-free connectivity between the hospital bed and most nurse-call systems on the market. And finally, ExactaMix Pro, the next-generation automated nutrition compounder designed to enhance security and improve customer experience and offer stronger data reporting capabilities.

Looking ahead, while macro environmental factors show signs of improvement, we remain cautious and balanced about the pace of recovery. This is why our current transformational initiatives are so vital. Our goal is to redefine our operation for sustained successes in rapidly evolving environment, while always remaining true to our life sustaining missions and focus on medically essential healthcare.

Our momentum today and tomorrow is fueled entirely by our employees. I thank them for their dedication and resilience which are vital to the transformation journey we are taking together.

Now, I will pass it on to Jay for a closer look at our performance and outlook.

[James Saccaro, Executive Vice President & Chief Financial Officer at Baxter International]

Thanks, Joe and good morning, everyone. As Joe mentioned, we're pleased with our first quarter results which came in ahead of our previous guidance range. First quarter 2023 global sales of $3.6 billion declined 2% on reported basis and increased 2% on a constant currency basis. These compared favorably to our guidances which called for constant currency sales to decline approximately 1%. As mentioned earlier, sales performance in the quarter benefited from better than expected sales in Renal Care and Pharmaceuticals, as well as Front Line Care which reflected improvement in availability of electromechanical components.

On the bottom line, adjusted earnings decreased 37% to $0.59 per share, reflecting the increased cost we've recognized due to the significant inflationary impacts on materials, labor and freight, alongwith certain supply chain constraints. Adjusted EPS for the quarter also came in ahead of our expectation of $0.46 to $0.50 per share [Phonetic] driven by improved operational performance and a benefit from lower-than-expected interest expense.

Now, I'll walk through performance by our regional segments and key product categories. Starting with sales by operating segment. Sales in the Americas declined 1% compared to the prior year on a constant currency basis. Sales in Europe, Middle East and Africa grew 9% on a constant currency basis, reflecting broad-based recovery in hospital admissions and surgical procedures across the region. And sales in our APAC region increased 3% constant currency. APAC sales reflected strength across the region, offset by a decline in China due to the impact from various government-based procurement initiatives being implemented in that market.

Moving on to performance by key product category. Global sales for Renal Care were $892 million, increasing 4% on a constant currency basis. Performance in the quarter was driven by mid-single-digit growth globally in our PD business, partially offset by lower U.S. in-center HD sales following exit of distribution agreement at the end of last year. Results from the quarter also reflected negative impact from ongoing government based procurements initiatives in China.

Sales in Medication Delivery of $687 million were flat year-over-year at constant currency rates. Strong international growth in Solutions was offset by lower infusion system sales. As mentioned, we've resubmitted our Novum IQ large-volume pump for FDA 510(k) clearance. In the meantime, we continue to promote our Spectrum IQ LVP which has been impacted by supply constraints for electromechanical components. Our teams have been and will continue to work diligently to secure additional parts to meet customer demand for the Spectrum IQ large-volume pump.

Pharmaceutical sales of $523 million increased 5% on a constant currency basis. Performance in the quarter reflected increased demand for our drug compounding portfolio internationally as well as double-digit growth in our U.S. injectables portfolio. This helped offset lower sales internationally for injectables.

Moving to Clinical Nutrition. Total sales were $224 million, increasing 3% on a constant currency basis. Performance in the quarter was driven by demand for our nutrition compounding service. Sales in Advanced Surgery were $246 million, advancing 11% on constant currency basis. Growth in the quarter reflects improvements of elective procedures globally. Surgical volume recovery was strong across all regions. Sales in our Acute Therapies business were $180 million, declining 1% on constant currency basis and reflecting difficult comparison to the prior year, where we had experienced elevated demand for CRRT given the rise in COVID cases. BioPharma Solutions in the quarter were $139 million, decreasing 9% on a constant currency basis. This decline was in-line with the expectations due to lower COVID vaccine-related revenue of approximately $35 million compared to prior year period of last year.

Sales in our Patient Support Systems business were $348 million, decreasing 8% on a constant currency basis. As Joe mentioned earlier, we believe performance in this business has been impacted by a slowdown in capital spending with respect to certain product categories. In addition, these businesses experiencing lower rental revenues as compared to the prior year period. For the year, we expect growth will continue to be dampen by this factors but we expect our order rate to improve over the course of the year.

