Clare Trachtman:

Good morning, and welcome to our second 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 second quarter 2024 results, along with our financial outlook for the third 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 third quarter and full year 2024, the status and anticipated timing of our ongoing strategic actions, including the proposed Kidney Care separation and the potential impact of our recent pricing actions, regulatory matters and the macroeconomic environment on our results of operations 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?

Joel Grade:

Thanks, Joe, and good morning, everyone. As Joe mentioned, we are pleased with our second quarter results, which came in ahead of our expectations and further reinforce our goal of consistently meeting and exceeding our financial objectives. Second quarter 2024 global sales of $3.8 billion increased 3% on a reported basis and 4% on a constant currency basis, and as mentioned, compared favorably to our previously issued guidance. Outperformance in the quarter benefited from better-than-expected sales in many product categories and particularly in patient support systems, infusion therapies, peritoneal dialysis and drug compounding. As compared to the prior-year period, sales, excluding Kidney Care, increased approximately 5% on a constant currency basis. On the bottom-line, adjusted earnings from continuing operations totaled $0.68 per share, increasing 24% versus the prior-year period and ahead of our prior guidance of $0.65 to $0.67 per share. Results in the quarter were driven by strong operational performance with continued momentum commercially, partially offset by a negative impact from non-operational items totaling $0.05 per share due to foreign exchange and a higher-than-anticipated tax rate. 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 and Therapies, or MPT, segment were $1.3 billion, increasing 5%. Within MPT, second quarter sales from our Infusion Therapies and Technologies division totaled $1 billion and increased 5%. Sales in the quarter benefited from strong growth internationally across the division, particularly for our IV solutions and infusion systems products, which benefited from both volume and pricing gains. Solid demand for nutrition globally also contributed to growth in the quarter. Sales from Advanced Surgery totaled $277 million and grew 4%, reflecting solid growth internationally. For our Healthcare Systems and Technologies, or HST, segment, sales in the quarter were $748 million and increased 1%, coming in ahead of our expectations. Within the HST segment, sales in our Care and Connectivity Solutions, or CCS, division were $452 million, growing 4%. Performance rebounded in the quarter, driven by significant growth in orders, both sequentially and year-over-year for our CCS products. As Joe mentioned, the actions we are taking to enhance our operational rigor and improve execution are yielding results. These factors contributed to orders growth across our CCS division of more than 40% compared to the prior year and over 60% sequentially. Results in the quarter included upgrades to both existing customers and competitive gains within our patient support systems business. We are very encouraged by the growth of orders in the US this quarter, which will be phased in over the course of the second half of this year and into 2025. Overall, we believe the initiatives we are implementing to improve commercial execution will continue to lead to improved performance, both in the second half of this year and beyond. Front Line Care sales in the quarter were $296 million, declining 4%, in line with our expectations and represented a double-digit improvement sequentially. Growth in the quarter continued to be impacted by a difficult comparison to the prior year as backlog reductions positively contributed to growth in the prior-year period. Performance in the quarter was also impacted by ongoing softness in the primary care market, which negatively impacted growth in both our connected monitoring and intelligence diagnostics product portfolios. The timing and release of government orders in the US also impacted growth in the quarter. We expect this division to return to growth in the second half of the year as growth for products in other settings such as cardiology and acute is anticipated to more than offset the continued softness in primary care and lower government orders. The anniversary of the prior-year impact from the backlog reduction will also benefit performance in the second half of the year. Moving on to Pharmaceuticals. Sales in this segment were $602 million, increasing 11%. Performance in the quarter reflect double-digit growth in our US injectables portfolio, driven by new product launches as well as strong demand for services from our Drug Compounding portfolio internationally, which has benefited from supply constraints for certain customers that are expected to ease in the second half of the year. Performance in the quarter was partially offset by lower sales in inhaled anesthetics globally. Sales in the quarter for our Kidney Care segment totaled $1.1 billion, increasing 3%. Within Kidney Care, global sales for Chronic Therapies were $917 million, increasing 1%. Strong PD growth in the quarter was partially offset by the expected negative impact from certain product and market exits in our in-center HD business as well as lower sales in China due to government procurement initiatives. We estimate that these items negatively impacted sales by just over $50 million in the quarter. Sales in our Acute Therapies business were $201 million, representing growth of 9%, driven by strong demand and competitive conversions in the United States. Other sales, which represent sales not allocated to a segment and primarily includes sales of products and services provided directly to certain of our manufacturing facilities, were $22 million and declined 5% during the quarter. Now, moving on to the rest of the P&L. Our adjusted gross margin totaled 41.2% and represented an increase of 80 basis points over the prior year. 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 were 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. Product mix and foreign exchange partially offset margin expansion in the quarter. Adjusted SG&A totaled $873 million, or $22.9 million as a percentage of sales, an increase of 10 basis points from the prior-year period as we are making select investments to support our growth objectives and new product launches. SG&A leverage is expected to continue to improve as sales ramp over the course of the year. Adjusted R&D spend in the quarter totaled $175 million and represented 4.6% as a percentage of sales, an increase of 10 basis points compared to the prior-year period and reflects our continued investments in advancing new products across the portfolio and bringing innovation to patients across our segments. These factors resulted in an adjusted operating margin of 13.7%, an increase of 50 basis points versus prior year, driven by the factors above, which more than offset a negative impact on operating margins of approximately 70 basis points due to foreign exchange. Net interest expense totaled $85 million in the quarter, a decrease of $39 million versus the prior-year period, driven by debt repayments in the fourth quarter of 2023 associated with the proceeds of our BPS divestiture. We plan to continue to repay debt in 2024, consistent with our stated capital allocation priorities. During July, Baxter finalized a bank finance bridge loan in the form of a delayed draw term loan, or DTTL, in lieu of a public bond financing with a total size of $2.05 billion. The DTTL provides certainty of ability to fund debt maturities coming due in the fourth quarter in the event we haven't completed the Kidney Care separation by that time. We expect to utilize proceeds from the separation to repay the loan if outstanding. We felt this was a better option as compared to bond financing given the more temporary nature of the cash need and the high cost of issuing new term debt in current markets. Adjusted other non-operating income totaled $20 million in the quarter compared to an expense of $22 million in the prior-year period, which included losses on both foreign exchange and marketable securities. The adjusted tax rate for the quarter of 23.9% came in higher than expectations and increased as compared to the prior-year tax rate of 17.8%. The year-over-year increase is primarily driven by the geographic mix of earnings, decreased utilization of foreign tax credits in the current year period and a non-recurring foreign tax incentive in the prior-year period. And as previously mentioned, adjusted earnings from continuing operations totaled $0.68 per share and increased 24% versus the prior year, primarily driven by improved commercial performance and a reduction in interest expense, offset by the impact of foreign exchange and a higher tax rate. Let me conclude my remarks by discussing our outlook for the third quarter and full year 2024, including some key assumptions underpinning the guidance. For full year 2024, Baxter now expects total sales growth of approximately 3% on both reported and constant currency basis, which is an increase from prior guidance of 2% to 3% on a constant currency basis. This increase reflects the outperformance we realized in the second quarter and continued momentum for our businesses. Constant-currency sales guidance for the full year by reportable segment is as follows

Robbie Marcus:

Great. Thanks for taking the questions, and congrats on a nice quarter. Two from me. Wanted to start with the revised guidance. And it looks like it's pretty much going higher from the second quarter beat and then third quarter upside versus the Street. So, you gave a lot of detail, but I was hoping you could just walk us through the underlying drivers and did I get the raise and impact correct? Thanks.

Robbie Marcus:

Thanks. And maybe just a quick follow-up here. The HST had a tough first quarter. It looks like it improved sequentially in second quarter. Front Line Care still negative year-over-year. Maybe just speak to the underlying trends you're seeing in the two businesses there and your confidence in a reacceleration and return to a positive growth in the second half of the year? Thanks.

Robbie Marcus:

Great. Thanks a lot.

Travis Steed:

Hey, thanks for taking the question. I wanted to ask about the KidneyCo separation. I think that was new that you added early 2025, so I wanted to ask about that. And does your thinking change at all on spend versus sell? And also noticed an impairment charge on that business. So, wasn't sure if there's anything to kind of read into that impairment charge this quarter.

Travis Steed:

Great. Thanks a lot. I wanted to ask a follow-up on the margins. So, first of all, the second half total company, you got a couple of hundred basis points second half margin ramp. So, I wanted to ask about the confidence and kind of what's driving that. But also if you think about the segment margins, in the first half of the year, all the margin expansion for the total company was more on the renal side and the core of Baxter business down year-over-year. I wanted to kind of think about how we get confidence that ex the RenalCo longer-term, like the RemainCo Baxter business is going to be expanding margins kind of the 50 basis points or so a year that you've kind of set out in the past?

Travis Steed:

Yeah, thanks a lot. I appreciate that.

David Roman:

Thank you, and good morning, everybody. I wanted just to start on the revenue outlook for the balance of the year, and recognizing the comment on exiting the year at the higher end of the 4% to 5% on the core Baxter business. But as you look at the sort of guidance that you've provided for Q3 and the balance of the year, I think that implies revenue growth in Q4 below 1%. Can you maybe just help us understand the drivers of the phasing of revenue for the balance of the year? And then, I have one follow-up on the strategic capital allocation side.

David Roman:

Got it. And then maybe just a follow-up, if you look at kind of the increases in discretionary spending on the SG&A and R&D side, could you maybe go into a little bit more detail about the internal capital allocation priorities? Where those incremental dollars in SG&A and R&D are being deployed? And maybe any early look you can give us into some of the either product launches or geographic expansion initiatives that may come out the other side of these investments?

David Roman:

Hello, Joe. Thank you. Nice to talk to you.

David Roman:

Very helpful. Thank you for taking the questions.

Larry Biegelsen:

Good morning. Thanks for taking the question, and congrats on the nice quarter here. Joel, I was hoping you could just give us a refresher on the key assumptions for Kidney Care sale or spin. The tax basis, how might it look different from the BPS sale? Just the margins for KidneyCo, first half was 10.9%, which is much higher than in prior year. So, when we're trying to estimate the dilution, what should we think about for margins and the stranded cost assumptions and use of proceeds would be helpful. Any color on that? Thanks for taking the question.

Larry Biegelsen:

All right. I'll leave it at that. Thanks for taking the question, guys.

Operator:

Vijay Kumar of Evercore ISI is on the line with the question. Please state your question.

Joel Grade:

It's primarily that and some Kidney, but I think the Drug Compounding is the main part of it. We haven't talked about the fact that our ex-Kidney exit rate for the year will be in the 4% to 5% range. So I think the -- but yeah, it's primarily compounding and then some slowdown in Kidney.

Vijay Kumar:

Understood, Joe. And maybe, Joe, a bigger-picture question for you. If I just go back last 18 months, there's been a lot of moving parts, challenges, a lot of questions raised on, is Baxter losing share. When I look at your order commentary within HS&T in some of the performance in core business, it looks like we're back to 4%-plus. When we look at the sort of the forward trajectory here, right, the implied exit rate, is that 4%-plus organic sustainable? Any one-offs we should be aware of? I know this year we had China VBP and some product exits. Any other noise factors that we need to be aware of as you look at the outlook and your comments on share losses?

Vijay Kumar:

Fantastic. Thanks guys, and congrats on the execution.

Operator:

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

Joe Almeida:

Thank you, Danielle. Listen, one of the things I want to underscore has been Baxter's capability bringing together a life-saving portfolio of products. And we have made significant progress in the last two years in our enterprise accounts and how Baxter-connected products now are starting to show to our customers and how interested they are. So, I feel that commercial execution not by segment or division only, but as a company has been very successful as of late, and we're starting to see that coming around. Second thing is now moving down from the sales into the ISC, we have turned the corner. Our colleagues in supply chain and our presidents of the segments have worked very, very closely and have devised and are implementing and executing really good plans in terms of cost optimization. And we can see that in our margins, start to turn the corner and we have made great changes to accomplish that. Going down one level, SG&A is all about what Joel spoke about, is our stranded cost associated with other efficiencies, primarily in G&A. This is where the recipe is for the next 12 to 24 months is to optimize the Baxter shared services organization even further and there's great opportunity there as well as contain and offset the stranded costs, so we can show progressively in the next year, two, three, consistent improvements in operating income margins.

Operator:

Matt Miksic of Barclays is on the line with a question. Please state your question.

Joe Almeida:

Thank you. As we had previously disclosed, we have negotiated two very large GPO agreements and conversations now have moved to the IDN level. As expected, customers are being thoughtful and thorough about evaluation -- evaluating their options. We believe now with the Novum launch and our ability to provide product, our supply chain resilience, by the way, is second to none. We have proven that over the years and that resonates with our customers tremendously. The association of that and the ability to have a large-volume parenteral pump as well as a syringe pump on a novel platform on the market makes a huge difference. So, I feel optimistic that we're going to close those negotiations in the next four months and be able to move on into 2025 with these things behind us. And by the way, pricing has been a contributor to Baxter, in Q2 2024, was about 100 basis points and expect to be roughly 100 basis points for the full year.

Operator:

Rick Wise of Stifel is on the line with a question. Please state your question.

Joe Almeida:

Rick, good morning. We found, as a matter of fact, we have sales of Novum in the second quarter, which we did not expect to have, but we're a little faster in having the product ready for the market. What we've seen is great interest. It plays well for our ability to compete. As you know, Spectrum is a great product, but it does not have a syringe pump. And having a syringe pump makes a huge difference. So, we're very happy with the momentum that we're getting in Novum. We'll been showing that to very large hospital systems and small as well. Our team is very hard at work and we feel confident in the technology. So, we have the ability to take market share. I think that is an important thing. This is about providing our patients and our customers with the best technology on the market, not a re-engineered technology from many, many years ago.

Joe Almeida:

You're welcome. So, Rick, let me break up a little bit, break down FLC for -- or Front Line Care to all listening to the call. Primary care is one segment, one division of that business. We have other divisions such as cardiology and monitoring. Those are going very well. We have no issues in the acute care space. So, let's focus on a specific, the patient, the primary care physician office. We believe this market has two dimensions. One is the amount of backlog we had in 2023 that we're able to catch up and ship and sell and fulfill orders that were outstanding. The second one is the slowdown in churn that we've seen due to several of these large primary care outfits exiting the market and moving. The demand is still there. Primary care demand is still there. We're number one shareholder, gaining a slight share with 80%-plus of market share already. So, we see that coming back because the demand is not going anywhere. The demand is high. So, the churn due to the changes on the market as well as what we saw last year, we're catching up with the backlog. Government orders is a completely different thing altogether. So eventually the government will need to buy the products that are needed for the government. And when that happens, we'll see the orders come in. We are a very large supplier of the government and I feel comfortable that those problems that we've seen in '24 with the decline in primary care, this year will turn the corner in 2025. The business has solid footing, good technology. On the other side of Front Line Care, we have technology that will be launched in early -- in mid-2025 to compete into monitoring and we are very happy with new launches that will happen in the MedSurg monitoring products that we have coming out in mid-2025. So, technology launches will fuel FLC in 2025 as well as the comp between '24 and '25, a re-emerging of the primary care and probably resuming orders with the government.

Joel Grade:

You're welcome.

Pito Chickering:

Hey, good morning, guys. Nice quarter and thanks for fitting in here. Looking at the infusion pumps, what do you think the market is growing sort of in 2024? And are you guys picking up or losing share this year? And with all the RFPs out for '25 and beyond, do you guys see yourselves as market share gainers or market share maintainers? And then, on the strong pricing gains for infusion that you talked about, as we think about pricing in 2025, should we see an acceleration of this pricing for next year?

Pito Chickering:

Yeah. So, you talked about the 100 basis points of pricing sort of this quarter and that continued in the back half of the year. Should that be accelerating in 2025 as you think about the GPO contracts?

Joe Almeida:

And Pito, answering the question on the infusion pump, first of all, we are market share gainers and have been for a long time, just about 100 basis points a year. This will accelerate and is accelerating with Novum we're going to see Q3, Q4 into 2025. So, we find that we have great interest in our pump. I think there is a churn -- a natural churn of the market in terms of number of pumps that need to be replaced and our objective is to be -- in every competitive account with our new technology.

Joel Grade:

Can you just repeat that? So, your phone was going in and out during that question. I apologize. Do you mind repeating that one more time, please?

Joel Grade:

Yeah. I mean, look, I think the main thing here is really we're going to continue to see, again, improvements in HST. So that's where I'm going to start with. In other words, we've seen that over the course of this year as that HST business has continued to accelerate, again, we think there'll be a strong exit rate for that business and that will continue to accelerate into 2025. I think as we talked about from a Pharma perspective, again, compounding is going to be a portion of that, that's going to drag. I don't know that we've specifically guided the actual compounding business, but that is something that is again going to be a continued -- it's slowing, as Joe talked about, for various customer reasons that that's happened. From MPT perspective, again, we continue to believe we've got some really solid momentum going into 2025, certainly coming out of 2024. And then, obviously -- so just to kind of summarize all that, I think the -- while there is a bit of a squeeze math from the -- we talked about the Kidney and the compounding, the reality of it is that we have a 4% to 5% growth of ex-Kidney that we're heading into -- exiting the year with and heading into next year. So that momentum is really strong, again ex-Kidney, and that's the part that we feel really excited about as we head into 2025.

Pito Chickering:

Great. Thanks so much.

Operator:

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

Joel Grade:

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.

Operator:

[Operator Instructions] 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.

Vijay Kumar:

I guess, my first one is on top line here. When I look at the business here, the Hillrom portion health care tech part of the business underperformed, 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, like when does Hillrom normalized? 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?

Joel Grade:

Yes. This is Joel. And so 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. We had positive manufacturing variances that flowed through. And so I think just in general, our ISC performance was a strong contributor there.

Operator:

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

Larry Biegelsen:

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.

José Almeida:

And you'll see a tremendous acceleration for HST, Larry, that is reflective of the pace of the business but also acceleration of some of our actions that we took mid-Q1, that is starting to get effect in Q2. We have accelerated our pump sales.

