Yahoo Finance Baxter International Inc. (NYSE:BAX) Q3 2023 Earnings Call Transcript
Baxter International Inc. (NYSE:BAX) Q3 2023 Earnings Call Transcript November 2, 2023
Baxter International Inc. beats earnings expectations. Reported EPS is $0.68, expectations were $0.66.
Operator: Good morning, ladies and gentlemen, and welcome to Baxter International's Third Quarter 2023 Earnings Conference Call. Your lines will remain in a listen-only mode until the question-and-answer segment of today’s 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, Senior Vice President, Chief Investor Relations Officer at Baxter International. Ms. Trachtman, you may begin.
Clare Trachtman: Good morning, and welcome to our third quarter 2020 earnings conference call. Joining me today are Joe Almeida, Baxter's Chairman and Chief Executive Officer; and Joel Grade, Baxter newly appointed Executive Vice President and Chief Financial Officer; and Brian Stevens, Baxter’s Senior Vice President, Chief Accounting Officer, Controller and former Interim CFO. On the call this morning, we will be discussing Baxter's third quarter 2023 financial results, along with our financial outlook for the fourth quarter and full year 2023. Please note, that we close the sale of our BioPharma Solutions or BPS business at the end of the third quarter, and results in the current and prior periods have been adjusted to reflect BPS as discontinued operations.
Restated schedules reflecting that discontinued operations presentation are included in the appendix to our earnings presentation, and available in the IR section of our website. With that, let me start our prepared remarks by reminding everyone that this presentation, including comments regarding our financial outlook for the fourth quarter and full year 2023, new product developments, including the impact and status of pending regulatory approvals, the status and potential impact of our ongoing strategic and recent pricing actions, business development, regulatory matters, and the macroeconomic environment, including commentary on continuing supply chain challenges and evolving customer capital spending trends, 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 the non-GAAP financial measures being discussed today to the comparable GAAP financial measures is included in the accompanying investor presentation and in our earnings release issued this morning, which are both available on our website. Now, I'd like to turn the call over to Joe. Joe?
Joe Almeida : Thank you, Claire, and good morning everyone. We appreciate you taking the time to join us today. I am pleased to be joined this morning by Chief Accounting Officer and Controller Brian Stevens, and to welcome our new Chief Financial Officer Joel Grade to the call. I will begin the call today with an overview of our third quarter performance and the continuing momentum of our ongoing transformational initiatives. I will also share perspective on the progress and potential of our proposed Kidney Care spinoff, including some context around recent developments in that therapeutic area. Brian will provide a more detailed account of Baxter's third quarter and financial outlook, and as always, we will close with your questions.
To get started, Baxter reported solid third quarter results that came in ahead of our projections, both on the top and bottom line. Sales from continuing operations rose 3% on a reported basis and 2% on a constant currency basis. As Claire noted earlier, sales from continuing operations exclude Baxter's BioPharma Solutions or BPS business, which Baxter divested at the close of the quarter. Sales in the aggregate, including discontinued operations, also increased 3% on a reported basis and 2% on a constant currency basis. Our better than expected top line performance was driven by positive demand for many of Baxter's products, combined with continued abatement of supply chain challenges. On the bottom line, third quarter aggregate adjusted earnings per share totaled $0.82, comprising EPS of $0.68 for continuing operations and $0.14 for discontinued operations.
Adjusted EPS from continuing operations exceeded the top end of our outlook range of $0.65 to $0.67, driven by end market stabilization and good sequential margin improvement across our business, which reflects strong execution against our strategic priorities. Overall, and especially when compared to what we've seen in recent quarters, we view the current market environment as relatively stable, though we continue to monitor hospital capital spending, particularly in light of an elevated interest rate environment. While we have seen sequential improvement in orders within our Care & Connectivity Solutions Division, we continue to expect hospitals to exercise some degree of caution with their capital budgets. The momentum we are building in financial performance is also reflected in the progress we're experiencing across the strategic priorities we laid out for you earlier this year.
These initiatives, in combination, are focused on enhancing strategic clarity, increasing operational efficiency, and accelerating innovation to deliver greater value for all of our stakeholders. During the third quarter, we achieved some pivotal milestones towards driving this improved performance. First, we've been hard at work realigning the businesses to simplify and streamline our operating model. These efforts are resulting in a more agile company with better visibility to our global markets and customers. In line with this realignment, today is the first time we formally report our results under the new operating model as four global vertically integrated business segments, Medical Products & Therapies, Healthcare Systems & Technologies, Pharmaceuticals & Kidney Care.