In addition, our backlog remains elevated and to date, we have not had any material cancellations. We're excited to launch Progressa+ this quarter and expect it to positively contribute to future performance. Front Line Care sales in the quarter were $302 million, increasing 4% on a constant currency basis. This reflects demand for our intelligent diagnostics portfolio. We saw a slight improvement in supply availability of electromechanical components during the quarter which enabled us to address a portion of our backlog associated with the Front Line Care business. While we're pleased to see improvement in our supply constraints, the business continues to have elevated backlog level which we hope continues to workdown over the course of the year as anticipated demand remained strong for this business.

Global Surgical Solutions sales in the quarter were $81 million, increasing 8% on constant currency basis. Performance in the quarter was driven by increased international placements in the quarter. Moving through rest of the P&L; our adjusted gross margin of 41.2% decreased 380 basis points over the prior year, reflecting cost of goods sold primarily driven by the factors we discussed around material and labor inflation, freight and supply chain constraint.

Adjusted SG&A of $845 million represents 23.2 percentage sales, an increase of 10 basis points versus prior year period, reflecting higher annual employee-based compensation accruals. Adjusted R&D spending in the quarter of $157 million represented $4.3 million as a percent of sales, an increase of 30 basis points versus prior year, as we increased our investments in innovation, particularly around advancing our connected-care technologies. These factors resulted in an adjusted operating margin in the quarter of 13.8%, a decrease of 420 basis points versus the prior year.

Net interest expense totaled $117 million in the quarter, an increase of $32 million versus the prior year, driven by the impact of increased interest rates on variable rate debt. Other nonoperating income totaled $1 million in the quarter compared to $16 million of income in the prior year period. Results in the quarter reflect benefit from amortization of pension benefits as well as an equity gain which we were offset by foreign exchange losses. The adjusted tax rate in the quarter was 23% compared to 20.8% in the prior year period. This increase was driven primarily by change in stock-based compensation impacts. And as previously mentioned, adjusted earnings of $0.59 per share declined 37% versus the prior year period. Earnings in the quarter reflected the increased cost of raw materials, freight and labor as well as the impact of higher interest rate on variable rate debts and foreign exchange headwinds.

Let me conclude my comments by discussing our outlook for the second quarter and full year 2023 including some key assumptions underpinning the guidance. As mentioned, we are pleased with the solid start to the year after the challenging macroeconomic environment we experienced in '22, the challenges of which we continue to address. Our business fundamentals are solid and we are seeing positive trends externally. We are cautiously optimistic and continue to work to position ourselves to see improved performance in the years ahead and remain steadfastly focused on executions.

Taking into account first quarter results, I'll now walk through our guidance and expectations. For full year 2023, we expect global sales growth of 1% to 2% on reported basis and approximately 1% growth on constant currency basis. We now expect full year adjusted operating margin to be between 15.5% and 16%. Interest expense is now expected to total of approximately $500 million. We continue to anticipate an adjusted tax rate of approximately 22% and a diluted average share count of 508 million shares. Based on this dynamics, we expect 2023 adjusted earnings excluding special items of $2.85 to $3 per diluted share.

Specific to the second quarter of 2023, we expect global sales growth of approximately 1% to 2% on a reported basis, 2% to 3% on a constant currency basis; and we expect adjusted earnings excluding special items of $0.59 to $0.61 [Phonetic] per diluted share.

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

Questions and Answers

[Operator]

[Operator Instructions] We would like to remind participants that this call is being recorded, and a digital replay will be available on the Baxter International website for 60 days at www.baxter.com. Your first question comes from the line of Vijay Kumar with Evercore ISI. Please go ahead.

[Vijay Kumar, Analyst at Evercore ISI]

Congratulations on a good start here. Maybe my first question here, Joe and Jay. You mentioned utilization trends now in the right direction. Supply chain constraints easing. So when I looked at your Q1 performance and your Q2 guidance, the annual guide implies back half of 0% constant currency growth. So maybe just walk us through on -- is this conservatism? Were there any timing elements? Or what's being assumed for the back half?