Larry Biegelsen:

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?

Operator:

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

José Almeida:

I want to start by saying that we actually increased R&D in HST, the former Hillrom business, we call HST in Baxter now. We increased R&D there. We are very, very judicious about capital allocation within the business and what put money in R&D. We also have plans in '24, but also in '25 to continue to increase the dollar's value, not as a percentage of sales, the dollar's value that we put there.

Robert Marcus:

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. Kind of same question, following up on Larry, but more specific to the drug compounding.

José Almeida:

Robbie, we at pharmaceutical relied outside the U.S. in very key markets, the combination of drug compounding and premix and vial pharmaceuticals as well as IV solutions as Baxter provides a full solution to the customers.

Operator:

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

José Almeida:

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 Novum.

Patrick Wood:

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.

José Almeida:

Patrick, we are in an injectable space that is -- it's called a specialty generic. We take ANDAs, and we create premixes. They're very safe, they have good shelf life and they can be deployed to hospitals very quickly. So as we think about drug shortages, we continue to explore drugs that can be put into that format.

Operator:

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

Joel Grade:

Yes. Thanks for the question. Yes, you're correct in your assumption on that. And then on the Kidney side in particular, there is a lot of impact on that, and something I referred to you earlier in terms of closing our Opelika plant. So again, in that -- in the first quarter, there was -- I call there's a lot of increased production that drove a fairly significant amount of margin in our Kidney business in Q1 in particular. 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 certainly not anticipating that to continue in Q2.

Joel Grade:

Yes. I think it's really a combination of things. First of all, it's the volume, as you said, it is continued opportunities from pricing. As you know, we've had some pricing impact this year. And we've renegotiated some of our contracts with our GPOs as we head into next year. We're anticipating continued favorability from a pricing standpoint.

Operator:

Josh Jennings of TD Cowen is on the line with the question.

José Almeida:

Yes. We have good performance in Western Europe, we see that, and we see good performance in Latin America as well. So we see that Baxter combination with Hillrom has expanded Hillrom opportunity 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, which is general acute market sales.

José Almeida:

We, with Novum IQ, syringe and LVP, large volume parenteral, now we have a suite that connects with Baxter, gateway, overall gateway called Connex. And the Connex brings all these devices to talk to each other. So right now, if you went to our center, our customer experience center in Batesville or in any other place that we have, you would see the pump communicating to devices like Volt, the bed communicating to Volt.

Matthew Miksic:

So I'd love to understand one of the things that a question I get often on Baxter is sort of where is the sort of tall pole in the tent? Where is the sort of significant single growth driver, if there is one? And looking into the end of back half of this year and '25, maybe, Joe or if you could 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 sort of see lift in growth or lifting leverage into '25?

Analysts:

Travis Steed - Bank of America Securities Matt Miksic - Barclays Vijay Kumar - Evercore ISI Pito Chickering - Deutsche Bank Securities Matt Taylor - Jefferies Danielle Antalffy - UBS

Clare Trachtman:

Good morning, and welcome to our fourth quarter 2023 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 fourth quarter and full year 2023 financial results along with our financial outlook for 2024. With that, let me start our prepared remarks by reminding everyone that this presentation, including comments regarding our financial outlook for the first quarter and full year 2024, new product development including the impact and status of pending regulatory approvals, the status and potential impact of our ongoing strategic and recent pricing actions, business development, regulatory matters, and the macroeconomic environment, including commentary on 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, along with 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?

Joel Grade:

Thanks, Joe and good morning, everyone. I’m happy to be joining the call this morning to provide some additional details on Baxter’s fourth quarter and full year 2023 financial performance as well as commentary on our financial outlook for 2024. As Joe mentioned, we are pleased with our fourth quarter results, which represented another step forward in our on-going business transformation. Fourth quarter 2023 global sales of $3.9 billion increased 4% on a reported basis and 3% on a constant currency basis and compared favorably to our previously issued guidance of 1% to 2% reported and approximately 1% constant currency. Outperformance in the quarter benefited from better than expected sales in many product categories and particularly in chronic therapies and drug compounding. As compared to the prior year period, we reported solid quarterly growth in health care systems and technologies, pharmaceuticals and medical products and therapies. And collectively, sales for these three businesses, which will comprise Baxter post the separation, increased approximately 5%. As expected, Kidney Care sales declined slightly in the quarter due to the factors Joe mentioned earlier. On the bottom line, adjusted earnings totalled $0.88 per share, increasing 13% versus the prior year period. These results reflect the ongoing operational improvements we are recognizing both commercially, as well as within our supply chain network as that team successfully executes on its margin improvement programs. Lower interest expense and a benefit from foreign exchange also contributed favorably to the quarter, partially offset by the impact of a higher tax rate compared to the prior year. Adjusted earnings per share for the quarter came in at the high end of our expected range of $0.85 to $0.88 per share, primarily driven by better sales and operational performance. Now I’ll walk through performance by our reportable segments. Commentary regarding sales growth will reflect growth at constant currency rates. Sales in our Medical Products and Therapies segments were $1.3 billion, increasing 4%. Full year 2023 sales totalled $5 billion also advancing 4%. Within Medical products and therapies, fourth quarter sales from our Infusion Therapies and Technologies division totalled $1 billion and increased 4%. Sales in the quarter benefited from strength in our IV Solutions portfolio, particularly outside the United States, as well as solid performance in our infusion system portfolio. Sales from Advanced Surgery totalled $278 million and grew 6%, coming in ahead of expectations and reflecting strong growth internationally. For our Healthcare Systems & Technologies or HST segment, sales in the quarter were $795 million and increased 7%. Full year 2023 sales totalled $3 billion, advancing 3%, within the HST segment, sales in our Care & Connectivity Solutions, or CCS division or $492 million, increasing 11%. Performance in the quarter benefited from double-digit growth in all key product categories within the division, including our care communications, surgical solutions and Patient Support Systems product offerings. Growth in the quarter was partially offset by lower contribution from rental revenues. Fourth quarter United States orders within CCS continued to improve sequentially, but notably also grew on a year-over-year basis for the first time in 2023. While we are encouraged by the improvement in capital spending we’ve seen from our U.S. hospital customers, we continue to believe there may still be select pockets of cautiousness in the marketplace. Front Line Care sales in the quarter were $303 million, increasing 2%, given the improvements in electromechanical component availability over the course of 2023, we’re able to successfully address our elevated backlog and exited the year at more normalized levels. Sales in our Pharmaceuticals segment were $596 million, increasing 7%. For the full year, sales were $2.2 billion, also advancing 7%. Performance in the quarter reflected double-digit growth in our U.S. injectables portfolio driven by new product launches, as well as continued strong demand for our services within our drug compounding portfolio internationally. Other sales, which represent sales not allocated to a segment and primarily include sales of products and services provided directly through certain of our manufacturing facilities were $18 million and declined 58% during the quarter in line with our expectations. This lower level of sales reflects reduced demand for certain contract manufacturing volumes and the termination of a royalty arrangement. Moving on to Kidney Care, sales in the quarter were $1.2 billion and declined 1%. Full year 2023 sales totalled $4.5 billion and increased 1%. Within Kidney Care, global sales for chronic therapies were $950 million, declining 3%, though as mentioned earlier, came in better than expected. Sales growth in the quarter was impacted by a difficult comparison to the prior year period, which included certain discrete items in the U.S. that totalled approximately $25 million. Finally, performance in chronic therapies continues to be impacted by lower sales in China due to certain government-based procurement initiatives and a lower patient census due to the pandemic. We estimate that collectively, these country-specific factors negatively impacted sales by approximately $35 million in the quarter. Sales in our Acute Therapies business were $206 million, representing growth of 6% with strength across most regions, including double-digit growth in the United States, where we’ve now rebased this business following the pandemic-related benefits we previously experienced. Now moving through the rest of the P&L. Our adjusted gross margin totalled 42% and represented an increase of 80 basis points over the prior year. The year-over-year improvement in gross margin primarily reflects the stabilization of macroeconomic factors and inflationary pressures that previously contributed to higher cost for raw materials, overhead and labor that impacted our margins earlier in the year. Margin improvement in the quarter also benefited from pricing initiatives in select markets and on-going margin improvement programs in our integrated supply chain network. Performance for the quarter was inline with our expectations as topline outperformance in the quarter was driven by lower-margin divisions, which drove a slightly negative gross profit mix in the quarter. Adjusted SG&A totalled $829 million or 21.3% as a percentage of sales, an increase of 20 basis points versus the prior year period. Performance in the quarter benefited from our on-going transformation initiatives to enhance operational efficiencies, offset by higher bonus accruals under our annual employee incentive compensation plans compared to the prior year and select investments in sales and marketing initiatives. Adjusted Research & Development spending in the quarter totalled $172 million and represented 4.4% as a percentage of sales, increasing 20 basis points versus the prior year. We have ramped up our R&D efforts, particularly increasing our investments in advancing new products across the portfolio and like SG&A, R&D expenses include the impact of higher employee incentive accruals as compared to the prior year period. These factors resulted in an adjusted operating margin of 16.2% and an increase of 30 basis points. Overall, we are very pleased with the second half margin expansion we’re able to realize with operating margins improving approximately 300 basis points in the second half of the year as compared to the first half of 2023. Net interest expense totalled $73 million in the quarter, a decrease of $44 million versus the prior year and down $55 million sequentially, driven by debt repayment of approximately $2.8 billion associated with the utilization of the proceeds from our BPS divestiture. We plan to continue to repay debt in 2024, consistent with our stated capital allocation priorities. Adjusted other non-operating income, totalled $11 million in the quarter compared to an expense of $11 million in the prior year period. Year-over-year improvement was largely due to lower foreign exchange losses incurred as compared with the prior year period. The adjusted tax rate in the quarter was 21.0% compared to 14.6% in the prior year period. The year-over-year increase is primarily driven by statute expirations on certain tax positions benefiting the prior year period. The tax rate in the quarter came in higher than expected, primarily driven by changes in geographic earnings mix. And as previously mentioned, adjusted earnings totalled $0.88 and increased 13% versus the prior year, primarily driven by better-than-expected sales and operational efficiencies, as well as lower interest expense, partially offset by the tax rate in the quarter. For the full year, Baxter’s adjusted earnings from continuing operations decreased 14% to $2.60 per diluted share, reflecting the impact of higher cost of goods sold, driven primarily by the macro environmental factors we previously discussed, greater annual employee bonus accruals, as well as increased non-operating expenses. These factors were partially offset by our operational and supply chain savings initiatives. With respect to cash flow, we generated free cash flow for the year of over $1 billion from continuing operations compared to $411 million in the prior year period. Going forward, cash flow generation and in particular, improving our working capital metrics is a key priority both for me and the Baxter team. To close on our full year results, we are pleased with our operating performance through 2023, which reflected both consistent progress and building momentum. And it is important to note that our teams were able to achieve this performance, while also making meaningful progress against our strategic initiatives designed to enhance our future performance and drive incremental value for all stakeholders. We look forward to building on that positive momentum as we enter 2024. Let me conclude my remarks by discussing our outlook for the first quarter and full year 2024, including some key assumptions underpinning the guidance. For full year 2024, Baxter expects total sales growth of 2% on both a reported and constant currency basis, as the impact from foreign exchange is currently expected to be minimal on a full year basis. Constant currency sales guidance for the full year by reportable segments is as follows; for Medical Products and Therapies, we expect sales growth of 3% to 4%; sales in our Healthcare Systems and Technology segments are expected to increase approximately 3%; we expect Pharmaceuticals sales growth of 4% to 5%. Collectively, sales for these remaining Baxter businesses are expected to increase 3% to 4% in 2024; for Kidney Care, we expect sales growth to decline 1% to 2% as compared to 2023. Factors impacting year-over-year growth are primarily driven by select market and product exits in connection with our margin expansion initiatives for this segment which we estimate will negatively impact sales by approximately $150 million. Additionally, the incremental impact from the ongoing government procurement initiatives in China is expected to total approximately $70 million in 2024. Now turning to our outlook for other P&L line items. We expect adjusted operating margin to increase by at least 50 basis points in 2024. We expect our non-operating expenses, which include net interest expense and other income and expense to total approximately $350 million in aggregate during 2024. We anticipate a full year adjusted tax rate between 22.0% and 22.5%, which reflects an approximate 100 basis point impact to the 2024 tax rate from the implementation of Pillar 2 [ph]. We expect our diluted share count to increase slightly and average 510 million shares for the year. Based on all these factors, we anticipate full year adjusted earnings, excluding special items, of $2.85 to $2.95 per diluted share. Specific to the first quarter of 2024, we expect global sales growth of approximately 1% on a reported basis and 1% to 2% on a constant currency basis. And we expect adjusted earnings, excluding special items, of $0.59 to $0.62 per diluted share. With that, we can now open up the call for Q&A.

Travis Steed:

Hi. Good morning, everybody, and thanks for taking the question. I’ll go ahead and ask both of mine upfront. One, on the revenue side, talked about sequential improvement every quarter and when you look at the 2024 revenue guidance to 2%, maybe think through like some of the areas that could improve over the course of the year, where there could be some conservatism built then to the ‘24 and how to think about the cadence of the year? And the second question really is on margins. If you think about the 50 basis point margin guidance. Curious what some of the underlying assumptions are on FX and inflationary pressures and stuff like that? Thanks a lot.

Clare Trachtman:

Yes, in that, I’ll just – I’ll add in a little – or sorry, Travis. I’ll add in a little bit here. That was my fault. So in terms of the cadence, I would say if we think about just the shape of the P&L, I think sales will be relatively – you’ll see some slight acceleration in the second half of the year. But in terms of margin expansion, you are going to see first half margin expansion more outsized than you will see in the second half, obviously, just given the comp and similarly, you’ll see that on earnings growth. So earnings growth in the first half of the year will be very strong. Your question on FX, Travis was FX is negative on margins for the year, about 40 basis points of an impact on our operating margins on a year-over-year basis.

Clare Trachtman:

Great. Thank you.

Unidentified Analyst:

Thanks. This is Allen on for Robbie. I had a question on some of the strength that we saw in the fourth quarter and a little bit of the softer first quarter guide. Was there any pull forward of sales into this quarter? You talked about how you recovered some of the backlogs. I expect some of that drove the outsized strength. But also just looking at first quarter, given what we view as an easy comp, why aren’t you able to put up a better growth number at the start of the year? How much of that is conservatism versus realism?

Jose Almeida:

And also, we are continuing to see momentum from 2023 into 2024. So I feel cautiously optimistic about the momentum that we got in Q4 going into Q1. Of course, we look at many different factors when we are guiding. But I can tell you that based on the market growth, some of the demand that we’re seeing, we feel very comfortable with Q1. And also, we have always a crescendo throughout the year, whereas we have product launches. We have 10 molecules launching in pharmaceutical. They’re starting this quarter that we see ramping throughout Q2, Q3 and Q4. And also, there are some very important accounts that we – is still closing on for the rest of the year that we will also boost our ability to do well in 2024.

Jose Almeida:

Most of our assumptions are large system – medium to large systems continue to improve. We can see that, and we’re going to see that slightly in Q1, but going into Q2, Q3 and Q4. There are pockets of softness in capital like always are primarily smaller systems. Remember, interest rates are still very high and those affect the smaller systems. But for the majority of our customers, we’re starting to see a recovery in capital when we feel really comfortable in 2024 that is recovering completely from what we saw in the beginning of – end of ‘22 into ‘23.

Operator:

Matt Miksic of Barclays is on the line with a question. Please state your question.

Jose Almeida:

Yes, we can.

Jose Almeida:

So we always have the seasonality. We see hospitals a little bit more cautious in the first quarter. And then as they get through the first quarter, they start spending the money that they have for the year and it culminates usually with a strong Q4 in terms of growth because a lot of spending gets done there. We try to, as much as possible, create more – a less seasonal less seasonality, but those things happen. And our focus are the – I think one important program we have in Baxter, as you noticed, strengthen our beds in the fourth quarter. We continue to go for some large accounts and conversions and we’re starting to get some success there. When we bring Baxter together, what Baxter can do as one company is incredible for hospitals. So we feel that, that momentum is starting to kick in with accounts that are partially penetrated, going full blow into a Baxter account. We saw that with the conversion that we get this kind of launch in early 2025 in Northern Cal that we have large accounts and other things that we can see. So this is a really good momentum for Baxter. We can see that going. But the first quarter is always a much lighter quarter than the rest of the year. The revenue in terms of Front Line Care is a business that has less seasonality than the CCS business under HST. The reason is that it’s more consistent with procurement in doctors’ offices and monitors into hospital med search floors. So that brings less seasonality. A business that is very predictable is our MPT business, which has been successfully growing, as you can see in 2023. 150 basis points above its market growth rate, driven tremendously by infusion systems as well as solutions, IV solutions. So that brings that business to a quite less seasonable, more repeatable. I hope I was able to answer your question.

Operator:

Vijay Kumar of Evercore ISI is on the line with a question. Please state your question.

Jose Almeida:

Vijay, let me give you a perspective on 3% to 4% for this business. It’s still growing above its market growth rate because we expect to be on the high end of that guidance. What breaks that business go 100 basis points above that? We have, first of all, this business has pharmaceutical in it. We still have price erosion there, but pharmaceutical is going to be punching 4% to 5%. Our NPT is going to be between 3% and 4% and probably with the opportunity to go above that. Now becomes HST. What is happening in HST? We have significant amount of launches going in, the end of ‘24 and ‘25. We have new monitors. We have new cardiology device and we continue to be successful on Progressa+. So a lot of that has to do with our – to get to the 4% to 5%, it has to be new product launches in 2025. Not for pharmaceutical because then you can see already is making a difference to their growth rate – is now for MPT, which is – continues to do extremely well in infusion systems. We’re going to have more than 40% growth between ‘24 and ‘23 in our infusion pumps. It’s going to be new products in HST primarily in Front Line Care and CCS with care communications, new versions of Voalte. There is the two new – three new versions will be launched this year as well as our new wireless communication device that we plan to launch in 2025. So monitors, wireless communication and cardiology, that is what’s going to drive that business to go above 4%. And if we execute well, you will do it.

