Conference Transcript - BAX 2026-03-11

Matt, Analyst — Moderator

Let's get started. Thanks again for joining us, everybody. Very happy to have with us at our conference, Baxter. And from Baxter, we've got Joel Grade, EVP Chief Financial Officer. And we've also got Kevin Moran, new addition to the Baxter team, recent sort of new addition to the Baxter team in IR. I'm going to send it over to Kevin for a couple of comments on compliance.

Kevin Moran, Head of Investor Relations

I'll be quick. First of all, just, one, thanks for having us here. It's been a good conference. And, two, just a reminder that we will be making forward-looking statements. And for more information, please just visit our IR website or our STP funds.

Matt, Analyst — Moderator

Perfect. That's good. I wish I could be as concise as I think. So, you know, with that, Joel, you know, one of the obligatory questions for any of the, you know, global multinationals that we cover is around the top looking Middle East price of oil. So in particular, I don't know if it's the easy part of the two questions, but maybe just can you, have you given some idea of the size of that business? I think investors have had it helpful to understand is this, you know, sub five, sub two, or how to think about the business in that region.

Joel Grade, CFO

Yeah, thanks, Matt. And again, thanks for your interest in Baxter. Yeah, I'd call it a sub two. So we do have some business there, but, again, it's small.

Matt, Analyst — Moderator

And then any operations, manufacturing, or other than obviously people, you know. I mean, we have some commercial people there, obviously.

Joel Grade, CFO

But really, it's primarily that, and, again, it's sub two on the revenue side.

Matt, Analyst — Moderator

Well, best to the folks who are in that region. And in the last week or so, things have changed a bunch. Second part of that is oil, price of energy. I think there was a time and some of it was maybe justified. Some of it was maybe a bit of a knee-jerk reaction over the past, say, four or five years that when energy prices went up, you know, Baxter was going to get hit. It was kind of the simple, you know, investor street reaction. And, you know, how has that changed post-Vantive, and maybe how should we be thinking about, you know, the way higher energy or resin or transportation costs would be absorbed?

Joel Grade, CFO

Yeah, maybe I'll start with the punchline. And the punchline is that the exposure that we have today relative to what we said at our 2022 investor day is somewhere less than half.

Matt, Analyst — Moderator

Okay.

Joel Grade, CFO

Okay, so in other words, at that investor day, I think was said that there was about a, you know, for every $10 of movement in a barrel, it was $25 million of impact. So, again, punchline is it's less than half of that. Now, I'll sort of take this from a couple different angles. Thing one is what I'm going to call our exposure to oil in particular, and that is less today. And the reason it's less than it was at the time of that investor day is really around our kidney business, in particular our PD business. That business is very much a, was a home delivery business. We had a fairly extensive last mile that we were exposed to at that time that now that we've actually obviously separated from kidney, we don't have that same exposure. So that's really kind of thing one. And again, I'll call that the exposure to oil side. The other is just on the materials side. side, again, there are certain materials, obviously, that are driven by the oil price. And even in that scenario, you know, whereas in the past when we had kidney, the material cost was exposed, obviously, for all that. Today, for part of it, we have MSAs with kidney. And for us, that actually is something we can pass through as part of the MSA price. So while we still do have some exposure there, I would say that, you know, a lot of piece and piece of that is obviously covered by the MSA. And then the other thing I would say is just from a timing perspective, and there's a lot of movement in spots right now, again, just the sort of the timing of how that all flows through. You know, we obviously, materials cost get capitalized for us and sold as we roll out those products. and so it's you know there's a there's a lag in that even so sure is that like a yeah a two turn

Matt, Analyst — Moderator

like six to nine month lag or is it yeah it's probably on the lower end of that okay yeah but

Joel Grade, CFO

i think that's but i just think so just to summarize again on the punch line uh exposure for us is uh somebody a little you know less than half of what it was uh in the last time we've

Matt, Analyst — Moderator

talked about that back in 2022 forever okay and so a combination of you know This is the good part of being cost-plus, I guess, in MSA, is that that goes through. And then the combination of that and the elimination of the PD home delivery part is what constitutes that half reduction.

Joel Grade, CFO

Yeah, again, we just simply don't have that level of last mile delivery that we had in our particular PD business.