[James Saccaro, Executive Vice President & Chief Financial Officer at Baxter International]

Yes, Vijay, thanks for the question and the comments. So far, so good in terms of sales performance in the first quarter of the year. And to your point, I think importantly, we've seen fairly cooperative environment both on the top line and also very importantly, from a general macro context. Those were some really important underpinnings of the guidance that we originally shared. We needed to see that, and we did; so really, really good start to the year. As it relates to sales cadence first half versus second half, really, there are a couple of specific drivers that lead to a slightly slower growth in the second half. And it's really not unplanned or consistent with our expectations. Essentially, our renal business has nearly $100 million of onetime headwinds, i.e., through specific payments that occurred exiting of distribution agreement last year or exiting lower margin arrangements. And so, all of those things take renal from positive growth in first half to negative growth in the second half; so very discrete items there. We expect that to sort of normalize and see growth more consistent with patients going into the future.

And then as we look at our Pharmaceuticals business, we really had outstanding performance in the first quarter. We'll expect to see some continued growth there but we do see little bit of decelerations, most notably compounding in the second half for the year. So that has an impact on the overall sales cadence. I think the most important thing from my perspective was steady macro environment and utilization and patient trends; so we saw that in the first quarter. We're happy to carry that forward.

[Vijay Kumar, Analyst at Evercore ISI]

That's helpful. And perhaps one follow-up on Hillrom. I think the prior guidance was 4% constant currency. Did that change at all? And perhaps Joe, if you can comment on -- Hillrom was 2% decline, mostly driven by PSS. I think most of your peers, they're talking about easing supply chains, electronic components, backlog getting converted. Like why is Baxter confident that this is not a share loss? I think you made some comments on backlog and orders; so maybe if you could size it for us?

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

Vijay, good morning. Just to preface on Hillrom. We're very happy with the performance of most of the businesses under Hillrom and how we've been integrating the business into Baxter. We had a very strong FLC quarter. Front Line Care has done a great job, and this has improved because supply of product. So we see low to single mid-single -- low to single middle single digits, 3% versus 4%. Suppliers are really -- supply is really getting better. And this is affecting FLC. Not only the performance of FLC is doing better, but also our backlog is increasing further than we thought was going to increase. So it's a really good momentum.

We see PSS with a reduction in sales in the first quarter. I want to remind you that we had a reduction of 20% in rentals. This is from the peak of COVID and a lot of rentals going on in '21 and early '22. We saw a significant reduction, also some postponement of capital spending. But we're very excited about the launch of Progressa+, an improvement our Centrella Bed. So those are coming in this quarter and will be great launches for us. We haven't launched a new platform like Progressa Plus in almost 10 years; so this is really good thing. We are number one in the ICU, and we will be able to actually continue to capitalize not on the Baxter accounts but hopefully into new accounts, competitive accounts.

I would say that it is important to note that capital postponement has specifically been focused in this category of spending. We have not seen that at all in the other Baxter categories. As I just mentioned, FLC has shown very strong growth. Our infusion therapies business, our pumps business, has shown very strong growth and strong forecast growth for the rest of the year. So this is a phenomenon specifically for beds. But as I said, with the launch of new products, we're really excited to come in and have this -- the situation reversed as we plan to have it reversed and ameliorate in the second half of 2023.

[Vijay Kumar, Analyst at Evercore ISI]

Fantastic. Thanks, guys.

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

Thank you.

[Operator]

Your next question comes from the line of Pito Chickering with Deutsche Bank. Please go ahead.

[Pito Chickering, Analyst at Deutsche Bank Aktiengesellschaft]

Hey, good morning. Thanks for taking my questions. The first one is similar sort of Vijay's question. But relative to your guidance that you've updated today, sort of what has been the biggest source of upside and downside in first quarter as it related to both revenues and inflationary pressures?

[James Saccaro, Executive Vice President & Chief Financial Officer at Baxter International]

Sure. I think there were a few areas where we saw solid performance in the first quarter. Our Pharma business, we added a new leader to this area last year. That team is really doing an excellent job with respect to new products and accelerating commercialization of some of these products. So we saw we had a really nice performance in the first quarter. Now, some of that did benefit from buoyant procedure and admissions backdrop but overall, really happy on pharma side. From renal standpoint, I think this is an important one. Renal benefited from solid pricing and mix, along with outside of certain markets in Asia, we saw some decent patient growth. So I think the Renal -- notwithstanding my comments earlier around second half comparable issues, the Renal story has started strong this year, and we expect it to continue.