Vijay Kumar:

Understood. And then maybe one on the guidance question. What is – is inflation still a headwind to margins? What is price versus inflation and interest expense Q4? You didn’t note the sequential step down in debt payments. Is that a sustainable number? Thank you.

Joel Grade:

Yes. And on the debt paydown, I mean, again, we – of the $3.7 billion of proceeds after tax we got from the sale of EPS, we actually used $2.8 million of that to pay down debt in the fourth quarter. Again, we have some debt coming due that’s maturing in 2024 that will use some of the rest of that for, particularly the Euro bond as Clare talked about. And then obviously, we have some debt during later in the year that we’ll actually address at that point in time.

Operator:

Pito Chickering of Deutsche Bank Securities is on the line with a question. Please state your question.

Joel Grade:

Sure. Absolutely. Thanks for asking the question. Yes, I think one of the biggest opportunities we have from a margin perspective is to continue the work that we’re doing in our independent supply chain group. I think the team has got a lot of really good margin improvement programs going that are designed specifically around things like automation. They’re designed around things like how do we enhance our procurement abilities. They’re around – continuing around things about how do we optimize our network and some of the logistics opportunities. I think some of the areas that are the most impactful over time sit in that space, again, and that’s – as the team has gotten off to, again, a really good start on that. You’ve heard Clare talk about the fact that as we continue to see some inflationary pressures coming out, I think the work that they’ve done has gotten us to a place where we have the ability to offset that. But to continue the expansion of the margins, to your point, fall into some of those categories that I just referred to. I think the other piece of some of you heard me say this already. We’re not going to SG&A ourselves to prosperity. But nonetheless, there are still opportunities in that space as well around things like again, how do we think about a shared services environment that actually allows for consistent execution of operations across the business. And I know this is not a margin question, but the other part of what we’re going to focus on heavily is our – is cash that we will continue to – how do we drive an improved use of working capital. How do we improve our cash conversion ratio again? I know that’s not specifically what you asked. But again, that’s going to be a – some in area I see the opportunity. And what that all leads to is then the opportunity for us to continue to reinvest some of that back into our business around innovation, around new product development. And back to the question that was asked earlier, how do we continue to accelerate growth. That’s what I call a flywheel that allows us to continue to grow, continue to invest and continue to grow, etcetera, etcetera, which is where we want to get to the company.

Jose Almeida:

Let me start with the pumps and then Clare is going to answer the first part of your question. Yesterday, we just got awarded best-in-class KLA for our Sigma Spectrum pump, which is a great honour. That pump continues to do a great job nonetheless, we’re looking forward to get Novum approved. But in terms of market share, we continue to advance our market share. This year, we have 40%-plus growth in our pumps versus last year. That’s our forecast. So we continue to do well, and we look forward to continue to gain market share and now with a nice award to our pump is the seventh award that, that pump received since it was launched. So, back to Clare now to answer the first part of your question.

Pito Chickering:

Great. Thanks so much.

Unidentified Analyst:

Hi. It’s Lei calling in for Larry. Thanks for taking my question. I just want to make sure I didn’t miss it. Did you comment on the status of Novum IQ, the resubmission, and your thoughts on potential approval in ‘24? And I have a follow-up.

Unidentified Analyst:

Got it. And my follow-up is just on your – what you said about expectations for the 2 segments in ‘24. So Baxter Ex-Reno, you expect 3% to 4% growth. Is that the right way to look at – is that the right way to look at it longer term? And similarly, in the renal business itself, you’re expecting 1% to 2% decline this year. But once you adjust for the exits in China VVP, does renal normalized to kind of low single-digit growth longer term? Thanks again for the question.

Joel Grade:

Yes. And I would just – the question you asked, the – we did again make purposeful decisions around exiting markets, exiting products. And so if you actually add that back from that $150 million we referred to earlier, I think, yes, you could find yourself in a place where there’s a – the growth is actually in the low single digits.

Matt Taylor:

Hi, thanks for the question. I know you noticed noted some progress on pricing. I was wondering if you could comment on that in your expectations for pricing in ‘24. And any updates on some of those bigger contracts that you’ve talked about in the past and your opportunities to reprice solutions, dialysis, nutrition, et cetera.

Matt Taylor:

So I just ask a follow-up. I mean when can we hear more about the bigger contracts? Are you going to talk about that throughout the year? And can you comment at all on the kind of opportunities you have with some of those contracts, what’s the order of magnitude of pricing you could get?

Joel Grade:

And we’re not going to give specific details on the pricing or volume, as Joe referenced. So just think about that as guidance that we ultimately give on margins and volume growth will be inclusive of the progress we’ll make with those contracts.

Danielle Antalffy:

Thanks, everyone. Good morning. And just a quick question on sort of what the longer-term focus is post Kidney Care? I assume we’ll get some more color here once we have the pre-spin Analyst Day. But just at a high level, Joe and Joel, curious about where you see the most opportunities to improve whether organically or inorganically from an R&D perspective? And just longer term, i.e. over the next few years, where you think Baxter will be most focused and investing behind? Thanks so much.

Clare Trachtman:

And Danielle, just to follow on and specific to kind of Kidney Care. What I would say is within Kidney Care, and obviously, Chris Toth will elaborate more on this. But they’re going to focus on continuing to increase PD penetration globally. Really focusing on how do they enhance this digitally as well and what digital capabilities are out there to really help both clinicians and patients advance that therapy. In addition, within the acute therapies business, I think they’ll continue to build upon the continued renal replacement therapy and broaden into more multi-organ support therapies as well. So I think that they have a strategy there that they’ll continue to build upon and execute as a stand-alone entity.

Danielle Antalffy:

Thank you so much.

Clare Trachtman:

Good morning, and welcome to our third quarter 2020 earnings conference call. Joining me today are Joe Almeida, Baxter's Chairman and Chief Executive Officer; and Joel Grade, Baxter newly appointed Executive Vice President and Chief Financial Officer; and Brian Stevens, Baxter’s Senior Vice President, Chief Accounting Officer, Controller and former Interim CFO. On the call this morning, we will be discussing Baxter's third quarter 2023 financial results, along with our financial outlook for the fourth quarter and full year 2023. Please note, that we close the sale of our BioPharma Solutions or BPS business at the end of the third quarter, and results in the current and prior periods have been adjusted to reflect BPS as discontinued operations. Restated schedules reflecting that discontinued operations presentation are included in the appendix to our earnings presentation, and available in the IR section of our website. With that, let me start our prepared remarks by reminding everyone that this presentation, including comments regarding our financial outlook for the fourth quarter and full year 2023, new product developments, including the impact and status of pending regulatory approvals, the status and potential impact of our ongoing strategic and recent pricing actions, business development, regulatory matters, and the macroeconomic environment, including commentary on continuing supply chain challenges and evolving customer capital spending trends, contain forward-looking statements that involve risks and uncertainties, and of course, our actual results could differ materially from our current expectations. Please refer to today's press release and our SEC filings for more detail concerning factors that could cause actual results to differ materially. In addition, on today's call, non-GAAP financial measures will be used to help investors understand Baxter’s ongoing business performance. A reconciliation of the non-GAAP financial measures being discussed today to the comparable GAAP financial measures is included in the accompanying investor presentation and in our earnings release issued this morning, which are both available on our website. Now, I'd like to turn the call over to Joe. Joe?

Joel Grade :

Thanks, Joe. Let me start by saying how excited I am to join all of you today for my first earnings call as Baxter's new CFO, and more importantly, how motivated I am to be joining Baxter during such an important point in its transformational journey. For many years, I've admired Baxter as an iconic company with an incredible mission to save and sustain lives. When the opportunity arose to join the team, I recognize that this is the right next step in my career. The position presented me with the ability to utilize my broad experiences in finance, operations, strategy and transformation, to help the company deliver on its strategic actions that Joe outlined earlier. While early, I've been extremely impressed with the talented and dedicated employees at Baxter and their unwavering passion for and commitment to our mission. In addition, I'm very optimistic about the numerous opportunities that exist for the company to increase long-term value for our stakeholders. Finally, I look forward to both speaking with and meeting many of you over the next coming months. Your perspective on our business and the surrounding market landscape will be incredibly valuable as we move forward in our transformation journey. With that, I'll turn it over to Brian to take us through the Q3 results. Brian, over to you.

Operator:

Thank you. We will now begin the question-and-answer session. [Operator Instructions] I would like to remind participants that this call is being recorded and a digital replay will be available on Baxter International's website for 60 days at www.baxter.com. Your first question comes from a line of Matt Miksic from Barclays. Your line is open.

A - Joe Almeida:

Thank you, Matt. Good morning. Matt, our preparations for the proposed spin-off of the Kidney Care segment into its own company, Vantive, continues to progress well. We've made significant progress in the – in Vantives operating model. We are designing the organization finished actually and we are allocating personnel to the company in all operational levels, and so it continues to progress well. But consistent with Board's exercise of its fiduciary duties, we'll continue to pressure test the related financials, including as a result of the evolving market conditions to ensure we proceed in the interest of maximizing shareholder value.

Joe Almeida:

Matt, July 2024 is – the end of July 2024 is where we stand today as the date. As far as we know today, the plan is July 2024.

A - Joe Almeida:

Matt, we've made a lot of progress. We redesigned the organizations. We put some really good people. We had to replace key positions as we thought that we needed higher caliber in some areas of the business and we have those folks in place. We put Reaz Rasul as the segment President. We had Julie Brewer who came in and brought a new team in place. So we feel that we've seen steady momentum in our front-line care business as well. The front-line care managed by Jim O'Connell is doing well with the improved supply chain availability for electro-mechanic components is up 8% in the quarter and 7% year-to-date and is doing well. CCS, which is, we have the PSS and GSS and the Care Communications, the former group that we used to call is called CCS today as you see in your financials, has been impacted by lower rental revenues and a bit of softness in the capital expanding. We're seeing improved in order sequentially and expect that to continue in the fourth quarter into 2024. We have increased our investments in HST. As you notice, our research and development has increased and we're going to continue to increase to get more innovation out. But I have to say that the whole overall business of HST is going to have a very large fourth quarter in terms of growth compared to the rest of the year, and bring them more in line with our expectations, including its profitability, which will increase in the fourth quarter as the rest of the company.

Clare Trachtman:

Thanks, Matt.

Operator:

Your next question comes from the line out of Vijay Kumar, Evercore ISI. Your line is open.

Clare Trachtman :

Yes. Vijay, I'll just quickly. Obviously, interest expense would be kind of a below the line item, so would not be part of our operating margin. But we are expecting – I'll let Brian get into the details in terms of what we're expecting. But as we said in the prepared remarks, we expect interest to be down about $45 million, net interest expense about $45 million in the fourth quarter.

Vijay Kumar :

Understood. And maybe just off of that question, Joe, for you on fiscal ’24. Can you talk about the big variables? What gets better? What gets worse in ‘24? When can Baxter get back to that mid-single LRP thesis? I think the street's modeling 100 basis points of margin expansion based on some of Joel's comments here. Does it seem reasonable for you for the street to be modeling 100 basis points margin expansion?

Vijay Kumar :

Thanks, guys.

Rick Wise:

Good morning, everybody. Good morning, Joe. It's a funny place to start maybe, and I know that Joel is fairly new to the job, but it's hard to resist asking, both from your perspective Joel, what did you charge Joel? What are you tasking him? Maybe talk about your requests of him as he steps into the role. And Joel, I'd be curious to hear what kind of special sauce you're going to bring to the job, and where your priorities lie and just your initial thoughts there.

Joel Grade :

Thank you. Great to be with all of you this morning. And I really look forward to meeting all of you in person, hopefully in the near future. So look, I'm first of all really excited to be here. I think all the things that I thought about when I was going through the process with Joe and with the team have only been reiterated to me as I've gotten here and realized the wonderful opportunities that we have here at Baxter. Yeah, I'd say early impressions, certainly as I said, lots ahead of us, there's lots to do, but we have great people here and incredibly passionate people as it relates to the mission of this company. And again, really a lot of talent as well is my early review. Yeah, I'd say my early focus, first of all, is going to be about learning the business. As you know I'm newer to the industry, but certainly I'm going to be focused heavily on making sure I understand and learn this complex, interesting business, so I can really make the best decisions to support the team. And from there, we're going to focus a lot on how do we continue to accelerate growth, how do we accelerate consistent execution of things, and how do we think about where those mechanisms are to ultimately fund growth and value creation. I’ll certainly be spending time understanding our talents and really just to focus the organization. As Joe said, the background I've gotten is both been rounded in finance, ops strategy, M&A, and transformation. And so bringing all those things to the table here for all the opportunities we have at Baxter, just really thrilled to be here, and those are some of the areas I'm going to be spending time focusing on going forward.

Brian Stevens:

Rick, maybe a few comments on that. As Joe mentioned earlier, the process of the spin is going between now and we're planning to wrap up in July of 2024. All the models are still in progress and we are refining our dis-synergy and standalone cost estimates. We do plan to be providing additional information on this in connection with our 2024 guidance that we provide at year end, as well as in connection with an Investor Day that we intend to have in advance of that spin taking place. So no specific guidance on the particular quantification of the synergies at this time.

Rick Wise:

Thank you, Joe.

Pito Chickering:

Hey. Good morning, guys, and thanks for taking my questions. On the Novum IQ pump, you now have two competitors with the next-gen pumps in the market right now. Yet your pump sales remain pretty robust in the quarter. At what point do you worry about losing market share to the other pumps? And then on your pump approval, any updates there? Is it worth pulling the 510-K and refilling helps you with the process or any updates there?

Pito Chickering:

Okay. And then, next question. Oil and diesel have been very volatile over the last few months and why aren't giving 2024 guidance? If oil and diesel stay in this range, can you help us quantify the headwind for 2024 as the costs roll through the balance sheet and on the P&L, and in any ways of how you can offset those costs? Thank you.

Pito Chickering:

Thank you.

Operator:

Your next question comes from a line of Robbie Marcus from J.P. Morgan. Your line is open.

Joe Almeida:

Robby, good morning. We expect, as I say, ex our kidney business, that our margin will be in line with the expectations, okay. Of the short term, and our objective for mid to long term for the company is 4% to 5% as we improve the WAMGR as well. But we have plans ex, to get back at a growth close to what it is today expected. So it is a good story there, as we have momentum in several different areas of the company with some product launches. As I said, one of the biggest headwinds that we had experienced in the past few years had been our pharmaceutical business that we were able to turn around with great launches. So not giving guidance in 2024, but our expectations is to be around the expectations of the market in terms of growth, and our mid to long term expectations is to be 4% to 5%.

Joe Almeida:

Robby, we have a significant amount of programs in our manufacturing team, logistics team, also pricing initiatives, as well as new product launches. So it's a mixed volume and cost reduction story. We will be improving sequentially our margins. As you've seen, as we said, remember we're executing on everything that we said we're going to do. We are improving our margins. You're going to see that in the fourth quarter as we have guided, as well as you're going to see that in 2024. So our confidence in continuing to improve our margins. And once we have the business spun off, the remaining Baxter we'll have even further ability to continue to grow its margins, okay. So because it's all about mix and new products and also pricing. So our story is about the same, is the aspiration to 45% on the top and the bottom – top line I’m sorry. And the bottom line continued to improve sequentially and continue to find a ways of getting productivity improvement through volume, mix and pricing.

Robert Marcus:

Very helpful. Thanks a lot.

Travis Steed :

Hey Joe, thanks for taking the questions. I just wanted to follow up on something you said earlier in the call about on the renal spend pressure testing and evolving market conditions to maximize shareholder value. I assume, current market conditions, you're still okay with the Renal thing going forward given you're still talking about it, but maybe just talk about what's left of analysis, the pressure tests, the Renal spend and kind of what you meant by that comment.

Joel Grade :

And Travis, one thing I would just say, it's Joel. This is also an opportunity to get me up to speed on all this. Again, I think there's going to be very sound strategic rationale on this bid, and obviously the team is taking me through a lot of the financials and a lot of those things. So part of this is also helping me, bring me up to speed in terms of sort of all the financial implications that are involved, so just to add that to this. Thanks.

Joe Almeida:

Well, we're going to anniversary some headwinds that we had in HST, primarily in the CCS business is one of them. Then we have some good launches in our pharmaceutical business, and we have continued demand increase for our SIGMA Spectrum pump, not even taking into consideration Novum on this, okay. Just by what we currently have today, give us confidence in our growth next year; ex-Renal to be higher than what we have today across all the three segments; MBT, HST, and Pharma.

Joe Almeida:

Just underscoring that the growth is in the remain part of Baxter ex-Renal is steadily improving and our MPT business has been growing above market every quarter and continues to do well. So I want to make sure that you appreciate the momentum that we are embarking and we have shown with the third quarter results what we meant by that.

Joe Almeida:

Thank you.

Joanne Wuensch:

Thank you so much and good morning and thank you for taking the questions. I have two. The first one is, when I take a look at medical products and therapies year-over-year, the margin was down about 190 basis points. And I think someone was heading towards this question earlier. I'm trying to figure out the trend in that and if we should look at that continuing to be pressured as we look into next year. And then my second question has to do with some of your GPO contracts and pricing and how we should think about restructuring or renegotiating those and the potential for taking higher price. Thank you.

Brian Stevens :

And I think adding to that, as Joe mentioned, we have a strong pump on the market right now and we're seeing mid-teens growth in some of the equipment sales that are coming through that business. So I think that is something that has helped us that we'll be continuing to focus on next year. Regarding the second question on pricing, there's some puts and takes here. We do have some of our GPO contracts coming up for renewal and we are committed to negotiating pricing that reflects current costs that have increased in recent years and is fair to both parties. We did get some temporary price increasing during the – in recent periods that's going to be rolling off, but shortly after that we'll be entering it into the negotiation stage. So stay tuned on that, but we are committed to focusing on pricing as one of our levers in the future.

Joanne Wuensch:

Thank you.