Each segment now has global profit and loss accountability, dedicated commercial operations, and fully aligned research and development, manufacturing, supply chain and functional support teams. This reorganization is already creating meaningful advantages in helping us set priorities, build alignment and operationalize our strategy. Advantages they have already and are expected to continue to pay dividends going forward. Our new segments are also a reminder of our highly diversified portfolio with strong brands, a global presence, and high trust among clinicians and patients. The diversity and durability of our portfolio focused on essential healthcare needs helps fuel sustained demand on multiple fronts, allowing us to better weather challenges that can emerge while continuing to deliver on our mission of saving and sustaining lives.
As discussed, this quarter we also completed the divestiture of our BioPharma Solutions business, further streamlining our focus on our core businesses. We are deploying substantially all of our estimated net after-tax cash proceeds of approximately $3.7 billion to pay down debt in accordance with our restated capital allocation priorities. The third transformational action we laid out at the start of the year was the planned separation of what is now our Kidney Care Segment. We are making significant progress and currently expect to launch Kidney Care as an independent, publicly traded company by July 2024. I continue to be impressed with the leadership of Chris Toth, who joined us in June as President of our Kidney Care Segment and designated CEO of Vantive.
In just five months, he has already proven himself as an astute, decisive, engaging leader. He has already surrounded himself with an outstanding team of experienced direct reports drawn from across Baxter and externally, and we expect to finalize the organizational structure for the new company by the end of the year. Meanwhile, the hard work of separating Kidney Care from Baxter is ongoing across commercial, legal, regulatory, supply chain, and numerous other key operational channels. Just like Baxter post-separation, Kidney Care will be positioned to benefit from heightened focus and the ability to pursue its unique investment priorities to serve patients and clinicians, drive growth and innovation, and create added value for shareholders.
With this as context, I wanted to briefly share some perspective on recent headlines regarding GLP-1, including Novo Nordisk October announcement about its flow study and broader speculation about the future of dialysis therapy. We, like the rest of the dialysis community, continue to follow developments closely, and we are eager to see the full study results, which are expected to be published in the first half of 2024. Given Baxter's life-sustaining mission, we welcome any new therapeutic approaches that have the potential to improve the lives of patients, particularly those with chronic conditions. We also believe that it is premature to assume that these drugs, particularly given the full trial results have yet to be published, will bring about any material shift in the need for dialysis services from a global market perspective.
We believe that dialysis therapy will remain in demand and a critical element of patient care for the foreseeable future. Let me highlight a couple of data points that we believe are relevant. The existing data on demographics and disease patterns continue to consistently suggest that the global incidence of end-stage kidney disease or ESKD will continue to rise over the next 15 to 20 years. To provide a bit more context, current data suggests that the global ESKD incidence overall will continue to grow, driven by a greater than 35% expected increase in the prevalence of diabetes by 2040. At the same time, global demographic data show that the number of people over 65 years old should be increasing by approximately 75% globally between now and 2040, which is also expected to increase the number of potential patients at risk of developing ESKD.
Collectively, these macro changes suggest the global incidence of ESKD is expected to continue to rise over the next 15 to 20 years, even with important innovations in CKD Therapeutics. We also believe these new drugs are doing important work in raising the awareness and prevalence of primary care discussions about CKD diagnosis and management. We welcome this focus, because better informed and empowered patients drive better preparation for dialysis. And studies have shown that the more informed the patient is about their treatment options, the more likely they are to choose home dialysis over other forms of dialysis when given the option. To that end, we're looking forward to seeing the new study data and understanding how it may provide additional options and benefits for patients with CKD.
My excitement for the trajectory of Kidney Care remains high. Our thesis and sense of opportunity for an independent, stand-alone Kidney Care business remain unchanged from the day we first announced this spin. This has been a year of investment, of transformation, of important and sometimes difficult steps taken to strengthen our present and redefine our future. We knew when we first laid out this transformation in January that we had to get it right, and less than a year later, our progress is evident and our path forward is clear. We have delivered on our BPS divestiture. We have implemented our verticalized segment structure, and we are well on our way toward achieving the planned Kidney Care separation. Our continued progress on this transformational journey is a credit to the exceptional hard work and commitment of our Baxter colleagues worldwide, who as always have my profound thanks.
I'm confident these actions are strongly positioning Baxter and in turn, Kidney Care to unlock meaningful long-term value for all stakeholders. Now before we take a closer look at our third quarter financials and outlook for the remainder of the year, I want to recognize Brian Stevens for serving so well as Interim CFO for over the past five months. We are also pleased to welcome incoming CFO, Joel Grade, whose wide-ranging experience and track record make him an outstanding fit at this time of transformation. I will first hand the call over to Joel for a few introductory comments before Brian then provide a more detailed overview of our results for the quarter.