And then finally, our Advanced Surgery, another area. We've got a great leader in this business and that team as well, benefiting from procedures clearly, but at the same time, solid execution across the board leads to some favorability there; so those were some of the bright spots that we saw. As it relates to challenges, I think Joe explained clearly, we were a little bit soft in PSS, but we remained very optimistic. I spent some time looking at our Progressa Plus, our new product there. It's really an exciting new development; so we'll see how that goes. That launch is happening, and it's something that I think the market will welcome. So those are a few comments on favorability and unfavorability for Q1.

And then Pito, your question about supply chain and what I would say there. Obviously, after the challenges that we experienced from a general macro backdrop last year, I was really happy to see, generally speaking, cooperative environment. And when I say generally speaking, on the one hand, commodities are going in the right direction. We are seeing indices support the forecasts that we put forth -- some of our suppliers are still looking to sort of increase prices to Baxter and we constantly work-through those situations carefully. But I would say, generally speaking, we have fairly stable backdrop from the supply chain standpoint.

[Pito Chickering, Analyst at Deutsche Bank Aktiengesellschaft]

Okay. And then specifically, can you refresh us on what assumptions you made in your updated guidance around transportation costs for 2023? What percent of those costs are over the ground? And what do you assume in diesel costs for the rest of the year? Just you want diesel serve in the low 4s at the pumps now. How should we think about the tailwinds from lower diesel costs rolling through the P&L?

[James Saccaro, Executive Vice President & Chief Financial Officer at Baxter International]

So listen, I don't want to do a detailed operational review here. So -- and we don't really share mix by ground versus air on freight costs and things of that nature. What I will tell you is we try to reflect -- in terms of the forecast that we put together, we try to reflect the most current indices that we have alongwith expectations from a number of reputable sources in terms of where those areas are going when we put the forecast together. And when we do this not only for diesel, freight, logistics costs, but also for resins, packaging, corrugate, etc. I think we have definitely significantly improved how we forecast this area as a necessity coming out of last year. Our supply chain finance team working with teams there has done lot of work to enhance this. But generally speaking, we look at current index levels. We look at the most reliable forecast going forward, and our performance is directly tied out to that. Part of the reason why we do see step-up in margin in the second half of this year relates to some of costs that we are experiencing at this point in time, not only from our freight and logistics but also in some of other categories.

[Pito Chickering, Analyst at Deutsche Bank Aktiengesellschaft]

Great, thanks so much.

[James Saccaro, Executive Vice President & Chief Financial Officer at Baxter International]

Thank you, Pito.

[Operator]

Our next question is from the line of Travis Steed with Bank of America Securities. Please go ahead.

[Travis Steed, Analyst at Bank of America Securities]

Thanks, everybody. Jay, I'd love to dig a little bit deeper in that second half margin ramp you just mentioned. I know you had the $300 million in cost savings, the macro cost. Can you help just give some confidence in the back half margin ramp?

[James Saccaro, Executive Vice President & Chief Financial Officer at Baxter International]

Yes. I think it's interesting. The first quarter performance really was a nice element for the performance sake in first quarter but importantly, I think some of the assumptions that we had confirmed, and that really gives us some solid confidence as we move to second half of the year. But admittedly, there is big step-up first half to second half. And I would say that there are really three drivers of the operating margin improvement that we expect to see. The first relates to generally, in the second half of the year, we have more sales than the first half of the year. So in the second half of this year, we expect north of $400 million, approaching $500 million more sales in second half versus the first half; that's not a dynamic that is unique to this year. If you look at any of the last couple of years, you would see that normal sales step up first half to second half. And that has margin benefit -- that also has a significant EPS benefit. So you'll see about $0.30-plus of EPS from those incremental sales dropping through.

The second thing is integrated supply chain. We -- the costs that we're experiencing today are costs that we realized or experienced in Q3, Q4 of last year when there were very elevated prices. As those indices have eased in the last few months, we have line of sight to improvements in supply chain that yield roughly $0.15 approximately of improvement first half to second half. Now, I should say it's not just indices that are co-operating, it is also the hard work that goes into what we call value improvement programs which are essentially efficiency initiatives in plants. But that's $0.15 of improvement. That's very real impact from our supply chain teams. And then the final thing is, listen, we've talked previously about some of the cost efforts that we're undertaking. And those benefit more in the second half than the first half and we've largely concluded those programs. They're in place.