Matt, Analyst — Moderator

And just to underscore that point, I've talked to folks who, you know, have this muscle memory idea about Baxter. I mean, Baxter has its strengths and weaknesses and challenges ahead of it, opportunities. But, you know, there's this association with just, you know, trucks and diesel and things like that. So without the delivery, and that not only being home delivery, but oftentimes home delivery in, like, places, you know, emerging markets or developing markets around the world. So a big lift, you know, in the PD delivery side that's now gone away. But in terms of, you know, trucks going to hospitals and how much of that is still on your P&L or how much of that are you doing to distributors? How should we think conceptually about your exposure to a bunch of Baxter trucks driving in and out of hospitals?

Joel Grade, CFO

I mean, we do still do some direct delivery in certain categories of products. And as you've already said, I mean, others of it does go through distribution. I would say what I have outlined here in terms of our total exposure is captured by the fact that that's our model setup.

Matt, Analyst — Moderator

Okay. All right. So some distribution, some trucks. But that's super helpful. All right. So maybe on to sort of like fundamentals, you know, a bunch of changes since the event of not the least of which you've got a new skipper running things, Baxter. Maybe talk a little bit about, you know, the term GPS comes up a bunch, new operating model comes up. Sometimes we hear these, and as folks who haven't run divisions or corporations or, you know, managed operations for global, you know, sometimes what this actually means when the rubber hits the road is hard for us to kind of understand. So maybe explain, you know, what are the underlying benefits of this? Where are you in terms of rolling it out? And when will investors maybe start seeing some of the benefits?

Joel Grade, CFO

Let me put just a little bit of context around this, and then I'll get to direct the answer to your question. I mean, I think one of the things that's important to remember is that from a timing perspective, I think some of these changes that we're talking about here with the new leader, with the new operating model, I think are really at a, I guess I'll call it a good jumping off point to some degree for our company. Why do I say that? I say that because back in January of 2023 the company outlined some strategic changes that had to happen post the Hill Round acquisition that included sale of BPS, that included sale of verticalization of the business structure And I think that resulted just really in three years of a lot of moving parts, you know, some you'd call impossible, you know, just distractions and really a focus on those areas as opposed to really trying to how do we run this business more effectively and consistently. And so I think now that we're through those things, I think this is where I now I go back to, hey, this is why this timing, I think, works well for us right now. So with Andrew coming in, he obviously brings with him a really strong background of operational and having run a number of businesses, obviously in GE and Danaher, obviously, as a CEO at ATS. And focus and sort of continuous improvement focus. And obviously with that comes what you talked about now with GPS and performance systems. And I think this is really around how do we think about the operating model at which our company runs in terms of the cadence, the ways that we expect, we set goals, we track goals, we set through KPIs. There's a regular operating cadence in ways that I think is fairly substantially different than happened in the past. And so on the kind of what's different side as it relates specifically to GPS, it really is around that operating cadence and, again, target setting, goal setting, and, again, KPI tracking in a much more rigorous way. So from an investor perspective, what does that mean? To me, what that ultimately means, and again, this doesn't happen overnight, but what this does mean over time is that we are, I would expect us to be a much more consistent company that consistently operates in a more efficient, effective way and predictable way. somebody that is more efficient effective at our at our forecasting and our predictability of our own results in the sense that again the way these these cadences allow us to measure and predict performance in a better way and then ultimately obviously you know i think about it as a cycle that allows us to ultimately ultimately expand margins generate more cash and then reinvested innovation and growth. And so that's kind of a summary of how I think about that. And I'd say the other changes since he's come in, there's been a couple things that I would call out that are important. One is some restructuring changes that have happened that have, I'd say, thinned out management layers that have been a part of sort of his view of, hey, how do we get he and all of us closer to the business, closer to our customers, and obviously in a more streamlined way across the organization. You know, second part of it is really around just the broader structural elements, and some of this comes into where we talk about stranded costs, but just reducing infrastructure in the areas to ensure that we are getting a more nimble, agile organization. And then third, really focused even more so on innovation. And I think the, you know, we've talked about some new product launches. We'll probably get into that in a second. But I expect you should, you know, hear more and more of that from us as we go forward with, again, a more focused, again, better execution and a better ability to continue to reinvest.

Matt, Analyst — Moderator

Got it. Yeah, I mean, just to, you know, having covered the company for a while, there was a time when there was a lot of cost being taken out of the organization. There was some kind of ship-shaped, you know, program that was put in place. This goes back a bunch of years. And so I would imagine some of that food's already been picked, but this maybe takes that up a level?

