Good morning, everyone, and welcome to Baxter International's First Quarter 2024 Earnings Conference Call. As a reminder, this call is being recorded by Baxter and is copyrighted material. It cannot be recorded or rebroadcast without Baxter's permission. If you have any objections, please disconnect at this time.

Good morning, and welcome to our first quarter 2024 earnings conference call. Joining me today are Joe Almeida, Baxter's Chairman and Chief Executive Officer; and Joel Grade, Baxter's Executive Vice President and Chief Financial Officer. On the call this morning, we will be discussing Baxter's first quarter 2024 results along with our financial outlook for the second quarter and full year 2024. 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 2024; new product development, including the potential impact of recent regulatory clearances with status and potential impact of our ongoing strategic and recent pricing actions, business development, regulatory matters and the macroeconomic environment, including commentary on improving supply chain conditions 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 also available 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?

Thank you, Clare, and good morning, everyone. We appreciate you taking the time to join us today. I will begin with an overview of our first quarter results and then provide some updates regarding our ongoing strategic transformation. Joel Grade will follow with a closer look at our financials as well as our outlook for the second quarter and the remainder of the year. Then, as always, we'll open it up to your questions. Baxter started the year on a positive note, delivering solid results, which exceeded previously issued guidance on both the top line and bottom line. First quarter sales from continuing operations were up 2% on a reported basis and 3% at constant currency rates, compared to our original outlook of approximately 1% reported and 1% to 2% constant currency. Overall revenue growth was driven by positive demand and pricing for a broad range of Baxter products. On the bottom line, adjusted earnings per share for continuing operations of $0.65 came in above our prior guidance range of $0.59 to $0.62 per share. This performance was fueled by top line results, combined with our intense focus on driving improved supply chain execution across our manufacturing network. Overall, performance is clearly benefiting from the streamlining and strategic clarity afforded by our newly implemented operating model, as we leverage the advantages of improved visibility globally, increased accountability, and function of verticalization. Crisp execution of our margin improvement initiatives, along with a more stable macroeconomic backdrop, is driving enhanced performance across our integrated supply chain operations. As always, Baxter benefits from its emphasis on essential health care needs in combination with the diversity and durability of our portfolio. This is clearly affecting our overall performance this quarter as the strength of our results across Medical Products and Therapies, Pharmaceuticals, and Kidney Care helped offset underperformance in our Healthcare Systems & Technology segment. Taking a closer look at our performance by segment, Medical Products and Therapies, or MPT, delivered first quarter growth of 6% above reported and constant currency rates. Growth was fueled by both pricing and volume gains amid stable market conditions globally. We believe we're well positioned to build on our momentum in MPT with the recent U.S. FDA clearance of our leading-edge Novum IQ large volume infusion pump and Dose IQ Safety Software. This integrated platform, which also includes our previously cleared syringe pump, comprises a single connected intelligent system offering a broad range of benefits for nurses, physicians, and other clinicians as well as the patients who depend on them. Our Novum IQ technology is now available to order in the U.S. as part of our expanding portfolio of connected care solutions. Customers are excited about the Novum platform's ability to advance connectivity and intelligent infusion therapy. The team is already engaged with many customers interested in this new technology. In fact, the large existing Novum syringes Spectrum customer will begin implementing the full Novum platform in the next few months. Just last week, we secured a 100% competitive account conversion to Baxter pumps with a top-tier multistate health system. As you may remember, Novum LVP clearance was not factored into our original FY 2024 outlook. Given the timing of the approval, we expect the contribution from the Novum launch to be more notable in the second half of the year, even as it displaces, to some degree, sales of our Spectrum IQ pump, and the outlook we are sharing today reflects this expected benefit along with the outperformance in the first quarter. Also in late-breaking MPT news last week, we received FDA approval of an expanded indication for Clinolipid, our mixed oil lipid emulsion that provides a source of calories and essential omega fatty acids for parenteral nutrition patients. Clinolipid is now indicated for use in pediatric patients, including preterm and term neonates. This is an example of our continued commitment to meeting the nutritional needs of patients of all ages and is expected to be a positive addition to our nutrition portfolio. Our Pharmaceutical segment achieved a growth of 11% in the first quarter at both reported and constant currency rates. Results for the quarter reflect a benefit from our recent new product launches in the U.S., including five new injectables in key therapeutic areas, including anti-infective and antihypertensive medications. Together, these new product introductions demonstrate our continued focus on innovation and delivering differentiated products that address areas of need with proprietary ready-to-use presentations, they can simplify the preparation process and support patient safety. Our performance in this segment was also strengthened by heightened demand outside the U.S. for our drug compounding services. This overall momentum more than offset declines from inhaled anesthesia products. Our Kidney Care segment delivered 3% growth at reported rates and 4% at constant currency. Growth was driven by pricing benefits as well as strong demand for our Acute Therapies portfolio and steady gains of peritoneal patients in nearly all markets. Growth in this business was tempered by the impact from select product and market exits and reduced volumes in China due to government-based procurement initiatives and a lower patient census. As noted, positive results across these three segments helped offset disappointing performance in Healthcare Systems & Technologies, or HST, which declined 9% at both reported and constant currency rates. This decline was driven to some extent by order timing as well as operational factors. Our new operating model has been vital in helping us isolate underlying challenges affecting this segment. The steps that are already underway to address and enhance performance in this business will help realize our full opportunity in this space. These include forging a deeper partnership between the commercial and enterprise account teams focused on the value and quality of the broader portfolio. Implementing new tools and processes focused on increasing visibility to historical purchases, creating greater differentiation in customer engagement practices and related measures. We expect these steps collectively to improve operational performance for HST, particularly in the second half of the year. I remain excited about HST and the positive contribution it is expected to deliver to the overall Baxter portfolio. The team is working incredibly hard to address this challenge and turnaround performance in this business, and I'm grateful for their dedication and efforts. Before I pass it to Joel, I will share an update on our proposed Kidney Care separation as we announced in the March 4th 8-K filing. We are now pursuing dual pathways in the proposed separation of this business, including potentially selling the business to a private equity investor. The ultimate path forward will be determined consistent with our objective to accelerate performance for both entities and maximize shareholder value. We currently expect the separation to take place in the second half of 2024. Looking ahead, I want to express my excitement about Baxter's overall trajectory. Our life-sustaining mission is, as always, our North Star, and our colleagues around the world are making it come alive with tenacious focus on execution and operational excellence. Our progress against our strategic transformation initiatives showcases our ability to deliver on what we set out to accomplish. The benefits are clear in our overall outperformance for the quarter, our building momentum, our recent innovation milestones, and the progress of our proposed Kidney Care separation journey. We will continue to maintain the pace and intensity of our transformation and take the necessary steps so that all of our segments are well positioned to power our performance going forward. I will now pass it to Joel to provide more detail on our performance and outlook.

