Baxter International Inc (BAX) May 13, 2026 Conference Transcript

Good morning. I think the last presentation of the morning. So welcome up next, Baxter International. We are lucky to have Andrew Heider, President and CEO. It's our first time having a fireside chat. So thanks for coming. And then Kevin Moran, VP of Investor Relations. I think you wanted to start out with the legal stuff, Kevin.

Yeah, thanks, Travis. Just a reminder, we will be making forward-looking statements today. For more information, please consult our IR website or our SEC filings. Back to you. Great. Thanks, Andrew.

Maybe starting out, like your initial time at Baxter, I think you talked about changing the culture to one that's more accountable.

Maybe just kind of talk about what kind of changes you've made so far and where you're at in the process. great and and good morning everyone um look i i came to to baxter with with with a belief around where we sit in the markets the engagement with our customers and really the ability to get back in line with execution and you know if i do a step back that's only that my my view on the business has continued to evolve, but the thesis around where we sit with our customers, our progress on performance, and then ultimately where we're taking this has been in line. And I would just say, early on in my journey, we started Baxter GPS and its growth and performance system. And the reason we did was that it's an alignment to the critical few metrics that we're hold at the highest level and we call them value creators and by the way um there are eight of them they never change every business every site every division has those eight revenue margin free cash flow roic top four financial on-time delivery and quality from a customer perspective internal fill rate and turnover from an employee perspective and the reason why that's important is as we've gone to a more decentralized organization, I don't like secret decoder rings as a CEO. I want to go on site and I want to know in three seconds, where do we need to focus and spend our time? And so to the culture question, we've moved the needle. Now we're early in that journey. And I want to be very clear on culture takes time, but I've been really encouraged by the engagement of the team around what that looks like in proof points. Q1, we did 231 GPS events. 231. Now, no single event is going to be a silver bullet. I'm here to tell you. It's a series of events that continue to change over time, but we've made progress additionally we've restructured the business to be very focused on our end markets what we call decentralized management and and and and to be you know to think about it cleanly it's it's it's we put the power in the p l in the business unit to drive effective change for our customers and ultimeric shareholders then the last piece is i'm a big say-do ratio person what we say we got to do so q1 i look i'm we're i'm pleased with the progress we have a lot of work to do but we've made progress and i would say we baxter need to continue to build that focus on execution and then alignment to high say do ratio so moving a lot of work to get done between between now and when i would say we're at our high point of execution but it's moving in the right direction so you've broken down the the turnaround and kind of multiple phases phase one holding people accountable maybe what's in phase two and when does phase two start or when you're going to move from phase one to phase two yeah and and and you know one of the when you look at um a continuous improvement culture one of the questions i get often is do you have the team and i would say everyone wants to do continuous improvement until you have to do it and and so that's going to evolve over time. But we've made significant progress. We've de-layered the organization. We put the power in the business units, and we're starting to execute. One of the next phases, and I've been very clear around this, is getting our leverage under three. And the reason why that's so critically important is it allows us to press the other areas of capital allocation. And if you join my team, you get two books. And one is the outsiders. And the reason I want you to have that in your back pocket is because I want you to know how I think about investment, how we think about investment, how we look at operationalizing our business, and how we expect execution. So when we achieve under three times, it allows us to open up that ability to execute from a capital allocation for long-term shareholder value. That will be part of the narrative for the future the q1 obviously beat is is that part of the accountability already showing up in a better execution right away is it too early to say uh look we have a lot of work to do right first half second half and i walked through why we're confident in second half um again i'm pleased with the progress more work to do throughout the year but proof points GPS events, training and engagement. We started the first week in January. We did a President's Kaizen event. There was 10 events, big impact events. I did it. My senior staff were involved in Kaizen events. The reason that matters for culture, it shows nobody's above continuous improvement. Everyone here has a stake in ownership around that. But the other proof point that I would say, we're pleased with the progress, not there, but pleased with the progress, is our free cash flow. And so we've made progress there. We're going to continue to laser focus on how we drive free cash flow in the business. It's not where we want it to be, but we have seen improvement, more work to do.