Danielle Antalffy:

Hey. Good morning, everyone. Thanks so much for taking the question. Joel, excited to meet you. You have a great team over there with Clare and Company, so very excited to work together. My question is around the new operating model and how to think about from a tangible perspective, how this changes the way Baxter invests in R&D. Should we be thinking about the real benefit of the operating model, more on the accountability and cost side or on the R&D side and elevating the TAM and WAMGR of the company over the next few years? I guess I'm trying to get an understanding of where the real benefit comes from this new operating model, and that's it for me. Thanks so much.

Danielle Antalffy:

Thank you.

Operator:

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

Clare Trachtman:

Good morning, and welcome to our second quarter 2020 earnings conference call. Joining me today are Joe Almeida, Baxter's Chairman and Chief Executive Officer; and Brian Stevens, Baxter Interim Chief Financial Officer and Chief Accounting Officer. On the call this morning, we will be discussing Baxter's second quarter 2023 financial results along with our financial outlook for the third quarter and full year 2023. Please note, results in the current period and prior periods have been adjusted to reflect the pending sale of our biopharma solutions or BPS business. While the closing of this transaction is subject to the satisfaction of customary closing conditions. That business is now reported as a discontinued operation. We have posted restated schedules reflecting that presentation for prior periods to our IR website. In addition, we will be providing a walk to reconcile our prior guidance for full year 2023 for updated financial outlook for continuing operations and in the aggregate. With that, let me start our prepared remarks by reminding everyone that this presentation, including comments regarding our financial outlook for the third quarter and full year 2023, new product development including the impact of pending regulatory approvals; the potential impact of our in-flight strategic and pricing actions, business development, regulatory matters, in the macroeconomic environment, including commentary on continuing supply game challenges and evolving customer capital spending contain forward-looking statements that involve risks and uncertainties. And of course, our actual results could differ materially from 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 Sector's ongoing business performance. A reconciliation of the non-GAAP financial measures being discussed today to the comparable GAAP financial measures is included in the accompanying investor presentation and in our earnings release issued this morning, which are both available on our website. Now, I'd like to turn the call over to Joe. Joe?

Brian Stevens:

Joe mentioned, we are pleased with our second quarter results, which came in ahead of our expectations. Second quarter 2023 global sales included $3.71 million from continuing operations and $142 million from discontinued operations. Sales in the quarter increased 3% on a reported basis and 4% on a constant currency basis and compared favorably to our guidance. Sales performance in the quarter benefited from better-than-expected sales across nearly every business line with particular outperformance realized in Medication Delivery, Pharmaceuticals and patient support systems. On a year-over-year basis, we recognized solid growth across much of the portfolio, which was partially offset by a 1% decline in Patient Support Systems, primarily reflecting lower rental revenues and reduced hospital capital spending as compared to prior periods. We also generated lower sales in BPS, which is now reported in discontinued operations due to a reduction in revenues from COVID vaccine manufacturing. On the bottom line, adjusted earnings in the aggregate, inclusive of both continuing and discontinued operations, decreased 24% to $0.66 and reflecting the impact on our results of the increased cost of materials, labor and freight we've absorbed due to the significant inflationary environment experienced over the past few years. Adjusted EPS for the quarter came in ahead of expectations of $0.59 to $0.61 per share, primarily driven by sales and operational performance. A lower-than-expected tax rate offset the negative impacts from foreign exchange and losses on equity investments. Now I'll walk through performance by our regional segments and key product categories, starting with sales by operating segment. Sales in the Americas grew 5% compared to the prior year on a constant currency basis. Sales in Europe, the Middle East and Africa grew 3% on a constant currency basis, and sales in our APAC region increased 4% constant currency. As we look to the second half of the year, we expect performance in APAC to be negatively impacted by a decline in China sales resulting from the effect of excess mortality on ESRD patient volumes due to the pandemic as well as the impact from the ongoing implementation of value-based procurement initiatives. Moving on to performance by key product category. Global sales for Renal Care were $936 million increasing 2% on a constant currency basis. Performance in the quarter was driven by mid-single-digit growth in our U.S. PD business, partially offset by lower U.S. in-center HD sales following the exit of a distribution agreement at the end of last year consistent with our optimization plans for this business. Globally, both PD and in-center HD sales advanced low single digits. Results in the quarter were partially offset by lower sales in China due to the factors just mentioned, including government-based procurement initiatives and the lower patient census in the region due to the pandemic. Sales in Medication Delivery of $761 million grew 7% year-over-year at constant currency rates, driven by strength globally for both infusion systems and IV solutions products. We continue to experience healthy demand in the U.S. for our Spectrum LVP pump. As we continue to work to improve the availability of components for spectrum, we expect sales to ramp in the second half of the year, and we also continue to focus on growing our Novan syringe base. Pharmaceutical sales of $550 million increased 6% on a constant currency basis. Performance in the quarter reflected strength in our U.S. injectables portfolio driven by new product launches, including Zosen, [indiscernible] room temperature and bendamustine as well as increased sales internationally for our hospital compounding portfolio. Total sales for Clinical Nutrition were $243 million, increasing 7% on a constant currency basis. Performance in the quarter was driven by a strong performance internationally, partially offset by declines in the U.S., reflecting a difficult comparison against the prior year period. Sales in Advanced Surgery were $272 million, advancing 4% on a constant currency basis. Growth in the quarter reflects an improvement of surgical procedures globally with particular strength internationally partially offset by the impact from exiting a distribution agreement in the U.S. as well as select supply constraints that hampered performance in the quarter. Sales in our Acute Therapies business were $180 million, representing growth of 6% on a constant currency basis and represented a return to growth in the U.S. and strength in our APAC region. Sales in our Patient Support Systems business were $359 million, decreasing 1% on a constant currency basis primarily driven by lower contribution from rental revenues and lower hospital capital spending as compared to the prior year period. In the quarter, we realized better-than-expected sales for ICU beds in the U.S., driven by the launch of Progressive Plus. We have experienced positive demand for that new entrant to our smart bed portfolio since its debut. As Joe mentioned, we saw a significant sequential improvement in orders, increasing approximately 30% and driven by demand for our segment-leading hospital beds and care communications products. We currently expect this momentum to continue with orders increasing in the second half of the year as compared to the first half. Front Line Care sales in the quarter were $307 million, increasing 9% on a constant currency basis. This growth reflects demand for our intelligent diagnostics, respiratory health and connected monitoring portfolios. We saw continued improvement in supply availability of electromechanical components during the quarter, which enabled us to address a portion of the backlog associated with the Front Line Care business. While we are pleased to see improvements in our supply constraints, the business continues to have an elevated backlog level, which we will continue to work down over the course of the year as anticipated demand remains strong for this portfolio of products. Global Surgical Solutions sales in the quarter were $77 million, increasing 9% on a constant currency basis. Performance in the quarter was driven by continued geographic expansion and increased hospital access. BPS second quarter sales, which are now reported as discontinued operations, were $142 million, decreasing 7% on a constant currency basis. This decline was in line with expectations due to lower COVID vaccine-related revenues of approximately $27 million compared to the prior year period. Underlying business momentum continues to build with strong growth, excluding the vaccine impact realized in the quarter. Moving to the rest of the P&L. Our adjusted gross margin from continuing operations totaled 40.4% in line with our expectations and represented a decline of 160 basis points over the prior year. The year-over-year decrease reflects increased cost of goods sold, primarily driven by material and labor inflation, freight and supply constraints partially offset by favorable pricing in select areas of the portfolio. The impact of discontinued operations reduced Q2 2023 adjusted gross margins by 40 basis points and Q2 2022 adjusted gross margins by 50 basis points. Adjusted SG&A totaled $844 million or 22.8% as a percentage of sales, a decrease of 40 basis points versus the prior year period. Performance in the quarter benefited from our ongoing transformation initiatives to enhance operational efficiencies, partially offset by higher bonus accruals under our annual employee incentive compensation plans versus the prior year. On an aggregate basis, inclusive of discontinued operations, adjusted SG&A was 22.1% as a percentage of sales in Q2 '23 and 22.4% as a percentage of sales in Q2 '22. Adjusted R&D spending in the quarter totaled $165 million and represented 4.5% as a percentage of sales, an increase of 40 basis points versus the prior year. We have ramped up our R&D efforts, particularly increasing our investments in advancing our connected care technologies on an aggregate basis, inclusive of discontinued operations, adjusted R&D was 4.3% as a percentage of sales in Q2 '23 and 4.0% as a percentage of sales in Q2 of '22. These factors resulted in an adjusted operating margin of 13.2% and a decrease of 150 basis points versus the prior year. On an aggregate basis, inclusive of discontinued operations adjusted operating margin was 14.4% as a percentage of sales in Q2 of '23 and 16.2% as a percentage of sales in Q2 of '22. Operating margin came in ahead of our expectations primarily driven by top line performance and enhanced execution on our transformational initiatives driving improved operational efficiency. Net interest expense totaled $124 million in the quarter, an increase of $35 million versus the prior year, driven by the impact of increased interest rates on our variable rate debt. Adjusted other nonoperating expense totaled $22 million in the quarter compared to $33 million of income in the prior year period. Results were unfavorable to expectations and driven by losses in both foreign exchange and marketable securities compared to gains in the prior year. The adjusted tax rate in the quarter was 17.8% compared to 20.5% in the prior year period. The year-over-year decrease was primarily driven by changes in geographic earnings mix. With respect to cash flow, in the first half of 2023, we generated free cash flow of $485 million, including discontinued operations compared to $171 million in the prior year period. we expect to remain on track to more than double our free cash flow year-over-year in 2023. And as previously mentioned, adjusted earnings from continuing operations totaled $0.55 and declined 25% versus the prior year. Adjusted earnings, including discontinued operations of $0.66 per diluted share declined 24% versus the prior year period, reflecting the increased cost of raw materials freight and labor as well as the impact of higher interest rates on variable rate debt, foreign exchange headwinds and higher bonus accruals. With respect to our original guidance, earnings favorability was driven by better-than-expected sales and SG&A savings as the benefit from the lower tax rate offset the negative impacts from FX and losses on marketable securities. Let me conclude my comments by discussing our outlook for the third quarter and full year 2023, including some key assumptions underpinning the guidance. As mentioned, we are pleased with the operational performance to date and positive momentum we have seen through the first half of the year. While we continue to work to mitigate the macroeconomic challenges that have impacted our results to date, the latest signs are reassuring. Our business fundamentals remain solid and demand for the portfolio is broad-based. Taking into account our positive second quarter results, I'll now walk through our updated guidance. Our current expectation is that the pending sale of VPS is likely to close towards the end of the third quarter. However, as the ultimate timing of completion is uncertain, we are providing adjusted operating margin and EPS guidance for full year 2023 that contemplates 2 scenarios, 1 where the deal does not close in 2023 and another that assumes it closes at the end of the third quarter. For full year 2023, Baxter now expects total sales growth from continuing operations of 1% to 2% on a reported basis and approximately 2% on a constant currency basis. We now expect foreign exchange to be a 50 basis point headwind to reported results on a full year basis. Assuming that BPS were to remain a part of Baxter through year-end 2023, our outlook for sales growth in the aggregate, including discontinued operations, would be the same as continuing operations growth on both a reported and constant currency basis. If BPS were to remain a part of Baxter through year-end, we will continue to expect full year adjusted operating margin in the aggregate, including discontinued operations, of 15.5% to 16%. On a continuing operations basis, we expect full year adjusted operating margin of 14.1% to 14.6% and which would not be significantly impacted by the timing of the pending BPS closure. If the pending BPS transaction does not close by year-end, we would expect to incur interest expense of approximately $500 million for fiscal 2023. However, if the BPS transaction closes by the end of September as currently anticipated, we would expect a reduction of interest expense of approximately $40 million, which would result in a benefit to continuing operations in the fourth quarter. We now anticipate a full year adjusted tax rate of 20.5% to 21% on both an aggregate and continuing operations basis. Given current foreign exchange rates, we expect to absorb a negative earnings impact of $0.05 to $0.07 per share in the second half of the year relative to prior expectations. Lastly, we expect a diluted average share count of 508 million shares. Under this scenario, where BPS remains a part of Baxter through year-end 2023, we now expect 2023 adjusted earnings on an aggregate basis, including discontinued operations to total $2.92 to $3 per diluted share, which includes adjusted earnings from continuing operations of $2.49 to $2.57 and adjusted earnings from discontinued operations of $0.43. If the pending BPS sale were to close at the end of the third quarter as currently anticipated, we would expect full year adjusted earnings in the aggregate, including discontinued operations of $2.87 to $2.95 per diluted share, adjusted earnings from continuing operations of $2.54 to $2.62 and adjusted earnings from discontinued operations of $0.33. This outlook excludes estimated fourth quarter adjusted earnings attributed to BPS consistent with the assumed September 30 closing date and includes a benefit of approximately $0.05, primarily due to reduced interest expense after giving effect to the anticipated debt repayment plan associated with closing of the pending BPS sale. Specific to the third quarter of 2023, we expect global sales growth from continuing operations of approximately 2% on a reported basis and 1% on a constant currency basis and we expect adjusted earnings from continuing operations, excluding special items, of $0.65 to $0.67 per diluted share. We expect adjusted earnings of $0.13 per diluted share from discontinued operations. Taking this into account, we would expect adjusted earnings in aggregate of $0.78 to $0.80 per diluted share. With that, we can now open up the call for Q&A.

Robert Marcus:

Congrats on a good quarter. Joe, maybe to start, it looks like the recovery is progressing nicely beat and raised but it's a bit complicated with discontinued and continuing operations. So would love to get a sense of -- how did the pro forma, the combined company do in the quarter on margins? And so we can compare it apples-to-apples. What's the expectation for the back half of the year and your confidence in regaining the margins?

Brian Stevens:

Thanks very much, Robbie, for the question. And as you mentioned, due to the signing of our agreement to sell BPS, which right now we expect is going to close likely in about 2 months at the end of September, although that's subject to customer closing conditions, as you can imagine. This has triggered discontinued operations reporting. One thing I did want to highlight is that at the end of our investor presentation, we have gone back and casted, recasted recent quarters to show our adjusted results on a discontinued operations basis to provide some visibility apples-to-apples going forward. One thing to point out though that what that does is while it takes out the contribution from BPS in the comparable periods, that recasting does not reflect the benefits that we expect to get going forward from interest expense savings. So I think if you're looking at EPS for the full year, while we expect about a $0.43 impact from discontinued operations after you net in the interest savings and things like that, we really think the headwind on an annual run rate basis is probably closer in the range of $0.15 to $0.18. So specific to your question, as far as where our operating margins landed, we reported on a discontinued operation basis, adjusted operating -- or adjusted operating margins of -- in the ballpark of about 13.2%, including the full company, we came in for the quarter at 14.4%, which was a little bit above where we were expected to land. On a full year basis for the entire company as if we own BPS for the full year, we would expect our operating margin -- our adjusted operating margin to come in at 15.5% to 16% and which is consistent with the prior guide that we gave last quarter. Now you'll note that this guide implies a 300 basis point margin expansion in the second half of the year. There's really 3 main drivers of that. The first driver is sales growth. As you know, our sales tend to be very back-end loaded in the second half of the year, which gives us greater absorption against our fixed cost base. And that is what the largest driver of the sequential operating margin improvement that we see and that we continue to be on track for the second component really relates to integrated supply chain. As you recall, we had adverse manufacturing variances coming into the year that rolled out during the first part of the year as the related inventory was sold. Additionally, a lot of the margin improvement initiatives that our integrated supply chain and manufacturing teams have been working on have been overshadowed by the high levels of inflation. As we've seen inflation start to stabilize in recent periods, we're now expecting in the back half of the year, the benefits from the savings from those initiatives is now we're starting to lap the inflation we're seeing such that we're expecting that's going to drop to the bottom line with expanded margins. And then finally, we're seeing benefits from cost savings. As you'll recall, we had some significant cost savings initiatives earlier this year in connection with our reorganization to a new operating model. And those cost savings already benefited and contributed to our beat this quarter, which, as you saw, we came in $0.05 above the top end of our guidance range for EPS on overall company and then even more of those cost savings initiatives are going to flow through in the second half. So really good traction we're seeing, and we're confident about where we're landing on the operating margin side.

Jose Almeida:

We believe we have successfully resolved the open issue that was primarily subject of the FDA's last additional information that they requested. Additionally, we have proactively implemented software changes that we had planned in consultation with the FDA. We have regular communications with the FDA during the review. We are committed to resolving any questions or issues that come up during the process and through learnings in connection with the recent launch of Novo LVP in Canada and related regulatory issues. So we are working on software upgrades to our current version of the Canadian pump. As we work through this in the next few months, we work alongside the FDA to tell them what's going on. And we are cautiously optimistic [indiscernible] updates to the product are implemented before in Canada and so we can communicate with the FDA properly. We are in constant communications with them. I just also want to add that our SIGMA Spectrum pump is doing extremely well. We are augmenting the supply chain of that pump to make sure that pump continues to be available. We need that pump to be available. We have hundreds of thousands of these pumps on the market, and by doing that, we're able actually to give continuity to hospitals, which own that today. It's a matter of fact that growth has been great. This year, we upped our forecast twice since the beginning of the year as the supply chain became better, and we are making sure that in the next 12 months, that pump will be backward integrated into the new gateway system that Novum uses in hospitals. So we have really alternatives for everything. I'd tell you, we've been getting market share steadily year-over-year. and we'll continue to do that. Of course, we're looking forward to have normal LVP in the U.S. market in just a little for our syringe pump, which has done extremely well, and we are actually exceeding by far our expectations for this year.

Larry Biegelsen:

Congrats on a nice quarter here. Joe or -- sorry, or Brian, yes, I wanted to ask about the guidance. You put up a nice 4% growth number in the second quarter, but I believe the third quarter you're guiding to about 1%. And Joe, you talked about improving trends so maybe talk about what you're assuming in the second half and why growth might be lower in the second half than what we've seen here in the second quarter? And I had 1 follow-up.