Thanks, Joe, and good morning, everyone. As Joe mentioned, we are pleased with our first quarter results, which came in ahead of our expectations. First quarter 2024 global sales of $3.6 billion increased 2% on a reported basis and 3% on a constant currency basis, and as mentioned, compared favorably to our previously issued guidance. Performance in the quarter benefited from better-than-expected sales across all our product divisions, with the exception of those within our Healthcare Systems & Technologies segment. On the bottom line, adjusted earnings from continuing operations totaled $0.65 per share, increasing 33% versus the prior year period and ahead of our prior guidance of $0.59 to $0.62 per share. These results reflect the meaningful operational improvements we are recognizing both commercially as well as within our integrated supply chain network, and these factors drove our outperformance in the quarter. Now I'll walk through our results by reportable segments. Commentary regarding sales growth will reflect growth at constant currency rates. Sales in our Medical Products & Therapies, or MPT segment, were $1.2 billion, increasing 6%. Within MPT, first quarter sales from our Infusion Therapies & Technologies division totaled $966 million and increased 6%. Sales in the quarter benefited from strong growth internationally across the division, including in our IV solutions, nutrition, and infusion systems portfolios. Solid demand in the U.S. for IV solutions also contributed to growth in the quarter. Sales in Advanced Surgery totaled $263 million and grew 8%, coming in ahead of expectations, and reflecting strong growth internationally. For our Healthcare Systems & Technologies, or HST segment, sales in the quarter were $667 million and declined 9%. Within the HST segment, sales in our Care and Connectivity Solutions, or CCS division were $402 million, declining 7%. Performance in the quarter was impacted by several factors, including the phasing of product installations, particularly for care communications, which is expected to accelerate later in the year, by the timing of capital orders, which increased mid-single digits in the quarter, but are expected to ramp more meaningfully over the course of the year. By lower rental revenues, which negatively impacted sales by approximately $5 million. Finally, by certain operational challenges, for which the team is in the process of implementing clear plans to improve performance and enhance commercial rigor. Given all these factors, we expect to see significant improvements for CCS in both orders and revenue in the second half of the year, which is similar to the challenges we experienced last year in this division. Front Line Care sales in the quarter were $265 million, declining 12%. Growth in the quarter was impacted by a difficult comparison in the prior year as backlog reductions positively contributed to growth in the prior year period. Performance in the quarter was also affected by softness in the primary care market which negatively impacted sales in both our connected monitoring and intelligent diagnostics product portfolios. Similar to CCS, we expect performance to meaningfully improve in the second half of the year as market conditions for primary care are anticipated to ease, the pace of customer orders is expected to increase, and we anniversary the prior year impact from the backlog reduction. Sales in our Pharmaceuticals segment were $578 million, increasing 11%. Performance in the quarter reflected double-digit growth in both our U.S. and international injectables portfolio, driven by new product launches as well as continued strong demand for services within our drug compounding portfolio internationally. Moving on to Kidney Care, sales in the quarter were $1.1 billion, increasing 4%. Within Kidney Care, global sales for chronic therapies were $888 million, increasing 2%. Solid PD growth in the quarter was partially offset by the negative impact from certain products and market exits in our in-center HD business as well as reduced sales in China due to government procurement initiatives and lower patient census volumes following the pandemic. We estimate that these items negatively impacted sales by approximately $50 million in the quarter. Sales in our Acute Therapies business were $214 million, representing growth of 15%, driven by strong demand and competitive wins in the U.S. and solid performance internationally. Other sales, which represent sales not allocated to a segment and primarily includes sales of products and services provided directly through certain of our manufacturing facilities, were $16 million and declined 47% during the quarter, in line with our expectations and reflecting reduced demand for certain contract manufacturing volumes. Now moving on to the rest of the P&L. Our adjusted gross margin totaled 42.5% and represented an increase of 170 basis points over the prior year and was favorable to our expectations. The year-over-year improvement in gross margin primarily reflects the strong operational