And so -- but because lot of those activities occurred in the first and second quarters, the benefit only is realized in the third and fourth quarters, and that's roughly $0.15 [Phonetic]. So, if I were to say why are we going to go from point A to point B with a very substantial improvement in margin, it really comes down to those three specific factors.

[Travis Steed, Analyst at Bank of America Securities]

That's super helpful. And a follow-up question on Novum IQ. Just assume when it gets approved, is that -- should we think about that as like $100 million in full year revenue $200 million margins? Are those above, below corporate average? And when you think about the potential for share gains -- I wonder you think you'll be on the market before your other competitor. But how do you think about the opportunity for share gains there?

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

We were not going to comment on the approval of the pump because it's not dependent upon us, it's with the FDA at the moment. We are optimistic about the performance of the pump when it gets approved. But we're not commenting in anything that the FDA is doing. I would say to you that there's an opportunity. There's a significant amount of pumps on recall at the moment, including brand new pumps which just launched, I recall, Class 1 the other day. So we are currently capitalizing on that with our Sigma spectrum. We upward forecast significantly on Sigma Spectrum. We are now more optimistic about the components. We are also doing some redesign of components to make sure there's more durability. And when Novum gets to the market, it's going to be for us to make the decision, how to phase that in. Customer comes to me want to stay with the current model of Sigma Spectrum because they have a fleet of it, and we have significant opportunities to gain market share once Novum is approved. So we're very excited about the platform that we have in front of us, and we're going to be putting more money in research and development assets to develop other categories of pumps within Baxter.

So I will tell you that we're not giving you what's the forecast for Novum once approved. As soon as we get news about Novum from the FDA, we'll let you know what that means in terms of numbers. But at the moment, I tell you the demand for pumps is high. primarily because Sigma Spectrum is a good pump that is performing extremely well and facing competitors who have consent decree and recalls in many different categories.

[Travis Steed, Analyst at Bank of America Securities]

Great. Thanks, Joe and congrats on a good quarter.

[James Saccaro, Executive Vice President & Chief Financial Officer at Baxter International]

Thanks.

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

Thank you.

[Operator]

Robbie Marcus with JPMorgan is on the line. Please go ahead with your question.

[Robert Marcus, Analyst at JPMorgan Chase & Co.]

Great, thanks for taking the questions. Maybe to start, I would love to get your thoughts on pricing. What it was in the quarter? And your ability to take price going forward, we see peers taking it in the capital components. And we hear some of your peers talk about it - and some of the hospital supply areas. Would love to get your thoughts on the potential for Baxter moving forward?

[James Saccaro, Executive Vice President & Chief Financial Officer at Baxter International]

Sure. I'm not going to get into specific amounts in the first quarter, but pricing was a contributor and an important one. And I think for us, what -- as we went through last year, we had significant incremental costs across the portfolio and basically every single product line that we sell. And at the end of the day, sometimes you don't have the ability to address price in the short term, in a given quarter or a given year. And in some instances, you actually have to wait a couple of years before you actually address price because of long-term agreements that you have in place. What's really important for our team is that we capture our fair share of economic value that we provide to our customers; and so this year we are working very carefully. There was positive pricing in renal, there will be positive pricing from hospital capital standpoint. In all of the areas we operate, we are expecting to see decent price but one exception, of course, is Pharma where it's been more stable, particularly in the first quarter, but that's still an area of more competition. But I think, Robbie, from our standpoint, this is going to be an important driver for us, not only this year, but I think in future years as well.

[Robert Marcus, Analyst at JPMorgan Chase & Co.]

Great, thanks. Maybe one more. We saw some news reports on a potential sale of the bioprocessing unit. Just the latest update on your thoughts on that business and how it will proceed. And if a sale does go through, is that repayment the primary use of cash?