Jose Almeida:

Augment the part on the concerns in the beginning of the year that we had with capital. We've seen that alleviating -- and I have to say that the launch of Progressive Plus has been a tremendous success. We've seen good momentum, a very update in quotations and also conversion from quotations to PO into delivery. That, as a matter of fact, we're starting to see competitive conversions, which is we're taking market share for competitors -- from competitors. So this has been a good track record for the company when they launch new products. And now with a very good team in place, we are able to actually execute on the plan above and beyond the great performance from Linecare and our medication delivery business as well in the U.S. So just a little bit of more color to Brian's comments on our excitement around the business.

Jose Almeida:

Larry, I'm not going to comment on Pfizer's status. They have to answer their own questions. I can tell you that from the portfolio that they sell, we have a little bit of competitive products that we can ramp up in the second half of the year. Will depend a lot about how much inventory is in the chain. But I'd say probably a little bit north of $10 million. is one opportunity that we have, maybe a little bit more than that, a little bit less. It depends what's in the chain. It depends how this is going to be there. One important thing is Baxter will be there for the patients when they need it. And if the customer needs will be there to serve them with the products that we have.

Operator:

Your next question comes from the line of Danielle Antalffy from UBS.

Jose Almeida:

I want to highlight what we call HST, which is our former call the Huron business, HST I think there is a great opportunity still in the frontline care. Front Line Care is really driving high single-digit growth. I think that will continue. And I think the recovery and the potential gain of market share in beds is a good possibility for us looking at the performance of our new bed launch today. I think another one is advanced surgery. We have per cloud coming in, the demand is high. The product is superior in side-by-side testing that we've seen to competitors. I'm not claiming anything on the label. I'm just saying that when we do, it looks like the product has a performance that pleases the customer by the speed and completeness of the hemostasis products. This is the first product that is Baxter's are passive hemostat. We don't have a test hemostat. And we're now constrained just by the capacity of the company to make the products, but we are working the supply chain to get a second supplier and which is going to come in line hopefully in 2024, but the demand is really good, and that's a good driver for it. And we have in the pharmaceutical business, we have new launches. Our new management in pharmaceuticals has really improved our ability to launch products and get the time to pick sales. So we have some really good stuff happening. And clearly, we would like to count on Nova. We're going to do everything we can to get that on the market. But as a backup to tell, we have a very solid platform with spectrum are still taking market share. And the syringe pump really makes it easier for us to penetrate hospitals that otherwise were never available to us before. So I think Baxter all in all, as we execute all those changes, the sale of BPS then spin off Renal is to create a company that is smaller, driven by innovation and the ability to actually impact lives of our patients is what we're targeting for 2024.

Operator:

And your next question comes from the line of Patrick Wood from Morgan Stanley.

Jose Almeida:

Our PD business, with exception of China, which I think we -- in the prepared remarks, we spoke about the 2 things affecting the being the VBP and also the mortality due to COVID. If you isolate that, the rest of the business is starting to recover from the COVID. We're starting to see patient growth, some geographies with mid-single-digit growth. Some others with low single digits, but coming up from negative growth last year. So we're starting to see that going well. We also took other initiatives to augment that business. We see HD as a portfolio rotation for us. We're looking at where to be, how to make that business accretive to Baxter, and we are in full-fledged optimization process. So we have -- we're looking at our dialyzer business. We're looking our HD monitors. And making sure that we are in the right place at the right time, competing in the right way. We want to make sure that, that is a supplemental business to Baxter that is profitable and is growing. But we're starting to see with optimism with the exception of China growth and recapture of the PD market. Remember, this is a business that we post COVID project long term to be a mid-single-digit growth business in terms of patient so we want to make sure that as the situation stabilized in China, we are prepared 100% to continue to grow in that market.

Travis Steed:

I did want to follow up, Joe, on Nova. It sounds like you have to upgrade the Canada pump first and that takes for a few months. And then after that's finished, then you can move it and work with the FDA. I just want to make sure understand the nuances there from your earlier response

Travis Steed:

Perfect. And then the other question I had was on the CFO update, ability to announce that by year-end. Any color on the type of person you're looking for or progress you're making with that search?

Clare Trachtman:

Travis, the one thing I would just want to augment to Joe's comments on [indiscernible] is to remind everyone that NOVUM is a brand-new innovative platform. that has some of the most advanced safety features out there. So again, to Joe's point, we're going to look at that and obviously work with FDA. We can't speak on behalf of FDA. But this is a brand-new innovative platform. And we mentioned the NOVUM syringe is doing really well in the market already. So we're going to look at -- obviously, address the situation with Health Canada and some of the issues as you find when you launch a brand-new platform, those issues can come up. So we're going to address those and obviously work with both agencies to get this pump on the market.

Operator:

Your next question comes from the line of Vijay Kumar from Evercore ISI.

Jose Almeida:

Vijay, we'll take one thing at a time. We are seeing the order between Q1 and Q2 growth for PSS, and that has encouraged us. We are we're going to cross the threshold on growth. Remember, this growth now was slightly negative. This quarter was ahead of our expectations. And we were looking at sequential growth in this product line.

Jose Almeida:

And in terms of pricing, I think you referred to pricing in general, are you talking about pricing of PSS.

Jose Almeida:

For U.S. pharma. We see continued pressure what Baxter is doing is by launching new products that we call the specialty generics, which are our premixes like we did with Norepinephrine and [indiscernible]. It has been a phenomenal execution of launches. And those products carry significant gross margin. So as we continue to face price pressure on more generic molecules, we're able to offset that, as you can see by the growth of this business in the second quarter and how we're going to go forward with this business we are making huge progress against price erosion. And that can only be done, can only be done with launches of new products, and we've been executing extremely well in all of them.

Vijay Kumar:

That's helpful. Then maybe one on margins, your back half, 200 basis point step up. How much of that is related to the volume leverage on higher revenues versus your supply chain and cost actions. And those supply chain cost actions, should we assume those are structural and should flow through for next year?

Clare Trachtman:

We have time for one more question.

Matt Miksic:

So I guess, I'd love to ask just a couple of broad questions, if I could. And the first, I think the perception may be that one of your comp competitors got out of approved. You have not yet got your new pump approved, the perception is that this is viewing the sort of the competitive landscape in a way that may be disadvantageous to Baxter in the near term. And I know you've just stepped through a little bit of this, but I'd love to get your sense of having statement of spectrum on the market, and this being your next-gen pump, if you could talk a little bit about what the current competitive dynamics look like on the pump front? And what you expect them to look like from now until when you're able to introduce your sort of next-gen platform? And then I have one follow-up, if I could.

Jose Almeida:

I think we said this more times, Matt, it is we have an on-market pump and we've been converting market share. As a matter of fact, we just converted accounts from a competitor for the reasons of the merits of spectrum by itself. So we do have that opportunity. Do we have greater opportunity with NOVUM? Of course, we do because it's a platform that has some safety features and integration that is a great opportunity for customers to have other software that we have come into play. So we're looking forward to that approval. But until then, we continue to do well with the current platform, and it's going to make that even more friendly by backward integrated into our new gateway, which is also develop by Baxter for our new platform that makes it easier to integrate between the syringe and the SIGMA spectrum.

Clare Trachtman:

Yes, Matt, I'll just give some of the facts. You're exactly right. In the first half of the year, the Hill-Rom or did call it the AST business was up low single digits. We expect that to accelerate to mid-single digits in the back half of the year, consistent with our expectations. Really driven by all the factors that we've talked about, improvement in Front Line Care, both and then within the PSS business, the new product launches. So that -- we believe that, that is that mid-single digit that underlying run rate is what we will continue to see going forward. But I'll let Joe.

Matt Miksic:

Congrats on the quarter.

Clare Trachtman:

Good morning, and welcome to our first quarter 2023 earnings conference call. Joining me today are Joe Almeida, Baxter's Chairman and Chief Executive Officer; and Jay Saccaro, Baxter's Chief Financial Officer. On the call this morning, we will be discussing Baxter's first quarter 2023 financial results, along with our financial outlook for the second quarter and full year 2023. With that, let me start our prepared remarks by reminding everyone that this presentation, including comments regarding our financial outlook for the second quarter and full year 2023, new product development, the potential impact of our in-flight proposed strategic and pricing action, business development, regulatory matters and the macroeconomic environment including commentary on anticipated customer capital spending contains 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 our earnings release issued this morning and available on our website. Now I'd like to turn the call over to Joe. Joe?

James Saccaro:

Thanks, Joe, and good morning, everyone. As Joe mentioned, we're pleased with our first quarter results, which came in ahead of our previous guidance range. First quarter 2023 global sales of $3.6 billion declined 2% on a reported basis and increased 2% on a constant currency basis. This compared favorably to our guidance, which called for constant currency sales to decline approximately 1%. As mentioned earlier, sales performance in the quarter benefited from better than expected sales in Renal Care and Pharmaceuticals as well as Front Line Care, which have reflected improvement in availability of electromechanical components. On the bottom line, adjusted earnings decreased 37% to $0.59 per share, reflecting the increased cost we've recognized due to the significant inflationary impacts on materials, labor and freight, along with certain supply chain constraints. Adjusted EPS for the quarter also came in ahead of our expectations of $0.46 to $0.50 per share, driven by improved operational performance and a benefit from lower than expected interest expense. Now I'll walk through performance by our regional segments and key product categories. Starting with sales by operating segment. Sales in the Americas declined 1% compared to the prior year on a constant currency basis. Sales in Europe, Middle East and Africa grew 9% on a constant currency basis, reflecting broad based recovery in hospital admissions and surgical procedures across the region, and sales in our APAC region increased 3% constant currency. APAC sales reflected strength across the region, offset by a decline in China due to the impact from various government based procurement initiatives being implemented in that market. Moving on to performance by key product category. Global sales for Renal Care were $892 million, increasing 4% on a constant currency basis. Performance in the quarter was driven by mid-single digit growth globally in our PD business, partially offset by lower U.S. in-center HD sales following the exit of a distribution agreement at the end of last year. Results in the quarter also reflected the negative impact from ongoing government based procurement initiatives in China. Sales in Medication Delivery of $687 million were flat year-over-year at constant currency rates. Strong international growth in solutions was offset by lower infusion system sales. As mentioned, we've resubmitted our Novum IQ large-volume pump for FDA 510(k) clearance. In the meantime, we continue to promote our spectrum IQ LVP which has been impacted by supply constraints for electromechanical components. Our teams have been and will continue to work diligently to secure additional parts to meet customer demand for the spectrum IQ large-volume pump. Pharmaceutical sales of $523 million increased 5% on a constant currency basis. Performance in the quarter reflected increased demand for our drug compounding portfolio internationally as well as double-digit growth in our U.S. injectables portfolio. This help to offset lower sales internationally for injectables. Moving to Clinical Nutrition. Total sales were $224 million, increasing 3% on a constant currency basis. Performance in the quarter was driven by demand for our nutrition compounding services. Sales in Advanced Surgery were $246 million, advancing a 11% on a constant currency basis. Growth in the quarter reflects an improvement of elective procedures globally. Surgical volume recovery was strong across all regions. Sales in our Acute Therapies business were $180 million, declining 1% on a constant currency basis and reflecting a difficult comparison to the prior year, where we had experienced elevated demand for CRRT given the rise in COVID cases. BioPharma Solutions in the quarter were $139 million, decreasing 9% on a constant currency basis. This decline was in line with expectations due to lower COVID vaccine-related revenues of approximately $35 million compared to the prior year period last year. Sales in our Patient Support Systems business were $348 million, decreasing 8% on a constant currency basis. As Joe mentioned earlier, we believe performance in this business has been impacted by a slowdown in capital spending with respect to certain product categories. In addition, this business is experiencing lower rental revenues as compared to the prior year period. For the year, we expect growth will continue to be dampened by these factors, but we expect our order rate to improve over the course of the year. In addition, our backlog remains elevated and to date, we have not had any material cancellations. We're excited to launch Progressa Plus this quarter and expect it to positively contribute to future performance. Front Line Care sales in the quarter were $302 million, increasing 4% on a constant currency basis. This reflects demand for our intelligent diagnostics portfolio. We saw a slight improvement in supply availability of electromechanical components during the quarter, which enabled us to address a portion of the backlog associated with the Front Line Care business. While we're pleased to see improvement in our supply constraints, the business continues to have an elevated backlog level, which we hope to continue to work down over the course of the year as anticipated demand remains strong for this business. Global Surgical Solutions sales in the quarter were $81 million, increasing 8% on a constant currency basis. Performance in the quarter was driven by increased international placements in the quarter. Moving through the rest of the P&L. Our adjusted gross margin of 41.2% decreased 380 basis points over the prior year, reflecting cost of goods sold, primarily driven by the factors we've discussed around material and labor inflation, freight and supply chain constraints. Adjusted SG&A of $845 million represent 23.2 percentage sales, an increase of 10 basis points versus the prior year period, reflecting higher annual employee-based compensation accruals. Adjusted R&D spending in the quarter of $157 million represented $4.3 million as a percent of sales, an increase of 30 basis points versus prior year, as we increased our investments in innovation, particularly around advancing our connected care technologies. These factors resulted in an adjusted operating margin in the quarter of 13.8%, a decrease of 420 basis points versus the prior year. Net interest expense totaled $117 million in the quarter, an increase of $32 million versus the prior year, driven by the impact of increased interest rates on variable rate debt. Other non-operating income totaled $1 million in the quarter compared to $16 million of income in the prior year period. Results in the quarter reflect a benefit from the amortization of pension benefits as well as an equity gain, which we were offset by foreign exchange losses. The adjusted tax rate in the quarter was 23% compared to 20.8% in the prior year period. This increase was driven primarily by a change in stock-based compensation impacts. And as previously mentioned, adjusted earnings of $0.59 per share declined 37% versus the prior year period. Earnings in the quarter reflected the increased cost of raw materials, freight and labor as well as the impact of higher interest rates on variable rate debt and foreign exchange headwinds. Let me conclude my comments by discussing our outlook for the second quarter and full year 2023, including some key assumptions underpinning the guidance. As mentioned, we're pleased with the solid start to the year. After the challenging macroeconomic environment we experienced in '22, the challenges of which we continue to address. Our business fundamentals are solid and we're seeing positive trends externally. We're cautiously optimistic and continue to work to position ourselves to see improved performance in the years ahead and we remain steadfastly focused on execution. Taking into account first quarter results, I'll now walk through our guidance and expectations. For full year 2023, we expect global sales growth of 1% to 2% on a reported basis and approximately 1% growth on a constant currency basis. We now expect full year adjusted operating margin to be between 15.5% and 16%. Interest expense is now expected to total approximately $500 million. We continue to anticipate an adjusted tax rate of approximately 22% and a diluted average share count of 508 million shares. Based on these dynamics, we expect 2023 adjusted earnings, excluding special items of $2.85 to $3 per diluted share. Specific to the second quarter of 2023, we expect global sales growth of approximately 1% to 2% on a reported basis, 2% to 3% on a constant currency basis. And we expect adjusted earnings, excluding special items of $0.59 to $0.61 per diluted share. With that, we can now open the call up to Q&A.

Vijay Kumar:

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

Vijay Kumar:

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

Vijay Kumar:

Fantastic. Thanks, guys.

Clare Trachtman:

Thanks, Vijay.

Pito Chickering:

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

Pito Chickering:

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

Pito Chickering:

Great. Thanks so much.

Operator:

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

James Saccaro:

Yeah. I think it's interesting. The first quarter performance really was a nice element for the performance sake in the first quarter. But importantly, I think some of the assumptions that we had were confirmed and that really gives us some solid confidence as we move to the second half of the year. But admittedly, there's a big step up first half to second half. And I would say that there are really three drivers of the operating margin improvement that we expect to see. The first relates to -- generally, in the second half of the year, we have more sales than the first half of the year. So in the second half of this year, we expect north of $400 million, approaching $500 million in more sales in the second half versus the first half. That's not a dynamic that is unique to this year. If you look at any of the last couple of years, you would see that normal sales step up first half to second half. And that has margin benefit, that also has a significant EPS benefit. So you'll see about $0.30 plus of EPS from those incremental sales dropping through. The second thing is, integrated supply chain. We -- the costs that we're experiencing today are costs that we realized or experienced in Q3, Q4 of last year when there were very elevated prices. As those indices have eased in the last few months, we have line of sight to improvements in supply chain that yield roughly $0.15 approximately of improvement first half to second half. Now I should say it's not just indices that are cooperating, it is also the hard work that goes into what we call value improvement programs, which are essentially efficiency initiatives in plants, but that's $0.15 of improvement. That's a very real impact from our supply chain team. And then the final thing is, listen, we've talked previously about some of the cost efforts that we're undertaking. And those benefit more in the second half than the first half. And we've largely concluded those programs. They're in place. And so -- but because a lot of those activities occurred in the first and second quarters, the benefit only is realized in the third and fourth quarters, and that's roughly $0.15. So if I were to say why are we going to go from point A to point B with a very substantial improvement in margin, it really comes down to those three specific factors.

Jose Almeida:

We were not going to comment on the approval of the pump because it's not dependent upon us, it's with the FDA at the moment. We are optimistic about the performance of the pump when it gets approved. But we're not commenting in anything that the FDA is doing. I would say to you that there's an opportunity. There's a significant amount of pumps on recall at the moment, including brand new pumps, which just launched, I recall, Class 1 the other day. So we are currently capitalizing on that with our Sigma spectrum. We upward forecast significantly on Sigma Spectrum. We are now more optimistic about the components. We are also doing some redesign of components to make sure there's more durability. And when Novum gets to the market, it's going to be for us to make the decision, how to phase that in. Customer comes to me want to stay with the current model of Sigma Spectrum because they have a fleet of it and we have significant opportunities to gain market share once Novum is approved. So we're very excited about the platform that we have in front of us, and we're going to be putting more money in research and development assets to develop other categories of pumps within Baxter. So I will tell you that we're not giving you what's the forecast for Novum once approved. As soon as we get news about Novum from the FDA, we'll let you know what that means in terms of numbers. But at the moment, I tell you the demand for pumps is high, primarily because Sigma Spectrum is a good pump that is performing extremely well and facing competitors who have consent decree and recalls in many different categories.