efficiencies we are realizing within our integrated supply chain network, resulting from execution of the margin improvement programs we're implementing and the anniversary of the negative margin impacts from inflationary pressures that drove higher cost of goods sold in the prior year period. Pricing initiatives in select markets also positively contributed to margin improvement in the quarter. First quarter margins also reflected a benefit from the closure of our dialyzer facility as production in the facility was increased in advance of the closure, resulting in better absorption and lower costs for these dialyzers. This benefit is expected to be isolated to the first quarter. Overall product mix in the quarter did partially offset margin expansion in the quarter. Adjusted SG&A totaled $856 million or 23.8% as a percentage of sales, consistent with the prior year period as ongoing transformation initiatives to enhance operational efficiencies were offset by higher spend in selected investments in sales and marketing initiatives. SG&A leverage is expected to improve as sales ramp over the course of the year. Adjusted R&D spending in the quarter totaled $160 million and represented 4.5% as a percentage of sales, similar to the prior year period and reflects our continued investments in advancing new products across the portfolio and bringing innovation to patients across various markets. These factors resulted in an adjusted operating margin of 14.3%, an increase of 180 basis points versus the prior year. Net interest expense totaled $78 million in the quarter, a decrease of $39 million versus the prior year period, driven by debt repayments in the fourth quarter of 2023 with proceeds from our BPS divestiture. We plan to continue to repay debt in 2024, consistent with our stated capital allocation priorities. Adjusted other nonoperating income totaled $7 million in the quarter, compared to income of $2 million in the prior year period. The adjusted tax rate in the quarter was 25.0% compared to 23.1% in the prior year period. The year-over-year increase is primarily driven by a valuation allowance recognized in the quarter. As previously mentioned, adjusted earnings from continuing operations totaled $0.65 per share and increased 33% versus the prior year, primarily driven by commercial performance and operational efficiencies within our integrated supply chain. Let me conclude my remarks by discussing our outlook for the second quarter and full year 2024, including some key assumptions underpinning the guidance. For full year 2024, Baxter now expects total sales growth of approximately 2% on a reported basis and 2% to 3% on a constant currency basis, which is an increase from prior guidance of approximately 2% on a constant currency basis. Constant currency sales guidance for the full year by reportable segments is as follows: For MPT, we expect sales growth of 4% to 5%. This is an increase from the prior guidance of 3% to 4% and reflects the first quarter outperformance and the inclusion of Novum, which is currently expected to contribute an incremental $25 million to infusion pump sales and reflects some cannibalization of prior planned sales of Spectrum. Sales in our Healthcare Systems & Technologies segment are expected to be flat to the prior year as compared to previous guidance of approximately 3%. As mentioned earlier, we expect performance to meaningfully improve in the second half of the year, driven by the factors discussed, including timing of installations, order phasing, and improved operational execution. We expect pharmaceutical sales growth of 6% to 7%, which compares favorably to prior guidance of 4% to 5% and reflects the strong start to the year and continued momentum for our new product launches. Collectively, sales for these Baxter businesses are expected to increase 3% to 4% in 2024. For Kidney Care, we expect sales growth of flat to 1% as compared to 2023. This also compares favorably to prior guidance and reflects the underlying momentum of this business. Now turning to our outlook for other P&L line items. We continue to expect adjusted operating margin to increase by at least 50 basis points in 2024. We expect our nonoperating expenses, which include net interest expense and other income and expense, to total approximately $350 million in aggregate during 2024. We continue to anticipate a full year adjusted tax rate between 22.0% and 22.5%. We expect our diluted share count to increase slightly and average 511 million shares for the year. Based on all these factors, we now anticipate full year adjusted earnings, excluding special items, of $2.88 to $2.98 per diluted share, which also compares favorably to prior guidance of $2.85 to $2.95 per diluted share and reflects the outperformance we realized in the first quarter. Specific to the second quarter of 2024, we expect global sales growth of approximately 1% on a reported basis and 2% to 3% on a constant currency basis. We expect adjusted earnings, excluding special items, of $0.65 to $0.67 per diluted share.