Joel Grade : Thanks, Joe. Let me start by saying how excited I am to join all of you today for my first earnings call as Baxter's new CFO, and more importantly, how motivated I am to be joining Baxter during such an important point in its transformational journey. For many years, I've admired Baxter as an iconic company with an incredible mission to save and sustain lives. When the opportunity arose to join the team, I recognize that this is the right next step in my career. The position presented me with the ability to utilize my broad experiences in finance, operations, strategy and transformation, to help the company deliver on its strategic actions that Joe outlined earlier. While early, I've been extremely impressed with the talented and dedicated employees at Baxter and their unwavering passion for and commitment to our mission.
In addition, I'm very optimistic about the numerous opportunities that exist for the company to increase long-term value for our stakeholders. Finally, I look forward to both speaking with and meeting many of you over the next coming months. Your perspective on our business and the surrounding market landscape will be incredibly valuable as we move forward in our transformation journey. With that, I'll turn it over to Brian to take us through the Q3 results. Brian, over to you.
Brian Stevens : Thanks, Joel, and good morning everyone. I'm happy to be joining the call this morning to provide some additional details on Baxter's third quarter financial performance, as well as commentary on our updated financial outlook. As Joel mentioned, we are pleased with our third quarter results which came in ahead of our expectations. Third quarter 2023 global sales included $3.71 billion from continuing operations and $191 million from discontinued operations. Sales in the quarter increased 3% on a reported basis and 2% on a constant currency basis and compared favorably to our guidance. Sales performance in the quarter benefited from better than expected sales in medical products and therapies, particularly our infusion systems and IV solutions products, as well as continued strength in our pharmaceuticals business, driven by injectables and drug compounding.
On the bottom line, adjusted earnings from continuing operations totaled $0.68 a share, decreasing 4% versus the prior year period and reflecting the ongoing operational improvements, primarily offset by the impact of increased interest expense. Adjusted EPS from continuing operations for the quarter came in ahead of our expectations of $0.65 to $0.67 per share, primarily driven by sales and operational performance, and partially offset by higher than expected tax rates. In the aggregate, inclusive of both continuing and discontinued operations, adjusted EPS was flat year-over-year and totaled $0.82 per share. Now, I’ll walk through the performance by our new reportable segments. Sales in our medical products and therapies segment were $1.26 billion, increasing 4% on a constant currency basis.
Within medical products and therapies, sales from our infusion therapies and technologies division, which includes our former medication delivery and nutrition businesses, totaled $1 billion and increased 4% on a constant currency basis. Sales in the quarter benefited from strong growth in our infusion systems portfolio, driven by continued demand for our infusion pump hardware, including the Spectrum LVP. Sales from advanced surgery totaled $255 million and grew 3% on a constant currency basis, in line with expectations and surgical procedure growth. Moving on to Kidney Care, sales in the quarter were $1.1 billion and were flat year-over-year on a constant currency basis. Within Kidney Care, global sales for chronic therapies were $921 million, declining 3% on a constant currency basis.
Sales performance in the quarter was impacted by a difficult comparison to the prior year period, which benefited from certain discrete items that totaled approximately $20 million. In addition, and consistent with our plans to enhance performance in our HD business, sales in the quarter reflect the exit of a distribution agreement in the U.S. earlier this year. Finally, performance in chronic therapies continues to be impacted by government-based procurement initiatives in China, and a lower patient census in the region due to the pandemic. We estimate that, collectively, these region-specific factors negatively impacted sales by more than $40 million dollars in the quarter. Sales in our Acute Therapies business were $188 million, representing growth of 12% on a constant currency basis, with double-digit growth across all regions and reflecting a more stabilized environment for this business, following significant heightened demand during the pandemic.
For our Healthcare Systems & Technology segment, sales in the quarter were $744 million and were flat to the prior year on a constant currency basis. Within the segment, sales in our Care & Connectivity solutions division, which includes our former Patient Support Systems and Surgical Solutions businesses, were $443 million, decreasing 4% on a constant currency basis, primarily driven by a lower contribution from rental revenues and lower hospital capital spending as compared to the prior year period. Orders within our Care & Connectivity Solutions division continued to improve sequentially, increasing more than 10% as compared to the second quarter. Frontline Care sales in the quarter were $301 million, increasing 8% on a constant currency basis and reflecting the continued benefit of easing supply constraints.