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

Hi, Robbie. Good morning. We've experienced significant interest in these business. We still are exploring strategic alternative and we will let folks know as soon as we make the decision. If there is a sale, the proceeds will be exclusively and mostly directed to debt repayments. So it opens the opportunity for Baxter for future reinvestment and even stock share buybacks and other opportunities. But the first thing for that amount of cash, if that is the alternative we decide to go forward with, will be to repay debt.

[Robert Marcus, Analyst at JPMorgan Chase & Co.]

Thanks for taking the questions.

[James Saccaro, Executive Vice President & Chief Financial Officer at Baxter International]

Thank you.

[Operator]

Your next question is from the line of Rick Wise with Stifel. Please go ahead.

[Rick Wise, Analyst at Stifel Nicolaus]

Good morning, Joe. A couple of questions. Joe, maybe talk us through where you see -- I mean you've addressed them several times -- where do you feel like you are with the Hillrom integration? Is it fully integrated, so to speak into Baxter now? You've got people and everything is functioning and we are just waiting for supply chain to sort of -- cooperate -- sort of -- and maybe just help us think about how you're thinking about the time line that it's going to take for Hillrom to get back to a more typical mid-single digit kind of growth rate, if you would?

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

Good morning, Rick. We have been very successful with the integration. So the first part of your question is the integration of Hillrom. We have retained some key talent, but also we put a lot of Baxter talent in Hillrom. Right now, we have Reaz Rasul running Hillrom with the three divisions of Hillrom, with the mix of Baxter and former Hillrom employees in charge of the divisions under Reaz. In terms of the synergies; as I mentioned before -- we -- in the first year came to realize twice as much as we planned and we continue on-track to deliver what we promised at onset of the acquisition. Other than the supply chain issues that we had last year, we started to see power of frontline-care and the power of the portfolio right now delivering good growth for us in U.S. and [indecipherable] are made more available. And as I said before, our backlog in FrontLine Care is actually growing with growth in sales and growth in backlog. So we're very excited about that business.

Our PSS business in the U.S., like I said, has a setback in this first quarter. As I said 20% reduction in rentals due to COVID partially last year and the year before. But we saw the launch of Progressa Plus and enhancements to Centrella; great catalyst for us in second quarter that we believe with alleviation of specific postponement of capital buying, that is going to accelerate in the second quarter. And we are confident to reestablish that business in a more normal run rate, hopefully, towards 2023, ex in '23 and 2024. We continue to look at opportunities to enhance leadership in all parts of that business, by the way. So PSS outside the U.S. is doing well. In the GSS business, albeit smaller, is doing well both in the U.S. and outside the U.S. So all in all, we're excited about Hillrom. We think it brings new avenues for growth for Baxter and also product launches. I'm looking at our pipeline of new launches, and a great deal of them are coming from pumps.

So there is a lot to come from there. We're going to navigate the short-term constraint in the U.S. for capital beds [Phonetic]. But as I said, launching these new products represent a great catalyst for the future.

[Rick Wise, Analyst at Stifel Nicolaus]

Great. Thanks for that. And a follow-up, maybe Jay or Joe. It's sort of a simple moderate way to ask this question, but clearly, electromechanical components are critical to this ongoing turnaround process. I mean, you can reframe the way I'm asking it. But are you 50% of the way back in terms of having what you need? 10%? 90%? Are you optimistic that you largely have what you need as you exited second half? Can you just Help me think through that a little bit?

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

Rick, the worst thing we can do is to feel good about something that just start turning around. So we're very excited about having availability. As I said before, the demand for our Sign [Phonetic] Spectrum infusion pump is very high. And we're very happy actually to have significant amount of components that will allow us to increase the sales of that product and satisfy the backlog that we have. If we had more, we could sell more. We see alleviation of backlog of products that need to be shipped on FrontLine Care already coming out. Our backorder has reduced in half of what we had about 9 months ago, and lot of that is related to semiconductors. With that said, we're not letting this go away. We got an opportunity to improve; so we have significant amount of initiatives within the company for redesign of components to go on board -- some are very critical; some are less critical.

We have a transfer office established within Baxter, not only for microprocessors but also for other components; things are not 100% normal right now. We still have great deal of suppliers trying to get pricing out of Baxter; we are offsetting those. We're absolutely not accepting but also offsetting with significant amount of cost reductions. So as we navigate through 2023, it will be very important that the company does not lose its focus in finishing what we started in the semiconductor transformation in the supplier chain resilience. But we feel cautiously optimistic that we have turned the corner when it comes to supply of components into our businesses.