I 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. Our first question comes from Vijay Kumar of Evercore ISI.

I guess my first one is on top line here. When I look at the business here, the Hillrom portion of the healthcare tech part of the business underperformed, but all other segments came in about right. And Joe, when you think about this exiting fiscal '24, can Baxter get back to like 4% top line? When does Hillrom normalize? And perhaps talk about what gives you confidence that this business is actually growing? Is there any reason to fear share loss within that part of the business?

Vijay, we are targeting an exit rate of around 4% for the year. We believe that what occurred with HST in the first quarter was a delay in orders along with some operational challenges that we are actively addressing. We are beginning to see positive results from these efforts. My confidence for HST in the second half of the year comes from the improved orders as we moved from Q1 to Q2, along with a strong pipeline of opportunities for the remainder of 2024. We have identified specific commercial and operational challenges and have put concrete action plans in place. Additionally, we are working through our existing backlog and noticed some typical seasonal patterns. The first quarter is generally the slowest for HST, while the fourth quarter tends to be the strongest. Compared to 2023, we expect to exit Q4 with 7% growth. I want to assure our investors that we will exit Baxter with around 4% this year, specifically 4% to 5%. We expect a recovery of HST based on their operational results and the promising opportunities we have established and are beginning to see. This is without considering Kidney. When I refer to Baxter's exit at 4% to 5%, I mean excluding Kidney. To address your question, we are confident about exiting the business at that 4% to 5% range, with solid plans in place, and we are starting to witness the recovery in HST. This is the key point.

That's helpful comments, Joe. One on maybe margins here. Q1, both gross margins and operating margins came in above. What drove those gross margins? Are we seeing benefits from cost actions, or is this any timing element? Are we seeing pricing contributions? Because when I look at the second quarter EPS, it's below 3. So was there any timing element here affecting those margins?