James Saccaro:

Thanks.

Operator:

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

James Saccaro:

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

Jose Almeida:

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

James Saccaro:

Thank you.

Rick Wise:

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

Rick Wise:

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

Rick Wise:

Appreciate the perspective, Joe. Thanks.

Operator:

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

Jose Almeida:

Larry, what we see is -- Matt, I'm sorry. Matt, what we see is an alleviation of the pressure of the hospitals were having last year with more availability of nursing. We -- just as a point of reference, we had some one-timers in our medication delivery business as we reported as we're continuing to report. Medication delivery, if you exclude the one-time between gains and losses between '22 and '23 first quarter, our growth is around 6.2%. This is exactly what we see in terms of growth coming out of hospitals, which are publicly traded companies and are reporting right now. So we see that is for a business like medication delivery, which are sets and infusion of solutions and vitamins. And that is a pretty good pickup on a business. They usually have a growth of low-single digits. So that is twice as much. So there is a rebound and back to normality that we see. So hence our comments on our prepared remarks. When you think about the relentless look for optimization of workflow in hospitals, that's when we start seeing some of our products coming to fruition. We just integrated our Sigma Spectrum the other day on a two way communication for hospitals. There's no more hospitals that will come in and ask just for a pump or a monitor. Everything needs to be integrated. The workflow needs to be improved. And that's where Baxter is focusing on a significant amount of extra money we gave to research and development of Front Line Care, for instance, to increase their ability to launch products faster, to integrate to create solutions to help hospitals. So we are cautiously optimistic that we've seen an uptick in procedures. We see higher admissions in ER, higher admissions in operating room. You can see the growth of our Advanced Surgery business. It was very, very robust -- very robust, close to 10%. And that shows that in the U.S., you have a good flow of procedures. So all-in-all, indicates that that's a good track for 2023.

James Saccaro:

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

James Saccaro:

Thank you.

Joanne Wuensch:

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

James Saccaro:

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

Matthew Taylor:

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

Matthew Taylor:

Sorry.

Matthew Taylor:

Thank you for that.

Clare Trachtman:

Great.

Clare Trachtman:

This concludes the call.

Clare Trachtman:

Good morning. and welcome to our fourth quarter 2022 earnings conference call. Joining me today are Joe Almedia, Baxter's Chairman and Chief Executive Officer; and Jay Saccaro, Baxter's Chief Financial Officer. On the call this morning, we will be discussing Baxter's fourth quarter and full year 2022 financial results, along with our financial outlook for 2023. With that, let me start our prepared remarks by reminding everyone that this presentation, including comments regarding our financial outlook for the first quarter and full year 2023, new product development, the potential impact of recently announced strategic actions, proposed pricing actions, business development and regulatory matters 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 our earnings release issued this morning and available on our website. On the call this morning, we will be discussing operational sales growth which for the fourth quarter and full year 2022, adjust for the impact of foreign exchange and the acquisition of Hillrom. Now, I'd like to turn the call over to Joe. Joe?

James Saccaro:

Thanks, Joe and good morning, everyone. Despite in line sales results, our fourth quarter earnings performance came in below our expectations. This variance was primarily driven by foreign exchange losses and product mix in the quarter. As Joe mentioned, we're not satisfied with our results and as such, we're taking a number of actions to improve our performance. Some of these initiatives are already underway and will be further enhanced with the cost reduction program that we are in the process of finalizing, in parallel with our operating model redesign. These actions are necessary and are expected to accelerate future performance. Collectively, these actions are expected to deliver more than $300 million in savings in 2023. Turning to our financial performance. Fourth quarter 2022 global sales of $3.9 billion, advanced 11% on a reported basis, 17% on a constant currency basis and 2% operationally. Sales performance in the quarter continues to underscore the strength of our broad portfolio of core therapy and connected care offerings across the care continuum. As we've discussed previously, supply for select products remains constrained and we estimate that these constraints impacted our revenues by approximately $50 million in the quarter or approximately 140 basis points. These supply constraints are a mixture of electromechanical components and shortages from other third-party suppliers. On the bottom line, adjusted earnings decreased 15% to $0.88 per share outside our guidance range of $0.92 to $0.99 per share. As mentioned earlier, this was due to unfavorable product mix and an approximate $0.04 headwind from foreign exchange losses on balance sheet positions, primarily due to the devaluation of the Russian ruble during the quarter. Now, I'll walk through performance by our regional segments and key product categories. Note that constant currency growth is equal to operational sales growth for all global businesses, in Baxter's 3 legacy geographic regions. Starting with sales by operating segment. Sales in the Americas were flat to the prior year on a constant currency basis. Sales in Europe, Middle East and Africa grew 5% on a constant currency basis and sales in our APAC region increased 2% constant currency. Quarterly sales in the region reflected strength in geographic segment sales offset by relatively flat growth in China due to the impact from various government-based procurement initiatives being implemented in that market. Moving on to performance by key product category. Global sales for Renal were $981 million, increasing 3% on a constant currency basis. Performance in the quarter was driven by solid growth in our PD business, where we observed an increase in PD patients globally, particularly in the U.S. which saw a sequential improvement in growth of 100 basis points and ended the year with patient growth of approximately 4%. Mid-single-digit PD growth in the quarter benefited from incremental revenues of nearly $20 million, resulting from a customer that was looking to build out a new business and did not meet its contractual minimum purchase requirements. This arrangement has been terminated and the related revenues will not recur in future periods. Performance in the quarter was partially offset by lower in-center HD sales due to HD monitor and associated consumable component supply challenges. Sales in Medication Delivery of $745 million declined 2% on a constant currency basis. Performance in the quarter was affected by a difficult comparison to the prior year which benefited from higher levels of infusion pump placements. Demand remains strong for Baxter's smart infusion pumps and as we have discussed, is currently outpacing our ability to supply, given continued challenges sourcing components. Our IV therapy portfolio grew low single digits globally, driven by strong demand internationally. During the quarter, we did not see pronounced impact from flu-related cases which, although reported case numbers were high, did not translate into increased hospital admissions. Pharmaceutical sales of $552 million declined 1% on a constant currency basis. Performance in the quarter reflects the continued impact of generic competition in the U.S. which was partially offset by increased demand for our drug compounding portfolio internationally. Moving to Clinical Nutrition. Total sales were $243 million, increasing 6% on a constant currency basis. Performance in the quarter was driven by demand for our broad multi-chamber bags and vitamins product portfolio. Sales in Advanced Surgery were $260 million, advancing 8% on a constant currency basis. Growth in the quarter reflects an improvement of electric procedures globally. Surgical volume recovery was strong across all regions. Sales in our Acute Therapies business were $182 million, declining 3% on a constant currency basis and reflecting a tough comparison to the prior year, where we had experienced elevated demand for CRRT given the rise in COVID cases. BioPharma Solutions sales in the quarter were $153 million, increasing 12% on a constant currency basis. Demand for non-COVID services more than offset the decline in COVID vaccine-related revenue compared to the same period last year. COVID vaccine sales for the quarter totaled $22 million. Legacy Hillrom contributed $734 million in sales in the quarter compared to $212 million in the prior year period after the acquisition closed on December 13, 2021. Hillrom sales included $360 million of sales in Patient Support Systems, $293 million of sales in Front Line Care and $81 million of sales in Global Surgical Solutions. Legacy Hillrom sales grew mid-single digits on a pro forma and FX-neutral basis as compared to Q4 2021. This growth reflects demand for the physical assessment and cardiology portfolios within the Front Line Care business. Within the quarter, we were able to secure some additional electromechanical components on the spot market which enabled us to address a portion of the backlog associated with the Front Line Care business. Sales in Patient Support Systems declined low single digits in the quarter, primarily driven by lower rental revenues in the quarter as the prior year period benefited from more than $10 million in sales due to COVID-related rentals. Moving through the rest of the P&L. Adjusted gross margin of 41.6% decreased 270 basis points versus the prior year, reflecting increased cost of goods sold, primarily driven by the factors we've discussed around inflation, freight and supply chain constraints. Adjusted SG&A of $797 million represented 20.5 as a percentage of sales, an increase of 30 basis points versus the prior year, driven by the addition of Hillrom as well as higher freight expenses. Adjusted R&D spending in the quarter of $157 million represented 4% of sales, an increase of 10 basis points versus prior year. Both SG&A and adjusted R&D reflected a benefit from lower bonus accruals under our annual employee incentive compensation plans which are directly tied to Baxter's performance. These factors resulted in an adjusted operating margin in the quarter of 17.1%, a decrease of 310 basis points versus the prior year. Adjusted net interest expense totaled $117 million in the quarter, an increase of $73 million versus the prior year, driven by higher outstanding debt balances related to the acquisition of Hillrom and the impact of interest rates on the variable rate debt. Adjusted other nonoperating expense totaled $12 million in the quarter, a decrease of $9 million versus the prior year, driven primarily by amortization of pension benefits. As I mentioned earlier, nonoperating expenses were unfavorable to our expectations primarily due to foreign exchange losses. The adjusted tax rate in the quarter was 16.1% compared to 18.6% in the prior year period. The year-over-year decrease was primarily driven by statute expirations on certain tax positions, partially offset by an increase due to a change in geographic earnings mix following the Hillrom acquisition. And as previously mentioned, adjusted earnings of $0.88 per share declined 15% versus the prior year period. Earnings in the quarter reflected the increase of cost of raw materials, freight and labor as well as the impact of rising interest rates and foreign exchange headwinds. Turning to full year 2022. Sales of $15.1 billion increased by 18% on a reported basis, 23% on a constant currency basis and 2% operationally. Legacy Hillrom's Front Line Care, Patient Support Systems and Global Surgical Solutions businesses contributed $2.9 billion to full year sales on a reported basis. On a pro forma basis and after adjusting for foreign exchange, full year legacy Hillrom sales were flat as compared to the prior year period, primarily reflecting the impact of supply constraints for electromechanical components. On the bottom line, Baxter's adjusted earnings decreased 3% to $3.50 per diluted share, reflecting the impacts we just highlighted. On a full year basis, we generated operating cash flow from continuing operations of $1.2 billion and free cash flow of $532 million. Throughout 2022, we remain focused on debt repayment following our Hillrom acquisition with 900 million paid boards deleveraging. We also returned approximately $600 million to shareholders through dividends and share repurchases. As we execute on our strategic actions outlined in the beginning of 2023, we are first and foremost committed to meaningfully improving our cash flow generation. Our priorities for cash deployment are focused on accelerating debt repayment, maintaining our dividend and resuming share repurchases over time. We are also actively pursuing strategic alternatives for our BioPharma Solutions business, while continuing to assess additional inorganic growth factors for products, therapies and connected care platforms for our new streamlined operations. As we progress towards the proposed spin-off of Kidney Care company, we'll look to utilize proceeds from these actions to accelerate Baxter's debt repayment schedule. We remain committed to an investment-grade credit rating profile, including taking actions towards achieving our previously stated commitment to achieve 2.75x net leverage. Although current business conditions might challenge our ability to satisfy that commitment, by the end of 2024, we do expect to make significant progress towards achieving the target during 2023 and 2024. Additionally, given the proposed spin-off and potential sale of BPS, we expect to provide additional information regarding our forward-looking outlook for both Baxter RemainCo and KidneyCo at a Capital Markets Day prior to completion of the proposed spin-off. Let me conclude my comments by discussing our outlook for the first quarter and full year 2023, including some key assumptions underpinning our guidance. On the top line, 2023 is expected to benefit from underlying volume growth, the pricing actions taken last year as well as new product launches across our GBUs. Some of these new planned product introductions include more than 5 injectable drug launches, a next-gen ICU bed, ExactaMix Pro, Nutrition Compounder, continued rollout of our Novum IQ LVP and syringe pump in Canada and launch of the Novum IQ syringe pump in the U.S. At this time, our 2023 guidance does not contemplate any U.S. revenues for the Novum IQ large-volume infusion pump. We anticipate submission of our final responses to FDA within the quarter. We continue to be very excited about the prospect of this launch and the benefits it offers our customers. Our objective remains to launch this pump in 2023. Throughout 2022, demand for our products and therapies remained solid but supply chain challenges impacted our ability to fully supply this demand. We experienced record levels of backorders and backlog, particularly for the legacy Hillrom business. And while we observed positive development and supply availability in the fourth quarter of 2022, we currently anticipate component availability will remain challenging and will continue to hamper top line sales in 2023. We are working relentlessly to secure components and address order backlog and our expectation is that supply for electromechanical components will improve in the second half of the year. As Joe outlined, we're implementing a series of changes across our organization that are designed to meaningfully simplify the operating model and manufacturing footprint drive strategic clarity, improve operational efficiencies and accelerate future growth. In addition to consolidating our operations into 4 vertically integrated global business units, we're also evaluating additional strategic actions, including potential product line and country exits to better position the company for more profitable growth over the mid to long term These exits are expected to reduce sales by more than $100 million as compared to full year '22. Lastly, as it relates to the top line 2022 results, included approximately $140 million of sales that are not expected to repeat in 2023 as well as the benefit of approximately $50 million due to lower customer rebate costs, this includes lower COVID vaccine revenue of approximately $100 million and 2 contractual payments which benefited Renal Care sales by approximately $40 million in the second half of 2022. Moving on to dynamics impacting the rest of the P&L. First, I want to point out a couple of factors that are impacting our 2023 performance as compared to 2022, such as higher annual incentive compensation payments for employees, increased interest expense and a higher tax rate assumption. In addition, while we see some improvement in the external macro environment, with select indices coming down from the peaks seen last year, our cost base is still elevated relative to historic norms. As such, cost of goods sold is expected to be a headwind compared to 2022. This is due to the rollout in the first half of 2023 of manufacturing-related costs capitalized into inventory in the second half of 2022 as well as a challenging comparison to the first half of 2022 prior to the start of significant increases in inflation. We expect the impact from these inflationary pressures to begin to ease in the second half of the year. Also, as mentioned earlier, in response to the significant macro challenges the company has experienced over the last 2 years, we will be implementing a cost reduction program in parallel with our operating model redesign that is expected to be finalized later this quarter. This initiative and additional actions the company has undertaken to enhance performance are expected to deliver more than $300 million in total savings during 2023. These savings are expected to increase over the course of the year, with the majority of the savings being realized in the second half of the year. The lower cost of goods, coupled with the increased savings, are expected to drive meaningful margin expansion and earnings growth in the second half of the year as compared to the first half. We also expect the impact from foreign exchange to lessen in the second half of the year. Finally, as Joe mentioned, with respect to our outlook for 2023, we biased our guidance towards capturing additional potential downside risks. We recognize that our performance last year disappointed investors and us alike. While we are confident the actions we are undertaking will set us on force for improved performance longer term, we have recognized that 2023 will be a transition year on our path to achieving this objective. Incorporating all of these factors, I'll now walk through our guidance and expectations. For full year 2023, we expect global sales growth of 1% to 2% on a reported basis and flat to 1% growth on a constant currency basis. We expect full year adjusted operating margin to be between 15% and 16%. Interest expense is expected to total approximately $540 million which reflects pass and potential future rate increases and adjusted tax rate of approximately 22% and a diluted average share count of 508 million shares. Based on these dynamics, we expect 2023 adjusted earnings, excluding special items, of $2.75 to $2.95 per diluted share. Specific to the first quarter of 2023, we expect global sales to decline by approximately 3% on a reported basis and approximately 1% on a constant currency basis. And we expect adjusted earnings, excluding special items, of $0.46 to $0.50 per diluted share. With that, we can now open the call up for Q&A.

Pito Chickering:

So I guess the first one is going to be on the operating margin expression. I guess, details on what the split is between SG&A, cost of sales and R&D. And can you point to the biggest pressure points in the gross margins? Is it diesel, resin, microchips, labor? I think investors understand the macro pressures for facing you guys, it's been challenging to understand how these macro pressures flow through the P&L? Any color there would be great.

Pito Chickering:

Apologies; this is all for 2023. A 15% to 16% operating margin that you guys referenced.

Pito Chickering:

Okay. And then would you have your talks to your customers about increased pricing? I guess, any color on how those are going? And what is your overall pricing view in 2023 versus 2022? And then if you break out gross margins from pharma specifically, do they have any outsized movement in your surprising for '23.

James Saccaro:

Sure. Overall, pricing is a net positive as we look at the year. So there is some benefit that we've reflected based on all the work that we've conducted over the last year, along with some existing contractual arrangements. There is some negative pricing pressure in pharma that offsets a higher number, excluding the impact of the pharma business.

Robbie Marcus:

Great. Jay, maybe to start, I think it'd be helpful for everyone to try and get a sense of what's conservatism in the guide with some the new philosophy you talked about. What's -- and what's actually being contemplated? There's $300 million in cost savings but margin is down as you just talked about. So really just help us understand what are some of the negative assumptions in there that you're putting in to help add more cushion on the bottom after the 2022 cadence?

Robbie Marcus:

Great. And Jay, how should we think about cash flow going through the year here? And how it will play out in '23 relative to '22? Will these cost savings actually cost money in '23 to achieve? Or do you think you could see cash flow improve despite the lower margins?

Operator:

We'll go next to Vijay Kumar at Evercore ISI.