[Rick Wise, Analyst at Stifel Nicolaus]

Appreciate the perspective, Joe. Thanks.

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

You're welcome.

[Operator]

Matt Miksic with Barclays is online. Please go ahead with your question.

[Matthew Miksic, Analyst at Barclays]

Hi, great. Thanks so much for taking the questions. So Joe or Jay, some of the themes have obviously come in here for Q1; so far this earnings cycle, healthcare and med-tech. And I guess providers, as well as improving utilization volumes, strong emissions is going to hear from my neighbor that covers services and improving staffing and easing those constraints. You talked about some of these things in your prepared remarks; but could you maybe just give us a sense of what strong uptick in these sorts of elements mean to you -- meant to you in the quarter? And then, what do they mean in terms of pull through increased assumption of some of the products that you sell, as well as the availability of staff to get some of the implementations of these systems done like in connected care or rollout of the beds? Maybe just some additional color on that. And then, I have one follow-up.

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

Larry, what we see is -- Matt, I'm sorry. Matt, what we see is an alleviation of pressures of the hospitals were having last year with more availability of nursing. Just as a point-of-reference, we had some onetimers in our medication delivery business as we reported as we were continuing to report. Medication delivery, if you exclude the onetime between gains and losses between '22 and '23 first quarter, our growth is around 6.2%. This is exactly what we see in terms of growth coming out of hospitals which are publicly traded companies and are reporting right now. So, we see that is for businesses like medication delivery which have sets and infusion of solutions and vitamins; and that is pretty good pick-up on our business. They usually have a growth of low single digits; so that is twice as much. So there is a rebound and back to normality that we see. So hence our comments on our prepared remarks.

When you think about the relentless look for optimization of workflow in hospitals, that's when we start seeing some of our products coming to fruition. We just integrated our Sigma Spectrum the other day on a 2-way communication for hospitals. There's no more hospitals that will come in and ask for a pump or monitor. Everything needs to be integrated. The workflow needs to be improved and that's where Baxter is focusing on significant amounts of extra money we gave to research and development of FrontLine Care, for instance, to increase their ability to launch products faster; to integrate, to create solutions, to help hospitals. So, we are cautiously optimistic that we've seen an uptick in procedures. We see higher admissions in ER, higher admissions in operating room. You can see the growth of our Advanced Surgery business; it was very, very robust, very robust, close to 10% and that shows in the U.S., you have good flow of procedures. So all in all, indicates that that's a good track for 2023.

[Matthew Miksic, Analyst at Barclays]

That's terrific. And then just if I could, a follow-up on a question that we get occasionally you're on the spin. I know it's still early, and you're working through many of the details as you lead up to that event. But around the dividend, Jay, if you could talk a little bit about how you're thinking about managing that? And what at this stage is your expectation or aspiration to sort of to continue to pay the Baxter dividend for the entire entity as you kind of get through the spin transaction next year?

[James Saccaro, Executive Vice President & Chief Financial Officer at Baxter International]

Yes. It's -- listen, in terms of capital structure for the two companies and dividend policies and approaches and all of that, it is very early days. We understand importance of the dividend. We, at Baxter, take the dividend very seriously. So we understand that that's a great tool to return capital to shareholders and it's been a very effective one for us over the years. So, we take the dividend very seriously. But at this point, it's too early to comment on capital structure and all of those things. We'll unveil all of these as we get much closer to the spin. And I think we'll talk about things like what is the dividend policy for Renal Co. if they have one. All of these things will come to bear, but I think it's little premature to do that as we are still in early stages of preparing for the spin-off.

[Matthew Miksic, Analyst at Barclays]

Got it. Congrats on the quarter. And thanks for the color.

[James Saccaro, Executive Vice President & Chief Financial Officer at Baxter International]

Thank you.

[Operator]

Joanne Wuensch from Citi is online with a question. Please go ahead.

[Joanne Wuensch, Analyst at Smith Barney Citigroup]

Good morning and thank you. Nice quarter. Two questions. One big picture, one specific big picture. You talked about transformational initiatives. And I'm curious how you start to measure those? And over what time frame you see to the goals? Is this a 2023 thing? Is this role over the next 5 years called DLRP? And then, my more specific question is Progressa+ Bed, how do new beds get taken up? Is it -- you have a backlog of people saying, now that you've launched it, I want it? Or just walk us through how we think about that new tail end.