As you've kind of evaluated the portfolio, is this the right mix of businesses for Baxter? How do you think about the quality of the different businesses?

There's obviously the team and culture things, but there's also the businesses, the markets that you compete in. yeah and i'll answer this in a few ways first baxter's gone through a lot of portfolio shift and then that's largely behind us and and i would say sure there's some tsa next year but but i would say large part with the kidney care business being spun out of vantiv um that's now behind us and so so so when i talk about stabilizing that's part of the equation for stabilizing number two we faced some headwinds in in in 25 that that i would say we had to call one of them was um iv solutions and and when i talk about iv solutions we initially had the perspective that it was going to come back in a shorter period of time and i'm here to tell you we made that call uh it's it's we're not talking fluid conservation it's it's the new norm um and and we've now right-sized the business for that. And so we would expect that business in the future to get back to low single-digit growth. And so what you're going to see in the future for Baxter is there's going to be three major categories that we're going to put our businesses in. There's going to be invest and grow, areas we know we can drive and continue to outpace the market. There's going to be sustain, which is is how we look at those businesses for cash generation. We look at them on the investment to return at a higher level of the expectation, but they're the fuelers. And then there's going to be fixed and or divest. And I would say you're going to find lower in that threshold, but we are going to look at businesses we need to fix and be laser focused on it. And so I would say our portfolio is good. We're going to continue to listen to customers. We've done a lot of work around the markets we serve. We've done a lot of insight around where we play in the value chain for our customers. But at no moment is that going to be kind of defining our future, meaning our portfolio will evolve. But we like our position today. And we have a lot of optionality for the future, but we need to execute on our plan.

Any sense for or color or which businesses kind of fall into those different categories?

Yeah, and I'm careful on this. And I would say, you know, we're not outlining that externally right now. But just to give it a couple examples, advanced surgery would be one we'd put in the invest and grow. There's a lot of options to drive that good, strong position. As a matter of fact, I'm meeting a couple of customers tomorrow as standard work as a CEO, as I meet with customers and I'm on site at our facilities. And so really seeing it firsthand, the impact that we have with that product set, the strong value we have with our customers, the technology and power we have in the product allows us to put it in that category. And then, you know, just to give you an example of what would be in the sustain, we want to sustain our position, our strong share position in our IB solutions and really drive that business and make sure that that continues to remain very relevant because our customers rely on Baxter to provide a solution, high-valued solution, where we make it easy for them on their workflow. And so we've also outlined our pharma business to be closer with our ITT business. So we now have it as combined because it's very similar selling process. High value capability, high patient impact, and makes it easier for the customer to run the workflow. And so you're going to start to see that evolve over time. And we're going to be very open around what that looks like.

You've talked about pushing down P&L responsibility. How deep in the organization is that going? Is it changing incentives and bonus structures, or how are you making those changes?