James Saccaro:

Sure. Vijay, let me walk through that specifically. To your point, we have a reduction from 4% which we talked about on the earnings call to flat to 1%. And there's really a few primary drivers of that. And interestingly, a lot of those impacts will be confined to 2023 which I think is really good news as we look at setting the stage for 2024. It begins with the large volume pump. And this -- in my view, this is really about conservatism on the sales guide. We've taken out $100 million relative to our prior expectations, roughly 70 basis points of growth relative to that 4%. The second item relates to the weighted average market growth. If you reflect back on our January 6 call, we talked about a slight lowering of the WAMGR of our markets on a compounded basis. But interestingly, a lot of that impact is most prominent and in fact, in some cases, confined to 2023. What I mean by that is the renal mortality issue that we face with -- that we've been faced with really collide into 2023. In addition to that, the acute growth challenge really is a 2023 impact. And then some of the capital assumptions that we've made which, again, is another area we hope to prove conservative, is really focused on 2023. And so as we approach year-end and refreshed our view of patient census of expectations into 2023, we did lower the WAMGR for 2023 by approximately 100 basis points which is included in the commentary that we made on January 6. In addition to that, we're looking very carefully at profitability by product line. At the end of the day, we're ensuring that every dollar in every market is a profitable one and a cash flowing one for Baxter. And so we have to made the decision to exit approximately $100 million or 70 basis points worth of sales. And then we did have roughly $50 million shift from 2023 to 2022 and I did make some commentary on this in the call. And so listen, we obviously don't like to lower expectations on the sales line. But what I take part in is the fact that many of these impacts are not sustainable impacts but are rather discrete to 2023. And then we'll expect to see acceleration from there. In the case of the pumps, let's watch carefully how that evolves over the course of the year.

James Saccaro:

Sure. So overall, with respect to operating margins, we do now anticipate a reduction, as you pointed out. And I would say that there are a few drivers of that. First, the lower sales outlook. When you think about things like absorption, some of the higher-margin areas, the lower sales outlook does have an impact of $0.40 to $0.50 in earnings with an attending operating margin impact. Secondly, I'd point to supply chain headwinds that impact the first half of the year, most prominently. And these are incremental to what we previously said. As we went through the fourth quarter, we were still purchasing electronic components at much higher levels than we anticipated. The spot market was very challenging. So things like that led to incremental costs that roll out into the first half of the year. And then, we do have some benefits related to the incremental savings program and FX is a modest headwind overall. As we look at operating margin, it's basically flat, maybe a little bit of a -- maybe -- it's basically flat as we look at the bottom line. And so, those are the factors that impact the operating margin. But Vijay, I do want to make a really important point. As we think about the cadence of the story that occurs over the course of the year, first half of the year will be a challenging operating margin story, as I've discussed. But as we start to benefit from indices that currently sit at today's levels in the product that we sell in the second half of the year, as we start to benefit from more electronic component availability and only reflected modest, very cautious improvements in this area in the second half and as we add incremental sales to the second half as we always do, the second half margin starts to look a lot nicer and a lot more consistent with the trajectory that we expect to see. As far as the synergies and incremental costs and so on, from a cash flow standpoint, we've included roughly $100 million in our cash flow statement. There is maybe $0.03 or so of non-adjusted impact in the P&L for things that are suboptimized as it relates to the spin. So a modest impact in that regard. We've reflected that. It's a bigger impact from a free cash flow standpoint. I've discussed this with a number of you already. So I think we've got that correctly modeled. And like I said, I think the operating margin story really does start to look a lot better as we approach Q3.

Matthew Mishan:

How are you guys looking at R&D into 2023? Do you have the flexibility to kind of speed up some projects, especially in the transition like this that sets you up for better growth in 2024 and 2025?

José Almeida:

Yes. I just want to complement that we're planning for double-digit R&D increase in 2023 versus 2022. And we're going to do -- no, probably this cadence year-over-year. We found some debt in the Hillrom portfolio, primarily parts in Connected Care will receive a significant portion of our increase in research and development. This is one of the things that we discussed in the thesis of the separation but KidneyCo was the ability to allocate capital to the right places. So if you look forward to Baxter will be significant investment in connected devices as well as smart devices. So, you look at continuation once we get through the large volume rental pump approval is the next generation of integration of the pump and safety software. And you'll see us in Q3 launching the progressive FLOSEAL, really making solid our position in terms of market leader in beds. So there's quite a bit of change in how we've seen R&D. We think innovations a path forward to Baxter. And the way to do it is actually to do what we're doing in '23 and allocating dollars on a double-digit growth to that line.

James Saccaro:

Sure. We did have some onetime and planning benefits accrued to 2022. And then as we look at 2023, we included things like sort of modified assumptions related to FAS 123R benefits, among other things. And so it's hard to say what to go-forward is beyond 2023. I think we've got it correctly pegged. We'll -- the tax team is hard at work and I know many of them, coming to this call, looking at planning ideas for 2022. But as we look beyond that, so much of this will depend on the setup of the 2 new companies that it's very challenging for me to comment specifically in this forum around the tax rates for the 2 companies but 22% is a good number for this year.

Matt Miksic:

I wanted to just follow up on where things stand with the integration and sort of synergies for Hillrom. Maybe Jay, if you could talk a little bit about how some of the inflationary pressures, energy costs, et cetera, have weighed on that business? And whether this sort of change in componentry and supply chain is something that you expect to kind of be able to sustain here in the first half? Or is that still sort of choppy? And then I have one follow-up.

José Almeida:

Yes. We have a pretty rich pipeline of products, starting with progressive FLOSEAL. As I said, it's going to really put Baxter -- continued probation of a very solid leadership position in the PET market. our Centrella bed has done a great job and is a product that continues to sell well. When we look at our Front Line Care, that business could have grown double digits easily in 2022 as well as in 2023. We're planning for Hillrom as a whole to grow around 4%. It could be north of that if few components become more available. We're starting to see that showing up the market, primarily from like [indiscernible] to see more components coming. We just look at them in the month of January. We're able to see some of that coming through. And also the innovation pipeline coming out of those 2 businesses look really good. And the Connected Devices, what we call care communications. We see good backlog coming into Nurse Call System as well as installation of Voalte. We see in the first half of the year a little bit depression in that as the nursing shortages continue to apply pressure the hospitals and also the macroeconomic indexes make hospitals be more cautious but we see that improving in the second half. So, you look at the market for capital, improving the second half. We look at the product launches that we have coming up. And the pipeline of innovation coming out of Hillrom is very exciting. Further to that, we're putting more money into research and development in 2023 disproportionately into Hillrom to accelerate the growth of that business.

José Almeida:

Listen, when I look at 2023, coming from 2022, we saw an incredible pressure in our manufacturing base. If you think about us, we're disproportionately affected by the significant increase in energy cost, transportation. Remember, Baxter's transportation as a percentage of sales is the high single digits. And go into some of our markets, it's even higher than that for some of the renal products. So what I think is remarkable is how we're able to get very quickly. Once we start seeing those things coming up so fast, we went on the other hand, we have created significant programs to offset -- the offset is not what transformed, what transforms Baxter is the amount of automation that we are putting into our manufacturing operations. The amount of plants we're going to be able to consolidate because of that. And this is all will take place in 12 to 24 months. We also looking at disproportional allocation of capital into businesses that are connected and have the possibility for growth. The market is very anxiously waiting for our pump. We feel optimistic where we are with the pump today. We don't speak on behalf of the FDA. Neither we're making a prediction about that but we're saying that we're enthusiastic because we know the products are doing very well in Canada. We just closed another -- a few thousand pumps deal in one of the provinces. So we are excited about the portfolio. So, when I look -- all in all, '23 is the year that has 2 different stories. The first half, the story of paying for some of the incremental cost and significant cost that we had in '22 coming through the inventory selling of the inventory that was produced with that incremental cost. I see the second half of the year becoming more focus on what Baxter used to be which is time to see leverage of the bottom line in bringing back the things that used to be part of Baxter. But this crisis brought to surface a lot of weaknesses in some of our supply chain operations. And while we took the opportunity was to regroup and understand how to modify this permanently and take away some of this variability from our future. I'm going to get out of being in the resin-based business, no. But we're going to make sure that our plants are in the right place. Our plants are automated and we have the ability to get really efficiency out of our system. So the cost reduction that we're putting, for instance, into 2023 are over $300 million. So that efficiency will pan out in '24 with another $300 million in '24 coming to our supply chain. So, all those things that we're doing is a transition year for Baxter. One that we reset, we regroup, look at our portfolio, restructure our capital structure with the selling of PPS, getting that to help us take the debt down but also feel future inorganic tuck-in opportunities. So this is the year that Baxter will execute in its final stage of the transition that we started 7 years ago.

Lawrence Biegelsen:

Jay, maybe it would be helpful to give us an update on the standup cost and the stranded cost. Is the right assumption about 1% of the respective company sales and the onetime disentanglement cost of 3% to 4% of total company sales? What's the timing on that? And will some of that impact non-GAAP earnings? And any -- Jay, I mean you know it's early but people are looking at '24 for valuation. Any framework on -- could margins get back to 2022 levels?

Lawrence Biegelsen:

Jay, that's helpful. Just let me ask one quick one here. The backlog and backorders, can you quantify those? And do you expect to get those back over time? We have seen some companies report Q4 results where we've seen some benefit from those coming through.

José Almeida:

Yes, just I would add that the backlog. We're starting to see some movement -- positive movement in semiconductors, primarily Front Line Care. We're starting to see that and that is very encouraging to us. But I think it is early to take a victory lap here. I think our supply chain folks have done a lot of work. However, we're starting to see this progress coming through, hopefully continues on and we can actually, in the next quarter, speak more about the positive tailwind that, that can plus. Thank you.

Clare Trachtman:

Good morning, and welcome to our third quarter 2022 earnings conference call. Joining me today are Joe Almeida, Baxter's Chairman and Chief Executive Officer; and Jay Saccaro, Baxter's Chief Financial Officer. On the call this morning, we will be discussing Baxter's third quarter 2022 financial results and full year financial outlook for 2022. With that, let me start our prepared remarks by reminding everyone that this presentation, including comments regarding our financial outlook for the fourth quarter and full year 2022, our 2022 to 2025 long range plans, the acquisition of Hillrom, new product development, the potential impact of proposed pricing actions, business development, portfolio optimization and regulatory matters contains 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 our earnings release issued this morning and available on our Web site. On the call this morning, we will be discussing operational sales growth, which adjusts for the impact of foreign exchange and the acquisition of Hillrom. Now, I'd like to turn the call over to Joe. Joe?

James Saccaro:

Thanks, Joe, and good morning, everyone. As Joe mentioned, our results for the quarter came in largely as expected, with some impact to sales due to select supply chain-related constraints. As discussed earlier, our teams have been and continue to identify opportunities to help mitigate the unprecedented macroeconomic headwinds we continue to face and we remain committed to delivering on our long-term objectives. Turning to our financial performance, third quarter 2022 global sales of 3.8 billion advanced 17% on a reported basis, 23% on a constant currency basis and rose slightly on an operational basis. On the bottom line, adjusted earnings decreased 20% to $0.82 per share, falling within our guidance range of $0.79 to $0.83 per share. Earnings in the quarter reflect the increased costs of raw materials, freight and labor, as well as the impact of rising interest rates, foreign exchange headwinds, and the higher tax rate. Before I review our financial performance for the quarter, I wanted to spend a moment discussing the non-cash impairment charge that we recorded related to the Hillrom acquisition. When we purchased Hillrom, we valued the business based on anticipated cash flows, Baxter’s prevailing cost of capital and market EBITDA multiples at the time of the transaction. As Joe mentioned, the primary reason for the write down was due to changes in external factors that have occurred since the acquisition date, specifically the significant increase in interest rates we have seen and the reduction in market-based EBITDA multiples. As we evaluated these environmental factors and coupled them with the supply chain impacts we've incurred, which we carry forward in our projections, we deemed it appropriate to reduce the carrying value of goodwill and certain other intangible assets associated with Hillrom. I want to reinforce Joe's earlier comment that we continue to see tremendous potential for our combined portfolios. We have accelerated our cost synergy targets, which continue to track ahead of our expectations, and our commercial leaders are driving actions to unlock the growth of the combined company. Now, I’ll walk through performance by our regional segments and key product categories. Note that constant currency growth is equal to operational sales growth for all global businesses and Baxter’s three legacy geographic regions. Starting with sales by operating segment, sales in the Americas were flat to the prior year on a constant currency basis. Sales in Europe, Middle East and Africa grew 3% on a constant currency basis, and sales in our APAC region decreased 2% on a constant currency basis. Quarterly sales in that region reflected a slowdown in growth in China, due to the country's zero COVID policy, which we estimate impacted sales by approximately 10 million in the quarter, as well as the anticipated impact from various value-based procurement initiatives being implemented in the region. Moving on to performance by key product category, global sales for renal care were $942 million increasing 4% on a constant currency basis. Performance in the quarter was driven by solid growth in our PD business, where we observed an increase in PD patients globally. PD growth was augmented by two discrete items totaling approximately $20 million. Performance in the quarter was partially offset by lower in-center HD sales partially due to HD monitor supply challenges due to component availability. Sales in medication delivery of 725 million were a similar level to prior year sales on a constant currency basis. Within the quarter we observed strong demand for products in our IV therapy portfolio. This growth was more than offset by lower infusion system sales, as component availability remain challenged, coupled with the large hospital system order in Q3 in 2021, which created this difficult comparator to the prior year. Pharmaceutical sales of $525 million declined 3% on a constant currency basis. Performance in the quarter reflects declines in our global generic injectables portfolio due to continued increased competitive activity, which were partially offset by increased sales of inhaled anesthesia globally. Moving to clinical nutrition, total sales were $231 million increasing 4% on a constant currency basis. Performance in the quarter was driven by demand for our broad multi-chamber product offering, partially offset by supply-related challenges for our vitamins. Sales in advanced surgery were $247 million advancing 6% on a constant currency basis. Growth in the quarter reflects recovery of elective procedures relative to pre-COVID levels. Surgical volume recovery was strong in Europe, while procedures in the U.S. and APAC region came in slightly below our expectations. Within the U.S. we observed a slow start to July, with an uptick in August and September. Sales in our acute therapies business were $158 million declining 9% on a constant currency basis and reflecting a tough comparison to the prior year where we had experienced elevated demand for CRRT given the rise in COVID cases. BioPharma Solutions sales in the quarter were $172 million declining 10% on a constant currency basis, and reflecting a step down in sales of COVID vaccines compared to the same period last year. COVID vaccine sales for the quarter totaled approximately $30 million. Hillrom contributed 735 million in sales to the quarter, which included 380 million in sales and patient support systems, 279 million of sales in front line care and 76 million of sales in global surgical solutions. Hillrom declined mid-single digits on a constant currency basis as compared to Q3 2021 when the company was a standalone entity. Performance in the quarter reflects a difficult comparison to the prior year period, as well as the impact of the semiconductor supply constraints we've discussed. We continue to experience record levels of backlog for the legacy Hillrom business. Our order book remains strong and to date, we have not seen any significant cancellations from customers. As mentioned last quarter, we remain somewhat cautious on capital spending, as hospitals continue to assess their budgets in light of the current market environment. Moving through the rest of the P&L, our adjusted gross margin of 42.9% decreased by 110 basis points over the prior year, reflecting increased cost of goods sold primarily driven by the factors we've discussed around inflation, freight and supply constraints. Adjusted SG&A of 821 million represented 21.8 as a percentage of sales, an increase of 200 basis points versus prior year, driven by the addition of Hillrom as well as higher freight expenses. As mentioned earlier, we continue to tightly manage our G&A base. Adjusted R&D spend in the order of $148 million represented 3.9 as a percentage of sales, a decrease of 10 basis points versus prior year. Both adjusted SG&A and adjusted R&D reflect a benefit from lower bonus accruals under our annual employee incentive compensation plans which is directly tied to Baxter's performance. These factors resulted in an adjusted operating margin in the quarter of 17.2%, a decrease of 300 basis points versus the prior year. Adjusted net interest expense totaled 104 million in the quarter, an increase of 72 million versus the prior year driven by higher outstanding debt balances related to the acquisition of Hillrom. Adjusted other non-operating income totaled 2 million in the quarter compared to a 12 million loss in the prior year period, driven primarily by amortization of pension benefits. The adjusted tax rate in the quarter was 23.8% as compared to 14.8% in the prior year period. The year-over-year increase was primarily due to the mix of earnings in the quarter, which has changed following the Hillrom acquisition. In addition, during the third quarter of 2021, the company recognized the benefit in its effective tax rate from a discrete item due to a reserve release resulting from a favorable tax ruling. And as previously mentioned, adjusted earnings of $0.82 per diluted share declined 20% versus the prior period. Let me conclude my comments by discussing our outlook for the fourth quarter and full year 2022, including some key assumptions underpinning our updated guidance. We have adjusted our full year earnings per share outlook primarily to account for a strengthening U.S. dollar and the resulting foreign exchange headwind, increased interest expense assumptions given rise in interest rates, and a higher expected full year tax rate due to earnings mix. As discussed, we anticipate electromechanical component availability will remain challenged in the fourth quarter and into 2023, which will continue to hamper sales growth for select businesses, including medication delivery, front line care and patient support systems. For the fourth quarter of 2022, we expect global sales growth of mid-to-high single digits on a reported basis, mid-teens on a constant currency basis and approximately flat on an operational basis. And we expect adjusted earnings, excluding special items, of $0.92 to $0.99 per diluted share. For full year 2022, we now expect global sales growth of 17% to 18% on a reported basis, approximately 23% on a constant currency basis, and low single digits operationally. Moving down the P&L, we expect full year adjusted operating margin to be between 17% and 17.5%, reflecting the impact of all of the various dynamics we've discussed today. For the year, we now expect interest expense to total approximately $400 million, given rate increases and adjusted tax rate of approximately 20% and a diluted share count of 508 million shares. Based on these factors, we now expect 2022 adjusted earnings, excluding special items, of $3.53 to $3.60 per diluted share. With that, we can now open up the call for Q&A.

Travis Steed:

Hi. Good morning, everybody. Thanks for taking the question. I guess, Jay, just to start out, bridging the gap on the changes of the 2022 guidance would be helpful, but more importantly we'd love to see if you would provide some initial thoughts on 2023 if you'd commit to some level of earnings growth off the 3.60 for next year and still at 75 basis points of margin expansion as before?

Clare Trachtman:

So the 2022 bridge for the EPS guidance.

José Almeida:

No, you have covered it all.

Travis Steed:

Thanks. A quick follow up just to make sure, I think putting that all together, it still sounds like earnings can be up next year versus 2022. And on the 75 basis points, what’s assumed on the $1 billion inflation, assume that’s stable and does it assume Novum IQ?