Yes, this is Joel. A couple of things on the Q1 margins, I would call out. Number one, the ISC drove a substantial portion of that. We had strong operational efficiencies and positive manufacturing variances that flowed through. So, in general, our ISC performance was a strong contributor there. Our pricing also had, I'd say, a modest, but partial part of that, in terms of enhancing our margins. There's a little bit of a mix impact that was offsetting some of that, but I think those are some of the primary drivers in the first quarter. I think from a second quarter standpoint, there are a couple of things I'd just call out. Number one is there was some favorability in the first quarter that was related to the closing of our dialyzer facility. We had production that was increased, resulting in better absorption. So from a timing standpoint, that benefited the Q1 margins to some extent that you won't see in Q2. Another point I would call out in Q2 is that, while we certainly continue to have positive contributions from ISC and positive contributions from pricing, particularly in some of our OUS markets, we did have a pharma MSA that was part of our BPS divestiture which is impacting the pharma margins in the second quarter as well. So those are a few of the puts and takes affecting Q1 and Q2 margins.

Pito Chickering of Deutsche Bank is on the line with a question.

Going back to the softness in Healthcare Systems & Technology, can you give a little more detail on what exactly were the operational factors that impacted the first quarter? And why it should ramp sort of in the back half of the year? And also on the capital orders, I guess, why did those not flow through in the quarter as you guys were expecting? And then finally, kind of why you saw lower rental revenues you're expecting? I guess I'm just trying to understand that the delta in the guidance you're seeing sort of today is down 300 bps for the year versus 3 months ago. What changed so dramatically?

I will take the first part of your question, and Joel will take the second part. We saw that the operational issues were more related to how we were integrating our enterprise accounts and our field personnel. We had made significant changes halfway through the quarter but did not catch up fast enough. We've been seeing a great deal of larger orders being signed today. As a matter of fact, a couple of them are full conversions from competitors. We have a very effective and large enterprise account that is now fully integrated with HST. Those were the things that we were not aligned with in the first quarter; we should have been integrated and done a better job back in August, September of last year. We did catch up to that and are seeing better results. We have integrated some of the sales systems with more rigor than we had before, and we are making some changes at the mid-level management in that operation so we can get more rigor in how we sell product. But I have to tell you that we're already seeing the momentum that Baxter brings to HST, the part of the two companies and how the connectivity of our new Novum pump works with the beds and the monitors. So that is one part. There were operational issues in frontline care completely different than our CCS business. Front Line Care was related to government orders slowed down by the government, as well as primary care issues with the payment system that was hacked in the first quarter, affecting how primary care physicians' offices order products and get paid. So that affects us as well. There is also a temporary contraction in the primary care physicians' market, in which we have a very high market share. In fact, we gained share in that business instead of losing. We actually have proof that we gained share. We see that as temporary blips in Front Line Care. In the CCS business, the operational issues were due to a lack of better integration in our key account management or enterprise accounts. So the headline of the answer is, we are executing much better right now. We're starting to see results in CCS, and we have converted several large accounts from the competition, which is driving sales. In terms of Front Line Care, we're starting to see the rebound.

Yes. Regarding your question on the second half of the year, why are we not recovering fully to the 3%? The first quarter was a fairly sharp decline relative to expectations. More than anything, it's simply that we're not fully anticipating making that up throughout the rest of the year. That said, to Joe's point, we remain optimistic about growth prospects in this business. We have a number of new product launches that are coming in, which will continue to enhance our growth. As Joe pointed out, the improvement in Front Line Care will be significant as we have several issues we are clearing up. We also had gone through a lot of backlog last year, affecting our performance in the first half of the year, but we expect orders from CCS to continue to increase meaningfully. Specific actions we've taken to ensure that commercially and operationally, we are executing better as we head into the back half of the year will lead to improvements.

Okay. And then a follow-up question on the gross margin. Is it just such a key part of the Baxter story here? Can you quantify the impact of the closing of the dialyzer facility in the quarter? Looking at the rest of the gross margin improvement year-over-year, what's the split between the inflationary pressures easing versus increased pricing versus operational efficiencies?

So Pito, I'll take that. There are a lot of questions in there. The key is that within our integrated supply chain, a lot of this comes down to the execution on our margin improvement initiatives. They are designed to offset inflation. We do still have normal inflationary pressures within our organization, but the MIPs that the team is executing against are more than offsetting that and driving the savings both on a year-over-year basis and relative to our expectations. In the first quarter, we did benefit from some of the positive manufacturing variances that Joel was referencing. In the fourth quarter, we had better volumes than anticipated, giving us a benefit inclusive of what Joel referenced on Opelika, where we were preparing for the closure of that dialyzer facility. So, that's what I would say. Pricing is a benefit both on a year-over-year basis and relative to our expectations. Pricing initiatives are having a positive impact across the organization. We're looking at those businesses and driving a lot of targeted actions both within and outside the U.S. So I think this aligns with what we said earlier about margin improvement coming from gross margin this year.