So a couple things I'm going to walk through, and I'm just going to hit, you know, how we think about it from a cultural perspective, where it sits in the business. But what I start with, if this team were to travel with me to the facility I'm going to tomorrow and Friday, what you would see is we start with the value creators. And as you walk through the facility, you're going to see how we measure that daily, weekly, quarterly, monthly, and on an annual basis. And the targets we set are on how we drive it. Now, that's early in its journey, but the team is taking this head on around red or green, not pink, purple, or yellow, red or green. And if you're red, it's okay, but it's not okay not to do something about it. So when you're red, it means action. And what do you do to drive root cause, countermeasure, and what's the target to get back on track? And why that matters to me as a leader is because then when I go on site, I understand, are you taking the critical actions? Because remember, businesses are going to be faced with many different variables along the way. It's are you training your leaders to drive action in them? And that's what we're looking at. Number two, around our position and how we think through how we drive our businesses. And the leaders with P&L have that overall accountability. So they own the P&L, but they drive very deep in their business. And I would say our bonus structure was good, but where we missed, and I'll just say it cleanly, we were low percentage in how we held people accountable to objectives and then what that looks like on impact. and we have driven that at the top all the way down to to full organization and it's a much higher percent it's close to close to 100 of our team is now objectives are aligned with the performance that we expect on the business and the teams are accountable to those numbers and driving those numbers that went into place january 1st went into place jan i would say over q1 uh as you recall You go through strategy, you go through what we call goal deployment, which is our X matrix around where you're going to stretch the business to drive and outpace. And then AOP and the net trickles down into what we expect from your supervisor to a manager to if you're in engineering, how are you launching products, expanding your ability with customers, and driving that for value creation? And we're being very focused on what that looks like. where are we with the the cfo search and like what kind of attributes you're looking for look it's it's a desire you know and i said it on the call it's a desirable job and and and i would say we're fortunate that we have we have a strong finance organization and and anita's lindsey has stepped in as the interim and she's she's doing she's our chief accounting officer she she is understand the nuts and bolts of the business so so comfortable on where we sit we're looking for an operationally focused cfo and and and i and and so when we think about the business it's about how do we maximize our performance and then longer term what do we do with that that cash and that's the capital allocation piece and and and getting somebody on that that understands who baxter is knows where we sit and then also the ability to align the business around execution and performance is somebody who we're looking for i want to touch on the macro inflation um you know what you're seeing on the cost pressures that are coming in from the macro standpoint so um and and you know and i'm not going to reiterate the the call we had um but but we we confirmed our full year guidance on our q1 call now what gave us the ability to do that um first we talked i talked a little bit about the oil impact and and and and how we view it today versus where we were in the past and to give you clarity when we had our kidney care business it was a higher level of exposure it's roughly half or less now so it's it's less exposure on that from a standpoint of oil impact and i even said on the call that if it stayed flat to where it is today we view that we're able to manage that number two being proactive and how we really manage our supply base and how we drive our supply base to minimize any type of disruption on on um you know increasing costs etc and we have driven that from a proactive approach and then the last piece is and you know Just to lay it, we went through a cost structure change, and part of that was two items. First, we de-layered the business, and we have outlined that, and that's part of the first half, second half equation. Number two, we took action on our IV solutions business, and we had carried a cost that was a burden cost. and never easy, but we realigned it to the new norm of the business. And we expect that to flow through in our inventory in the second half of the year. So comfortable where it sits today, but we are not immune. And I want to be very clear on that. It's about how do we take proactive approach? How do we drive our business? But we're not immune. And so we often look at how do we potentially offset something that could come down. And we're constantly looking at what are the areas that we might be challenged on. and and and take action what are the areas to kind of watch out for is it mostly oil resins and shipping costs or is there there's is there anything on computer chips or other areas that that maybe we should be watching yeah and and i walked through a little bit around the the chip aspect and i would say um it it has not been a big impact on us today we're being very close and intentional on that um oil we watch and and we do look at that from a resin perspective but i did walk through what that looks like and and so i would say we continue to monitor the global impact and tariffs obviously being one of them um that that we monitor to make sure that we're we're positioning the business to continue to drive to what we signed up for what other um maybe cost savings programs or offsets do you have in the business if things do get worse to offset some of it and i would say so so we call it ppb purchase price variance um we're being much more proactive on that and i would say the team understands what that looks like and oh by the way part of that is also hitting free cash flow because we expect also payment terms to be something we view with our supply base we're also looking at how do we look at levers within efficiency in the business and we hold ourselves that we call them uh our our our improvement process internal and and we look at automation for that we look at we look at efficiencies on labor with that we look at how we how we go to go to market on that so all those areas and then there is some element of price that we look at as well and and i would say you know baxter has gotten better we're not perfect but we've gotten better from where we were in the past there is an element of if our costs go up, we have the ability to go back in the discussion. It takes time. And as you're well aware, last year we had about 100 basis point of price in our number from last year. And we are looking at that for the future because we offer a high value for our customers and that constant driver on value and value creation. And that's why innovation is also a key element in our future. And base hit out innovation where being in front of customer, listening and launching solutions that really enable them to do their process better and be more effective on care for patient. And so we're very aligned with what that looks like. And a clear example of that is the Dynamo stretcher. Very proud of that launch. A lot of excitement around it. We've seen a tremendous, tremendous, you know, feedback from our customers in a positive way it's it's a it's a connected stretcher and and and it's about that that listening and launching solutions that that offer higher value for our customer base on uh on margins um first half the second half there's a 500 basis might step up i think a lot of people are looking at that and seeing and how is that possible so just help us bridge bridge that gap maybe i'll let you you start and then i'll add in the high level sure so um we tried to put out a fair amount of color on the call, kind of helping people understand and process what those buckets were.