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

Hi Joanne, good morning. The transformation has three specific objectives. The one is, of course, bring a more effective way of managing Baxter business instead of regionally managing the business between three large regions in the world, give P&L responsibility to business leaders who are mini CEOs who control 100% of that business, including supply chain and all aspects of that business. So that transformation is in process, and we're starting to see the difference in how the ownership of this business have transitioned and how effective this new model is.

The second is through a new model, you're doing it not only because you need more effectiveness in our organization, but also we need to reduce cost of operating. So Baxter is a company that has one of the lowest SG&As amongst peers. We are 21%, 22%; we want to be sub-20% [Phonetic]. And to do that, we need to do it two different ways; one is more effectiveness -- effective use of personnel. The second is use of systems such as intelligence in different locations of the world for us to provide our services; we are on that path. For instance, as organization [indecipherable] finance has done a significant amount of work with moving back-office to different parts of the world. And this specific change we just made in organization is going to give Baxter significant amount of dollars that we are going to realize, but also full Boeing 24, very large cost savings that we did through the reorganization that true our reduction in force. So reduction force in come first, the organization design in first reduction in force was a consequence of better use of our resources.

And lastly, and also probably the most important, is the ability to accelerate innovation and move some of the money that we are saving back in research and development. We just did that. We just gave the HST or the new Hillrom business under Reaz Rasul. More money for research and development and we're going to actually also improved and increased the amount of dollars going into our pump platforms because we want to accelerate some of the R&D development in that area. So this transformation is very profound for Baxter. It's part of transforming the company that I started back in 2016, and this is the third leg and is still the third phase of this transformation.

[James Saccaro, Executive Vice President & Chief Financial Officer at Baxter International]

Joanne, I think, we lost you. Perhaps, we move to the last and final question.

[Operator]

Yes. We'll move to the final question now, and it comes from the line of Matt Taylor with Jefferies. Please go ahead.

[Matthew Taylor, Analyst at Jefferies Financial Group]

Hi, thanks for taking the question. Jay, I wanted to ask you kind of a big picture question. And I was just thinking about the 2022 Analyst Day, you talked about $1 billion in gross savings through 2025. Now you've got this $300 million restructuring. And I know some things have changed. But I guess I was just hoping you could give us some perspective on how those things are related, if at all? And then, you gave a gross savings number. Could you talk about what are kind of the net savings we could see from some of these programs?

[James Saccaro, Executive Vice President & Chief Financial Officer at Baxter International]

Well, I -- what I would say is, as a company, we are very much committed to enhancing operating margin overtime. And there are a lot of different levers to get after that. New products, sales growth, pricing and then things like operational efficiency. And so we outlined a series of activities in 2022 at our Analyst Day. And I would say that, in short term they were overshadowed meaningfully by inflationary impacts. What I'm really excited about is our ability to put those on full display in the backdrop against backdrop of calmer inflationary environments because what you'll see is -- you'll see some of the savings initiatives that Joe discussed but you will also see some of the great progress that we are making from there [Phonetic].

Matt, maybe could you go on mute?

[Matthew Taylor, Analyst at Jefferies Financial Group]

Sorry.

[James Saccaro, Executive Vice President & Chief Financial Officer at Baxter International]

No problem. You'll also see the tremendous work that we're doing in the integrated supply chain area. We recently approved a very large automation program that will allow us to simplify how a number of our plants operating. And that's going to have a great impact for years to come. And so, what I would say is we feel very good about the activities that we outlined in 2022 at Analyst Day. And then, now we've supplemented that with reorganization that Joe described; all of this is intended to accelerate margin improvement and so we are excited to see the impact of that over time.

[Matthew Taylor, Analyst at Jefferies Financial Group]

Thank you for that.

[James Saccaro, Executive Vice President & Chief Financial Officer at Baxter International]

All right.

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

Great.

[James Saccaro, Executive Vice President & Chief Financial Officer at Baxter International]

Thanks everybody for joining us today.

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

This concludes the call.

[Operator]

[Operator Closing Remarks]