Larry Biegelsen of Wells Fargo is on the line with a question.

Joe, there was a lot of strength in Q1 outside of HST, but the guidance implies growth slows in all segments. Why would growth slow so much relative to Q1 in Q2 through Q4 in those other segments? And I had one follow-up.

So, Larry, I'll begin with that and let others respond. We did notice some positive performance in our Kidney Care segment that exceeded our expectations. However, we anticipate a slowdown in the second half of the year due to the impact of government pricing initiatives in China and some market exits we will be facing for the remainder of the year. This is likely the most significant difference when considering the balance of the year. Additionally, in our Pharmaceuticals division, we experienced excellent performance from our hospital pharmacy compounding business outside the U.S., and we continue to see strong demand in that area. We are also focused on enhancing the profitability of that business. As we move forward, we will maintain a disciplined approach regarding the business we engage with and how we manage it. These are likely the two main factors contributing to the changes from the first half to the second half of the year.

And you'll see tremendous acceleration for HST, Larry, that is reflective of the pace of the business but also acceleration of some of the actions we took in mid-Q1 that are starting to effect in Q2. We have accelerated our pump sales. We also see tremendous demand for our IV solutions and our nutritional IV doing pretty well. Our Pharmaceutical is doing extremely well with five launches. We incorporated those gains into the forecast going forward. However, we are seeking profitability ahead of sales growth, so we will make some decisions to be in markets where we can actually improve the bottom line. So it's a combination. You saw what happens. We beat the top, we beat the bottom, and we continue to seek opportunities to hopefully overperform.

And if I could just add one thing on the kidney piece for a little bit, just one order of magnitude. That business that we talked about going from flat to 1% from a guidance perspective would be closer to mid-single digits without some of the market exits. So to Clare's point, that is a fairly sizable impact as we head into the remaining part of the year on a holdco basis.

That's helpful. Just one quick follow-up. Joe, on the plan for Kidney Co. spin versus sale, when do you expect to make a decision? And how do you guys think about the pros and cons of the spin versus a sale?

Larry, we will be separating the business in the second half of 2024. I don't want to comment at the moment on which option is better than the other. We're contemplating both options, and we have said before that we will maximize shareholder return for whatever option we choose. So, we will separate first of all. Second, when we separate, we will do so with the goal of maximizing shareholder return.

Robbie Marcus of JPMorgan is on the line with a question.

Maybe one on R&D. This is one of the first years in a while that R&D is growing slower than sales. How do you think about your R&D investment and where it's going? Are we just seeing some of the benefits of the Hillrom integration here?

I want to start by saying that we actually increased R&D in HST, the former Hillrom business, which we now call HST in Baxter. We increased R&D there. We are very judicious about capital allocation within the business and what funds we put into R&D. We also have plans in '24, but also in '25 to continue to increase the dollar value, not as a percentage of sales, but the dollar amount we invest. So we have not reduced the dollar value of R&D for '24; we actually increased that. As a percentage, that number may show a slowdown, but it has dollar-wise improved. There are no savings we are seeking in research and development. As a matter of fact, we continue to hire individuals. We are currently exploring alternative sites for more R&D centers in one in Ireland and another one on the East Coast of the United States. We are actually increasing our capacity there. So our objective is to drive our goal of 4% to 5% top line growth with innovation, and that's going to be fueled by R&D.

Great. And maybe one, it doesn't get a lot of attention, but I feel like almost every quarter for the past few years, it keeps driving upside, and now it's broken out as drug compounding. Nice high-teens growth here. The same question, following up on Larry, but more specific to the drug compounding. How do we think about the trajectory of this business? It's one that keeps growing double digits year in and year out and the expectations it always will slow, but it hasn't yet. So what are your views here on how to think about this for the rest of the year?