Joel Grade, CFO

Yeah, I think that's a good way to think about it. Because, like, and again, I like to say this to make sure I reinforce a key point here. This is not a, hey, we're taking out, trying to SG&A our way to prosperity. That's not what this is about. But when you think about the, you know, kidney was 30-plus percent of our business. And there is an infrastructure in place, I'd say particularly outside the U.S., that business had a 70-30 split OUS-U.S., which is much more OUS than Baxter is. Right now we're around 55-45 U.S. being the 55. And so there's just things that's just one example of things where infrastructure needs to be realigned with the way the business is. And so it's not just a, hey, we're just trying to take costs out to drive profitability. It's really trying to set up our business to make decisions to be better for our customers and more focused in that way. And so I think that's really a key.

Matt, Analyst — Moderator

Got it. So some, you know, we think about portfolio management all the time, but some geographic, you know, portfolio geographies sort of management and decisions that you're making, it sounds like. Okay, fair enough. So let's talk about maybe, you know, some of the performance exiting as you wrapped up sort of last year and sort of, you know, some of the things that were working and kind of came in ahead of plan, advanced surgery and HST. Maybe, you know, I know we all know kind of where you've set guidance, which is, you know, call it for stability. And, you know, we'd like to see there's some conservatism in there, but it's not overly ambitious here with this stage of the, you know, new management, new program, kind of all the things that you just talked about. But what's happening at those businesses that's working and how durable and sustainable is that this year? This is advanced surgery and HST.

Joel Grade, CFO

Yeah. So maybe I'll start with that. I mean, I think, look, our advanced surgery business really continues to produce a set of very differentiated products that I think are extremely well-received. There's really good global demand for those products. I think surgeons see those products as, again, unique and differentiated in the industry. And, again, that business continues. Because, again, it had a really good year last year, but it's had a series of good years. And I anticipate that as a continued strong area and a margin accretive business for us. So I think CCS is the other one, as you've called out here. Look, we've had a continued strong order book in that business. I think one of the questions we often get is, you know, have we seen, you know, hesitancy from a capital spend standpoint from uh from the from the industry broadly and we really haven't and that's one of those things that we just continue to obviously we certainly have a close eye out for it but not something that we've seen and our order book remains strong there uh and so i think you know again we had a little bit of what i'd call it a novel in the fourth quarter in the sense that we had a lot more business ship outside the u.s and particularly to our emerging market countries than the U.S., but again, I look at that as a quarter, a bit of a lumpy business at times versus a long-term trend. So I feel good about that space. I think if I just run down a couple of other businesses, I think the frontline care business, that was also a business this year that kind of returned to a growth state. I think the primary care markets have – we had predicted this coming into 25, that there would be some stabilization in the primary care markets, and we saw that. And so, again, I think that was an area that we see as a, again, a continued area of sort of building strength. For us, obviously, those are really – so both parts of HST in general had a decent year, and, again, we continue to expect that heading into 26. You know, I think about our ITT business, again, I think the, you know, one of the areas that has been, again, some of the impact on our guidance, if you want to call it that, and sort of what's going the opposite direction there is really around, it's really two parts. One, we've said now that we don't expect Novum, we don't expect to be selling Novum pumps through 2026. We certainly remain committed to that and continuing to do good work to get that back to market as soon as possible. But that has been, I'll say, a detriment from a guidance standpoint. And we also, last, in the fourth quarter, we basically said that, you know, once we have some clarity around that, there'd be an expectation of some different customer behaviors. And we didn't see as much of that in Q4, so we've carried some of that risk into 2026 as well. And then from a solutions perspective, you know, I think one of the things we've tried to be really clear on is the fact that we do have a new baseline of essentially a demand for our solutions products that was somewhere in the 10% to 15% range relative to pre-hurricane. And so those are some of the things going in the opposite direction. And then in pharma, in the pharmaceutical business, certainly on the positive side, from a growth perspective, our drug compounding continues to be a very strong growth area. Do I expect that to be at 18% heading into next year? No, I don't. But that is a business that continues to grow well. And while it's margin dilutive, it is our shortest cash cycle in our business. On the flip side of that, we have continued to have some challenges in the objectives and anesthesia space. And some of that is I'll call market-driven. Some of it is on us. And we've talked about the fact that there were some operational challenges that we identified in that business. We think we're making good progress on that, and we do expect that to improve as we head into particular in the second half of 26. Some of the things, the IV push and some of the protocols that came out of the hurricane are still having some level of challenge in that space.

Matt, Analyst — Moderator

Okay. So a bit of a reset in Ivy Solutions, which I think for some part of last year, there was some hope that those would sort of reverse back to historical trends and now we're sort of saying this is where we are.