During the quarter, the business was able to continue to reduce its backlog and we expect to exit the year with a more normalized backlog level. Sales in our pharmaceutical segment were $580 million, increasing 9% on a constant currency basis. Performance in the quarter reflected continued strength in our U.S. injectables portfolio, driven by new product launches, as well as continued strong demand for our services within our hospital compounding portfolio internationally. Other sales, which represent sales not allocated to a segment and primarily include sales of products and services provided directly through certain of our manufacturing facilities, declined more than 50% during the quarter. This lower level of sales reflects reduced demand in 2023 for certain contract manufacturing volumes and the termination of the royalty arrangement following our acquisition of the rights to the underlying products.
BPS third quarter sales reported as discontinued operations were $191 million, increasing 11% on a constant currency basis. Now, moving through the rest of the P&L. Our adjusted gross margin from continuing operations totaled 41.7% and represented a decline of 70 basis points over the prior year, but improved 130 basis points sequentially. The year-over-year decline in gross margin reflects the impact of higher costs for raw materials, overhead and labor, driven by the elevated inflationary impacts we've absorbed over the last couple of years. We were able to partially offset these cost increases through pricing and ongoing margin improvement programs and our integrated supply chain network. Adjusted SG&A totaled $820 million or 22.1% of sales, a decrease of 50 basis points versus the prior year period.
Performance in the quarter benefited from our ongoing transformation initiatives to enhance operational efficiencies, partially offset by higher bonus accruals under our annual employee incentive compensation plans compared to the prior year. Adjusted R&D spending in the quarter totaled $161 million and represented 4.3% of sales, an increase of 20 basis points versus the prior year. We have ramped up our R&D efforts, particularly increasing our investments in advancing our Connected Care Technologies and like SG&A, R&D expenses include the impact of higher employee incentive accruals as compared to the prior period. These factors resulted in an adjusted operating margin of 15.2%, a decrease of 50 basis points versus the prior year, but a sequential improvement of 200 basis points in operating margin as compared to the second quarter.
Operating margin came in ahead of our expectations, primarily driven by top line performance and enhanced execution on our initiatives focused on driving improved operational efficiency. Net interest expense totaled $128 million in the quarter, an increase of $24 million versus the prior year, driven by the impact of higher interest rates on our variable rate debt. Adjusted other non-operating income totaled $7 million in the quarter compared to $4 million in the prior year period. Results were unfavorable to expectations, driven mostly by losses in foreign exchange. The adjusted tax rate in the quarter was 21.8% compared to 22% in the prior year period. The year-over-year decrease, as well as the unfavorability versus expectations was primarily driven by changes in geographic earnings mix.
And as previously mentioned, adjusted earnings from continuing operations totaled $0.68 and declined 4% versus the prior year, primarily reflecting the increase in cost of goods sold due to inflation, as well as higher interest expense and foreign exchange headwinds. With respect to our prior guidance, earnings favorability was driven by better than expected sales and operational efficiencies, partially offset by negative impacts from FX and a higher than expected tax rate in the quarter. Total company adjusted earnings of $0.82 per diluted share, which includes discontinued operations, was flat versus the prior year period. With respect to cash flow, in the first nine months of 2023, we generated free cash flow of $666 million, including discontinued operations, compared to $293 million in the prior year period.
And we remain on track to more than double our free cash flow in 2023 from prior year levels. Now, let me conclude my remarks by discussing our outlook for the fourth quarter and full year 2023, including some key assumptions underpinning that guidance. For full year 2023, Baxter expects total sales growth from continuing operations of 1% to 2% on a reported basis, and approximately 2% on a constant currency basis. Foreign exchange is expected to be an approximate 50 basis point headwind to reported results on a full year basis. On a Continuing Operations basis, we expect full year adjusted operating margin of 14.3% to 14.5%. With the closing of the BPS transaction and related debt pay down, we expect a reduction of net interest expense of approximately $45 million in the fourth quarter.
For the full year, we expect net interest expense to be approximately $450 million. We anticipate a full year adjusted tax rate of 20.5% to 21%. And lastly, we expect a diluted average share count of 508 million shares. We now expect full year adjusted earnings from continuing operations of $2.57 to $2.60 per share. Specific to the fourth quarter of 2023, we expect global sales growth of approximately 1% to 2% on a reported basis and approximately 1% on a constant currency basis. And we expect adjusted earnings, excluding special items of $0.85 to $0.88 per diluted share. With that, we can now open up the call for Q&A.
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