In pharmaceuticals, we depend on key markets outside the U.S., where drug compounding, premix pharmaceuticals, and IV solutions offer comprehensive solutions for our customers. While drug compounding is not a strategic focus for Baxter overall, it is important in specific markets. In the first quarter, the performance of injectable pharmaceuticals grew by 8%. We are beginning to see new products gain traction, which helps counteract price erosion and the decline in gross margin that occurred during the pandemic. I remain optimistic about the volume of the compounding business in the latter half of the year. However, it is crucial for us to promote the new products we are launching, as each dollar generated from a new molecule or launched premix has one of the highest gross margins in the company, typically ranging from 70% to 85%. This will be our primary focus.

Danielle Antalffy of UBS is on the line with a question.

Congrats on a good start to the year here. I just wanted to ask about Novum. Obviously, that's probably the biggest event that has happened now since we were all asked on the phone together. So just curious what you're seeing. I know it's early days, but with Novum, how much of that is factored into the Q1 outperformance or maybe drove some of the Q1 outperformance and into the higher guidance? And just sort of what you're seeing from a competitive dynamic now that you have Novum out there?

Thank you for the compliment. Opening the question, it was very nice of you to recognize that; we agree with you. Novum has had no impact in the first quarter. As a matter of fact, that performance is driven by strong volumes all around the MPT portfolio, but not from Novum. So Novum will have an impact on the company in the second half of the year when we start shipping. We noted in the prepared remarks, we have two large accounts that just ordered the product. One is a full conversion from our largest competitor, and we will continue to see that as our technology is modern and new. The equipment was designed with a significant amount of productivity built in. It comes with the best drug library on the market. We will continue to have good alternatives for our customers between SIGMA SPECTRUM and Novum as we transition between one technology and the other, ensuring that we meet customer needs.

Yes, and if I could just add a couple of things to that. Number one, keep in mind, as Joe talked about, we continue to see really strong performance in our Spectrum pump. Throughout the course of the year, we've anticipated still strong double-digit growth in Spectrum. As we head into the second half of the year, again, we will start rolling out Novum. We have anticipated some cannibalization of Spectrum with the rollout of Novum, but we have included certainly $25 million in the fourth quarter of the year as an anticipation of incremental impact from the rollout of Novum and much more heading into 2025.

Patrick Wood of Morgan Stanley is on the line with a question.

Amazing. I'll keep it to one given the amount going on this morning. So thank you for taking it. Pharmaceuticals, obviously, again very strong growth. I'm just trying to think bigger picture. The drug shortage list is still very high. You've got some onshoring certainly of the syringe side of things. And I think the Civica experiment didn't really work, and some of the Indian manufacturers have been having a difficult time. I guess what do you see as a long-term opportunity there within that business to keep pushing out ANDAs and potentially benefit from onshoring or pulling back some capacity and better pricing amid the drug shortages? Just curious for the outlook there.

We operate in the injectable specialty generic space, where we take Abbreviated New Drug Applications and create premixes. These premixes are very safe, have a good shelf life, and can be quickly delivered to hospitals. As we consider drug shortages, we are actively exploring drugs that can be converted into this format. Additionally, we utilize two technologies, one named Calix and another called Viaflo. The Viaflo technology enhances our ability to create premixes without the need for refrigeration in most cases. Our portfolio, managed by Alok Sonig, has generated numerous opportunities to assess additional drugs and molecules. We have updated our portfolio to include new molecules aimed at relevant needs and successfully launched five new products. We have strong prospects for Baxter extending into 2024 and 2025. This business is expected to introduce between three to five relevant molecules each year. With market expansion both domestically and internationally, we anticipate launching more than 25 different products in 2025.

Travis Steed of Bank of America Securities is on line with a question.

I wanted to ask about some of the segment margins, like Renal margins were really strong this quarter; HST margins were lower. I assume that's the revenue stuff, but I just wanted to ensure any other color you can provide on kind of those segment margins this quarter given they were kind of way off trend?

Yes, thanks for the question. You're correct in your assumption on the Kidney side in particular. There was a lot of impact on that, and something I referred to you earlier in closing our Opelika plant. In the first quarter, there was a lot of increased production that drove a fairly significant amount of margin in our Kidney business. So I think that's really the main driver of that business that you saw that looked like a bit of an outsized margin. We're not anticipating that to continue in Q2.