Joel Grade, CFO

That's right. This is kind of where we are. And look, we remain a market leader in that space. It's a really good business for us. We're very positive on the long term of that business. But you've said it well. That's kind of where we are right now.

Matt, Analyst — Moderator

And then on the pump side, the sort of business planning or guidance assumption that you're not going to sell any pumps this year, is that sort of because you see something that's going to happen towards the end of the year that will enable you to sell pumps next year? Or is that, you know, in the absence of visibility and some kind of certainty, you know, we're going to go with that assumption until we know different?

Joel Grade, CFO

Well, let me just say something slightly differently. we will sell pumps this year we will sell spectrum pumps

Matt, Analyst — Moderator

I'm at Novum I just want to make sure that was

Joel Grade, CFO

really clear on the Novum side specifically I would say it's more that we don't yet have complete clarity working with customers, working with regulators and again having really good dialogue all along the way we have a lot of customers who are using our Novum product safely based on the protocols we've set. But I'd say just given that lack of complete certainty, we've chosen to talk about it in that way. And obviously, you know, love that to be an opportunity to beat, but I'm certainly not calling that. But I do just want to emphasize, again, this pump portfolio we have, there's a very solid demand for our spectrum pumps. And we're selling them well. We've got inventory and production that match the demand for those products. And so that's been a workhorse pump for us prior to Novum, even while we launched Novum. And now, again, the demand range is strong for that. So our pump sales continue to be solid there.

Matt, Analyst — Moderator

And just to make you mention frontline care, but that, I mean, I think, again, And investor perception has been, you know, the Hillrom businesses have struggled kind of consistently. And I think, I mean, you know, it seems like Surfaces actually had a pretty good year last year. It was really frontline care that's now kind of joined the pack of being on the right side of growth and picking up momentum again. I think that's right, Matt.

Joel Grade, CFO

I mean, I think if you look last year in general, we had a solid year, I'll call it, in our HST businesses. And I think the thing, which obviously were the former HILROM, and I guess what I would say to that, too, is that is an area that is really front and center around innovation. So a couple of the things that we've recently talked about, specifically regarding our Connects 360.

Matt, Analyst — Moderator

Yep, that's a great segue. Yeah, so next generation.

Joel Grade, CFO

monitoring device again lots of good nice uh the features within you know the monitoring itself but also you know cyber and and again it easily uploads for for updates and things it's a very state-of-the-art product and we're really excited about that and then on the ccs side our uh our stretcher dynamo we're really launching into that space and again this is a product developed with customers in the way that really, again, this is what we like to talk about, customer-centric innovation, something we're really excited about. I expect that to come to market relatively in the near future, and I expect to see some of those benefits in the second half of the year as well.

Matt, Analyst — Moderator

So maybe on margins we're going to have to make it quick because we're running down on time, but I'll just say, you know, So returning to below three times leverage is an important goal right now. And then it's sort of like we'll talk about use of cash after. It's a fair way to characterize the cash flow strategy here. But what are some of the sort of like, you know, puts and takes on margins in a nutshell, if you would describe this year over last year?

Joel Grade, CFO

Yeah, I'd say a couple of the puts and takes on margins. On the one hand, we capitalized a lot of our inventory costs that were higher last year because, again, taking on our solutions business, we expected an improved recovery on the demand. And so as we capitalize those, we head into 26, and as we sell those products, obviously, we're still selling what I'd call a higher-cost inventory, but we're doing that really until the second half of the year. So that's one just kind of mathematical thing that I would think about. You know, in the first half of the year, we also had a tariff impact that, you know, again, we didn't have it in the first half of 25 that we're having now in the first half of 2026. Six. So those are on the downside. But again, as we think about some of the areas of improvement, number one, some of the work that we've done to restructure, we talked about we expect to see some of those benefits heading into the second half of the year. The fact that we now have leveled out our staffing and our warehouse and our manufacturing facilities relative to demand ultimately will flow through our capitalized inventory and show improvement in the second half of the year as well. Some of the new product launches we talked about will allow us to begin to improve in the second half of the year. And so there's just a few of these key areas. And, you know, we talked about from a pharmaceutical standpoint, from the operational challenges that we had and we identified in Q4, we do anticipate those improvements to happen. And, of course, there's a few one-time items in the fourth quarter that we don't expect to recur as we head into 2026.

Matt, Analyst — Moderator

Super helpful. Well, thank you, Joel. Thank you, Kevin. Good to see you both. Appreciate you joining.

Joel Grade, CFO

Thanks, Matt.

Matt, Analyst — Moderator

Appreciate everyone's interest.