So call 500 basis points from what we said about first half and kind of implied at the midpoint of our guidance. About half that is simply an improvement in volumes and capturing an appropriate level of leverage associated with that. And that frankly has not been the case recently here. And so kind of getting back to that more normal leverage that we would expect. The other two areas, one would be realizing the benefits from the cost structure actions that Andrew discussed. Those were mostly taken in January. Those are going to be realized. We just have to see them flow through the P&L. And the third piece is cycling through the higher cost inventory or the absorption headwind that exists in the first half. It was around a $20 million impact in Q1. It's probably going to be closer to $50 million impact in Q2. But importantly, as we exit the first half, we think that will be behind us. Again, it's a very mechanical thing. We're just going to sell through the inventory that was produced at the end of last year before we took those cost actions. These are the three biggest areas. Obviously, not all-encompassing. You know, we've talked about inflation. I think importantly there, you know, based on the cap and roll and where we sit today, that that would only be, you know, a month or two impact for the full year. And so as we took a step back, looked at all the risks and opportunities for the year, felt comfortable that that was a manageable risk in the context of everything in totality.

Yeah, and like, I don't have much to add, Kevin, Kevin laid that out appropriately. I mean, if you look at it, right, 50% is, like you said, typical market for our business. And it's just math. It's how it's going to roll through. And so, yeah, of course, we're going to continue to face areas that we're going to drive in the business. And there's a lot of wood to chop between first half and second half. But we do view that we are very comfortable with reiterating our guidance for the year and what that looks like and how we're executing towards it. You've also kind of talked about 2027. you said grow ability to grow revenue and eps both you've been saying that for a few months what's given you the confidence to kind of say that a year in advance what are some of the risks to that so a couple items first i want to be very clear about something our path to 27 is through our ability to execute in 26 so i want to be crystal clear on it's how we execute throughout the year and of course there's a lot of dynamics between now and next year and And I'm not here to go through all what that could look like because we're going to be faced with different challenges throughout the year that we're going to take head on. But as we look at next year, our typical market growth is low single digits. We would expect it to be that in next year. And through that, as we look at how to drive the business, we would also look at forms of our ability to expand our margin profile through that increase. And so I'm not here to talk about 27. I'm here to talk about our path there is through 26. and and through that is is launching new products executing our plan driving the business and that puts us in a better position to execute 27 28 29 when you look at like this year obviously below your weighted average market growth rate which assumes implies share loss like you look at where you're losing share what what's kind of giving you the confidence to get back to stabilize share in those businesses yeah and and i i wouldn't agree with losing share what i can say is um you know we did have and i talked about fluid conservation that that is a real item in q1 it was a bigger bigger quarter last year and that comp was was a challenge for us when we look at the year getting back to a more i would say i you know we we let it out to neutral or just above um when we go through our businesses it's how do we align them for driving expansion with customers and we've largely now have gone through and lapped some of the conservation that we've seen and or ordering process around that and we're setting up to a more normalized approach on Baxter and I would say we were very comfortable in our share position we're very comfortable with the market dynamics we're very comfortable with the value for our customers and then realizing that over a long period of time just just to build on that so you touched upon the new market