Okay. And then just kind of bigger picture, when you think about the core Baxter business excluding the Renal business, just the opportunity for continued margin expansion. You're getting good margin expansion this year. But just in general, like what are the line of sight that you have? Is it cost rolling off based on revenue growth acceleration? Is it cost opportunities you can take out of this business just to kind of keep this margin trajectory and expansion going longer term?

Yes, I think it's really a combination of things. First of all, it's the volume, as you said, but also continued opportunities from pricing. We've had some pricing impact this year. We've renegotiated some of our contracts with our GPOs as we head into next year, and we're anticipating continued favorability from a pricing standpoint. The ISC continues to be an area of strength for us that is positively impacting our margins. I think the continued operations for execution, operational efficiencies, and opportunities for automation have benefitted us significantly. We are also continuing to look from a procurement standpoint and consider some of the buying opportunities we have both to leverage our scale as well as for risk mitigation. I see continued opportunities across our margin infrastructure.

Joshua Jennings of TD Cowen is on the line with a question.

I was hoping to ask Joe and team just about the geographic expansion initiative for the Hillrom or HST portfolio. Has it taken a little bit longer than Baxter initially thought, or are there challenges to bring Hillrom technologies into international geographies where Baxter is present and Hillrom wasn't? It sounds like some of the international softness was based on government order timing in Q1, but I just wanted to get an update there as it was part of the strategic rationale for the Hillrom acquisition.

Yes, we have good performance in Western Europe and strong performance in Latin America. The combination of Baxter and Hillrom has expanded Hillrom's opportunities in those markets. We are making changes in our Asia Pacific organization to bring more focus on capital sales to supplement what Baxter is strong in, which is general acute market sales. We're increasing talent in Asia Pacific with some changes we made recently. Western Europe continues to be a strong market for us, and we continue to strengthen the group there. In Latin America as well, we've been successful. The market where things are not as strong is China, specifically due to Made-in-China restrictions. However, our sales ambitions there were relatively minor compared to markets in Latin America and Western Europe. Overall, our combination with Hillrom has been positive, and we continue to strengthen the team with new hires.

Understood. And just one follow-up. Wanted to ask about the Connectivity Solutions technology. It sounds like Novum IQ and the smart beds are adding to that connectivity solutions portfolio. But could you share with us any pipeline initiatives and how you think they will roll in and start delivering bigger sales impacts as we move into '25 and '26?

The Novum IQ, along with our syringe and large volume parenteral (LVP), now connect with Baxter's overall gateway called Connex, which brings all devices to communicate with each other. The connectivity is crucial. If you went to our center, you would see the pump communicating with devices like Volt, the bed communicating with Volt. As connectivity becomes more important to our customers, Baxter has the right solutions for hospitals. The ability to connect is table stakes, but we will innovate further to bring specific solutions that will improve productivity in the hospital setting. When we hold our Investor Day later this year, we will be able to provide a demonstration showing how these devices connect. This is a critical area for our growth strategy.

We have time for one final question. Matt Miksic of Barclays is on the line with our final question.

So I'd love to understand one of the things that a question I get often on Baxter is sort of where is the tall pole in the tent? Where is the significant single growth driver, if there is one? Looking into the back half of this year and '25, could you highlight which of the product lines or business lines do you think are going to emerge as something that we're all going to look to, to see lift in growth or lifting leverage into '25?

Matt, one of the advantages of Baxter is its diverse portfolio that brings a variety of opportunities to acute markets; significant infrastructure products for those markets include IV solutions, pharmaceuticals, and pumps. We have several drivers of growth. You could see this quarter was a significant amount of growth, more than enough to offset some headwinds we faced in HST. I am cautiously optimistic about the HST business. We are back into our cadence of growth for that business. Innovation is prominent in various segments. We expect significant contributions from pharmaceuticals, particularly our injectable pharmaceutical portfolio. Our pump conversion rates are going to be crucial in that growth, as we are positioned well against our biggest competitor. We also anticipate more than seven significant product launches in HST in 2025. Ultimately, innovation in Baxter is not dependent on one or two products but rather on a wide range of products that derisk the company and position it well for 4% to 5% growth excluding Kidney.

Ladies and gentlemen, this concludes today's conference call with Baxter International. Thank you for participating.