baseline and iv solutions that's impacting 26 but recall there's also um we're annualizing or lapping the lost novum sales as well that were in the prior year and we are also um facing some pressures of the injectables business and we've talked about some of the supply challenges there so those are all three things that are impacting 26 that don't necessarily have to do with share when when you first came in i think you stopped giving quarterly guidance i think you were like hey, our visibility is not there to do that.

You gave some color this past quarter on Q2. Is the visibility and your ability to set guidance getting better at this stage?

Yeah, and look, I look at it as no single quarter is going to define our business, right? It's how we continue to execute year over year and that constant drive to always focus on the areas that need to improve. And I would say that was one of the areas around why we are very comfortable on looking at the full year guidance. And so when we think about the year, that's how we're going to lay it out.

And then I want to touch on free cash flow. It's going to have been an area that Baxter's probably needing to improve going forward. What's the kind of the levers and how long is it going to take to start improving the cash generation here?

So again, in Q1, it was a nice area of improvement, a lot of work to do. There's three areas. there's there's there's collection from customers there's payments of suppliers and how we manage our inventory we have action plans around around all three and and i would say we're getting better we're not where we need to be and you're going to see us constantly drive around how do we get better on this process because free cash flow as i mentioned earlier is one of our value creators and it's one of the areas we look at with with a keen eye on on we're going to hold ourselves accountable to getting better on this on an ongoing basis you're even confident not to put buybacks on the long-term slide that kind of stood out to me is that still the plan longer term so once we get past and get under three times it opens up a whole area that we can look at from from a capital allocation and there's there's five points right there's there's debt repayment There's buybacks, there's internal investment, there's M&A, and then there's dividend. And I would say we talk about it because we're going to be looking at that for the future around the greatest return to shareholders, and it's over a long period of time. So I would say we're signaling it because it will be consideration, of course. It's one of the five levers. But I'm not here to tell you that we're at a point at which we're going to put the percentages of what we're going to do with the free cash flow. Because we're going to look at that on an ongoing basis around that impact for the long term.

So M&A is still part of the strategy?

Today, we're focused on executing the business. Once we get to that level, M&A is going to be part of the consideration around what we look at. But I'm not here to tell you what that's going to look like. I was asking kind of post three times, obviously. so and and look um my view is uh having done this before um cultivation is king um i'm a huge believer i call it abc always be cultivating um and how do we get out and we're we're building those relationships now but but but these take time and and i'm not going to be in a position where where we feel like we need to jump to something it's about strategic focus on where we're going to see expanded growth with our position today in the market, and how do we drive that from an overall capital allocation perspective? And we're going to look at ROIC as a threshold. And so, you know, when we start to get to that level, we want to have built that relationship. And the reason why we want to build that relationship is we want to have the ability to either have last look or have that relationship for when a customer decides they want to, or when a company decides they want to do something different they reach out to baxter first and so that type of thing takes time and we're building that but but we're early in our journey there so your that's prior predecessors or not prior predecessors but your prior companies you worked at were kind of leading companies in the space is that is that the goal like what does baxter look like on the other end of this we want to be known as strong executors in the markets we serve. And what you're going to see over time is you're going to see us focus on not only expansion in the markets we participate in. So we want to outpace our competition in the markets we participate in. We're also going to look at how do we do systematic M&A around how do we drive our ability to really align to customer and shareholder value. And you're going to see us, and with that, it's going to be some portfolio shift, but you're going to see us focusing on areas that are high value return and and and how do we be strong stewards for our shareholders anything that i didn't touch on kevin you want to all right thanks thanks for joining us thank you very much appreciate it