Travis Steed:

So the 75 basis points, what’s assumed on inflation in Novum IQ.

José Almeida:

I will. So we always preface any conversation on products which are not approved that we do not, I speak on behalf of the FDA. We believe that we have successfully resolved the issue that was the primary subject of the FDA’s last additional information request. We referenced this on the Q2 call. We will submit data and we believe demonstrates successful resolution of the interest as part of our response. Since that time, we have identified additional software changes we're planning to implement proactively in consultation with the FDA. We're in process of updating our response. And because of that, we're doing everything we can to submit our response as quickly as possible. While we hope that to be in a position to submit those responses by late Q4, it may spill over into a couple of weeks of January, maybe half January. So we're doing the best we can to pull this together. We are very comprehensive in how we answer the FDA. We work very collaboratively with them. And we want to make sure that the product has all the information before we send to them. So there's no further request for information. That's our objective.

José Almeida:

Thank you.

Robbie Marcus:

Great, thanks. Maybe I could start off on capital allocation, how you're thinking about the business mix. We saw some reports in the news about potential sales or divestitures of some of the assets within renal that were low to no growth and low to negative margin. Maybe just give us a sense of how you're thinking about your portfolio here in the environment to get deals done, whether it's additive or subtraction?

Robbie Marcus:

Great. Maybe just as a follow up, Jay, you talked about something like $100 million, and I guess theoretical lost sales in the quarter from supply chain issues, but also about how the supply chain was a positive in the quarter and helped the margins. How should we think about those two reconciling next year? And in that 4% growth and 75 bips of margin, how should we think about what's being resolved in the backlog and how much improvement we'll be seeing in the supply chain? Thanks a lot.

James Saccaro:

Sure. Robbie, as we move to next year, we continue to assume a constrained top line due to semiconductors and availability of other components. So that does not fully resolve next year. We do expect to see some improvement and no deterioration relative to today's level. But we will live with this throughout most of next year. As we think about the margin improvement, really that's emanating from a significant improvement in value improvement programs, things like automation initiatives that we have going on in the plan. And that really helps support the 75 basis points improvement that we've discussed. We'll see lower than expected freight. And we are only targeting roughly 75 basis points or in excess of 75 basis points, because we don't have a big commodity easing assumption in the numbers that we're sharing. To the extent that materializes, certainly that could be an upside, but we're not banking on that at this point. We're banking on living in a challenging commodity world for 2023 for the most part, along with a supply constrained world. Those two items are very big uncertainties. I'm hopeful that we take a conservative decision and those break our way over the course of the year. But we'll have to watch that very carefully.

James Saccaro:

Thank you.

Rick Wise:

Good morning, Joe. Hi, Jay. I thought I'd focus on Hillrom which you described as down mid single digits. First, I wanted to understand is the decline -- if I think of Hillrom maybe as a mid single digit-ish kind of grower, it was a decline -- to what degree was it integration bumps with Baxter, to what extent was it components? Was it all supplying components? I’d just like to frame that. And Joe, when do you think -- based on what you know today, Hillrom could return to being Hillrom for you? Is it going to take into '24? Do you think it's second half of next year? And then I have a follow-up question also related to Hillrom.

James Saccaro:

Yes, sure. Overall, Rick, Hillrom did decline in the quarter, roughly 5% and was down roughly 1% year-to-date. And what's interesting is that the demand for Hillrom products remains incredibly strong. We've seen historic levels of backlog in our front line care business. We've seen backlog in our PSS business as well. So as we look at the portfolio of products, the innovation, the complementarity with the Baxter portfolio, we're incredibly excited. And the environment for their orders has been fairly strong throughout the year, it's been fairly consistent. But we've had severe supply constraints. And so without supply constraints, Hillrom would have been probably flat in the third quarter, and on a year-to-date basis would be growing close to mid single digits, which I would characterize as kind of where we would have hoped it would have been. But with these supply constraints that have been extremely challenging, in particular, in the case of front line care, it's been hard to get to the sales level that we hoped for. So Joe, maybe you want to add to that.

Rick Wise:

Got you. Maybe I'll change the topic, but for my follow up you talked about passing on the cost pressures and you're in the process or you're well along signing new price agreements. Can you help us think through -- is this 100% of your business? How do we think about the impact and just even touchy feely, Jay, how do we sort of factor that into our thinking as we look ahead to '23 that you could have another 50 basis points of price on half the portfolio? Any extra depth or color perspective would be great. Thank you so much.

James Saccaro:

Sure. Rick, I don't want to get into too much detail on specifics around price and what pieces of the portfolio and so on. But it's safe to say we expect price will be a positive contributor to our numbers next year in 2023. The other thing I would say is it is something that we look at in every single market, in every product line. Why? Because in every one of our areas, we have been challenged with very high levels of inflation, very high levels of incremental costs. So from our perspective, we really have to challenge every sale to make sure that we're garnering enough profit from it and offsetting some of the significant costs that we've had.

James Saccaro:

Thanks.

Pito Chickering:

Good morning, guys. Thanks for taking my questions. You mentioned that you haven't seen any cancellations due to hospital CapEx pressures and that the backlog remains full here. How do you look at new orders on that backlog versus supply issues sort of keeping that backlog high? And are you seeing any impact to new sales versus stroke levels as hospitals struggle with lower margins and lower cash flows?

Pito Chickering:

Okay, fair enough. And then a follow up on the supply chain, can you breakout the $100 million of impact to revenues in 3Q on semiconductors versus the other raw materials, out of curiosity, what are the other raw material shortages? And then on the semiconductor side, the macro data shows that the pressure peaked sort of into 2Q, has been improving sort of during 3Q. So curious if you see any semiconductor shortage improvement from July versus October?

José Almeida:

More so what we're doing is because we're seeing this issue with the semiconductor manufacturers, not all chips are created the same. So you hear Intel sales are down quite a bit in PCs. This is good news for our chips, it's not. We don't use the same chips at all. We actually use very little, very few chips from Intel, for instance. Our chips are IoT, Internet of Things. They are much thicker and they are chips that are using better software. So that demand -- by the way, some of these chips are about 12% of the semiconductor industry output. So because of that, we work very close now directly with companies. We're being very successful with few companies who are working very well with us. But what we also do is start a redesign program for our boards. We have identified critical components and we have started a process in our Reno business to redesign 30 of our boards with one of our suppliers and we have front line care programs started by now to replace six key semiconductors that may be constrained in the next 18 months with a redesign of boards. So redesign of boards is not as simple as everybody think. It is not a plug and play, because the form and fit and function of the semiconductors change. We have to redesign the board. We have sometimes to revalidate and clinically revalidate the board. So saying just that we're redesigning boards [indiscernible] is not. It is all hands on deck is finding new ways to deal with our current suppliers, it is buying directly from them, buying through brokers throughout the world, inventory there is available as well as redesigning the boards so we can have alternates that can be put in, in the future. So we became a much more sharp company when it comes to semiconductors and boards and this process in fact is very painful. We had to acquire significant expertise in this area. It’s going to pay dividends in the future.

José Almeida:

No, I'm saying that in 2021, this time of the year and last year in 2021, we were not -- we did not own Hillrom, but their orders were extremely high. Primarily, the rentals were extremely high because of COVID, okay. What I'm saying to you is we have not seen our book of business be affected by capital constraint. Now and going forward, what we see is delays in some accounts due to labor shortages in primary large installations. But we have continued dialogue with everyone about our orders. As a matter of fact, I'm planning to see in the first quarter next year a large installation that we're going to probably be doing in hospitals in the U.S. So I don't see -- we don't see today a significant change in the order pattern in capital. That's what I meant. I'm not comparing to 2021, which has significant high rental revenue into Hillrom, because the COVID effect primarily as you know coming out of the summer is going to Omicron in October and November of last year.

José Almeida:

Thank you.

Joanne Wuensch:

Thank you for taking my question. Briefly, it sounds like you have significant back orders and backlogs. What is happening to those orders? Are they being fulfilled by somebody else? Are they just piling up so that at some stage in the future, they get met? And I'll toss my second question at the same time? It sounds like you're also working to get better expense synergies out of Hillrom. Is there a way to quantify what you think those may be now versus what you thought they would be before? Thank you.

Joanne Wuensch:

Thanks.

Clare Trachtman:

We have time for one more question.

Joshua Jennings:

Good morning. Thanks a lot. Joe, I wanted to ask just about connected care initiatives and just how -- anything you can share just on progress post the Hillrom acquisition on developing these connected care technologies or programs? And how should we be thinking about updates and tracking the progress? And then maybe just a second question for Jay, just thinking about the target of getting down to 2.75x net leverage in 2020. Just help us think through some of the puts in takes and your confidence level in terms that you are on pace to hit that target? Thanks for taking the questions.

James Saccaro:

Sure. As you know, we're really focused on maintaining solid investment grade credit ratings. We define that as BBB. So the rating that we currently have is one that we're maintaining. And in order to do that, we want to make very good progress towards the 2.75 net debt to EBITDA which is our objective. I would say that from a cash flow standpoint, this year has fallen short of our expectations. And I would say that, of course, we've had some challenges on the income statement. But as we look at inventory, we've had a fairly substantial inventory build over the course of the year, which is interesting, because of what's happening is you have a pump, which is lacking one critical component. And so you're unable to sell that pump until you get that critical component. For example, we also saw extended shipping lane times over the course of the year and increases in the cost of our inventory due to our suppliers. And so for all those reasons, we've had a very challenging year from an inventory standpoint. I would note that in the third quarter, we did see a decline in inventory. And we are expecting a fairly substantial improvement in free cash flow in the fourth quarter, as is typically the case. But here's the interesting thing. While net income growth next year is low, free cash flow growth we expect to be substantial. And so we're still finalizing our plans. But you're going to start to see a very significant acceleration of free cash flow growth as the inventory situation normalizes over the next one to two years. And that will really support some of the work that we're doing to get to 2.75x net debt to EBITDA which again is a clear focus for our entire management team.

Clare Trachtman:

Thank you very much.

Clare Trachtman:

Good morning, and welcome to our second quarter 2022 earnings conference call. Joining me today are Joe Almeida, Baxter's Chairman and Chief Executive Officer, and Jay Saccaro, Baxter's Chief Financial Officer. On the call this morning, we will be discussing Baxter's second quarter 2022 financial results and our full-year financial outlook for 2022. With that, let me start our prepared remarks by reminding everyone that this presentation, including comments regarding our financial outlook for the third quarter and full-year 2022 and our 2022 to 2025 long range plans, the recent acquisition of Hillrom, new product development, the potential impact of proposed pricing actions, business development and regulatory matters contains 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 our earnings release issued this morning and available on our website. On the call this morning, we will be discussing operational sales growth, which adjusts for the impact of foreign exchange and the acquisition of Hillrom. Now, I'd like to turn the call over to Joe. Joe?

James Saccaro :

Thanks, Joe. And good morning, everyone. As Joe mentioned, we're continuing to navigate a dynamic and ever-changing macro environment. This near-term volatility has created certain challenges for our business, and led us to lowering our full-year outlook. But we're committed to working through these headwinds and delivering on our long-term commitments off this new base. Most importantly, demand for our Baxter products remain strong and our integrated supply chain and commercial teams are working tirelessly to get products in the hands of our customers and patients to fulfill our mission. Turning to our financial performance. Second quarter 2022 global sales of $3.7 billion advanced 21% on a reported basis, 26% constant currency, and 3% operationally. As the US dollar strengthened over the quarter, foreign exchange negatively impacted reported sales by approximately 500 basis points. And as Joe mentioned, sales within the quarter were constrained due to lack of both raw materials and component availability, particularly as it relates to electromechanical components. Second quarter sales were also impacted by a lack of hospital access, which is needed to install select products, particularly in our patient support systems product category. We estimate these constraints negatively impacted sales by over 300 basis points in the quarter. Compared to the prior-year period, operational sales grew 3%, reflecting a gradual recovery in hospital admission rates and elective surgeries, strength in our medication delivery and nutrition businesses and solid growth in PD. On the bottom line, adjusted earnings increased 9% to $0.87 per share, falling within our guidance range of $0.86 to $0.89 cents per share. Now I'll walk through performance by our regional segments and key product categories. Note that constant currency growth is equal to operational sales growth for all global businesses and Baxter's three legacy geographic regions. Starting with sales by operational segment, sales in the Americas increased 2% on a constant currency basis. Sales in Europe, Middle East and Africa grew 6% on a constant currency basis, and sales in our APAC region increased 1% on a constant currency basis. Sales in our APAC region were negatively impacted in the quarter by the resurgence of COVID cases in the region, particularly in China, which we estimate was an impact of approximately $15 million. Moving on to performance by key product category, global sales for renal care were $931 million, increasing 2% on a constant currency basis. Performance in the quarter was driven by solid growth in our PD business where we observe both a sequential and year-over-year improvement in global patient volumes. This growth was partially offset by lower in-center HD sales, partially due to HD monitor supply challenges due to component availability. Sales and medication delivery of $710 million increased 4% on a constant currency basis. Growth in this business reflects strong global demand for our products and our IV therapy portfolio. This was partially offset by lower sales in APAC, driven by COVID-related lockdowns in China and the resulting impact on utilization. This product category was also impacted by lower sales of large volume pumps in the quarter due to constrained demand from the lack of component availability. Pharmaceutical sales of $528 million grew 3% on a constant currency basis. Performance in the quarter was driven by increased sales internationally for inhaled anesthetics, offsetting increased competition within our US generic injectables portfolio, as well as supply constraints for select molecules. Moving to clinical nutrition. Total sales were $230 million, increasing 4% on a constant currency basis. Performance in the quarter was driven by demand for our broad multi-chamber product offering, vitamins and automated compounding. Sales in advanced surgery were $263 million, advancing 8% on a constant currency basis. Growth in the quarter reflects continued gradual recovery of elective procedures in the US and Europe, as well as strong demand for RECOTHROM given competitive constraints. Recovery in our APAC region remains subdued, with several countries experiencing somewhat depressed levels of surgical volumes. Sales in our acute therapies business were $173 million, declining 4% on a constant currency basis, reflecting the difficult comparison to the prior-year period where we experienced elevated demand for CRRT, given the rising COVID cases. Biopharma solutions in the quarter were $163 million, declining 5% on a constant currency basis and reflecting an expected step down in sales of COVID vaccines compared to the same period last year. COVID vaccine sales for the quarter totaled approximately $35 million. Hillrom contributed $715 million in sales in the quarter, which included $364 million of sales in patient support systems, $282 million of sales in frontline care and $69 million of sales in global surgical solutions. Hillrom grew 2% on a constant currency basis as compared to Q2 2021 when the company was a standalone entity. Despite solid growth in the quarter, sales came in below our expectations largely due to the supply constraints for electromechanical parts, primarily implant packing frontline care, as well as select delays in product installations and patient support systems in global surgical solutions due to lack of hospital access. As a result, we're experiencing unprecedented levels of product backlog throughout these businesses. Demand remains strong, though, and we'll continue to monitor the situation and work this backlog as rapidly as possible. And while to date, we haven't yet seen an impact on the flow of capital orders, we are taking a more conservative approach for the second half given delays related to hospital staffing challenges, as well as more cautious commentary from customers regarding hospital CapEx. Moving through the rest of the P&L. Our adjusted gross margin of 42.5% decreased by 10 basis points over the prior year, reflecting the impact of increased expenses, primarily driven by inflation and freight. Adjusted SG&A of $839 million represented 22.4% as a percent of sales, an increase of 150 basis points versus prior year, driven by the addition of Hillrom, as well as higher freight expenses, partially offset by lower bonus accruals under our annual employee incentive compensation plans. Adjusted R&D spending in the quarter of $148 million represents 4% as a percent of sales, a decrease of 50 basis points versus prior year. Adjusted operating margin in the quarter was 16.2%, a decrease of 100 basis points versus the prior year, primarily driven by incremental freight expenses in the quarter, resulting from higher fuel prices and inflation, partly offset by actions we are taking to improve productivity and reduce spend. Adjusted net interest expense totaled $89 million in the quarter, an increase of $55 million versus the prior year, driven by higher outstanding debt balances related to the acquisition of Hillrom. Given the current interest rate environment, we now expect net interest expense to be slightly higher than we had previously forecasted. Adjusted other non-operating income totaled $33 million in the quarter, an increase of $31 million compared to the prior-year period, driven by foreign exchange and equity investment gains, as well as amortization of pension benefits. The adjusted tax rate in the quarter was 18.8% as compared to 17.8% in the prior period. The year-over-year increase was driven by the addition of Hillrom as well as lower stock-based compensation award deductions as compared to the prior-year period. And as previously mentioned, adjusted earnings of $0.87 per diluted share advanced 9% versus the prior-year period. Let me conclude my comments by discussing our outlook for the third quarter and full-year 2022, including some key assumptions underpinning our revised guidance. As discussed, throughout the second quarter, Baxter experienced increased inflationary pressure related to fuel commodity and labor prices. Our prior outlook did not assume the divergence we're experiencing between diesel and crude oil, but did assume an easing commodity pricing, in line with external indices forecasts. Our current outlook now assumes pricing for these key raw materials remains at current levels for the remainder of the year. We anticipate component availability remains challenging through the second half of 2022, which will continue to impact our overall production volumes and absorption rates. We anticipate our order backlog will stay at elevated levels, resulting in a phasing impact of top line sales, primarily for infusion pumps in the frontline care business. Our teams are working tirelessly to secure key electronic components to lower our backlog to more normalized levels. In addition, we project a potential slowdown in hospital capital spending in the second half of the year, which will impact our PSS and GSS businesses. For the third quarter of 2022, we expect global sales growth of high teens on a reported basis, mid-20s on a constant currency basis and low-single digits operationally, and we expect adjusted earnings excluding special items of $0.79 to $0.83 per diluted share. For full-year 2022, we now expect global sales growth of high teens on a reported basis, mid-20s constant currency, and 2% to 3% operationally. As mentioned earlier, operational growth for Baxter excludes the impact of foreign exchange and Hillrom. The reduction in our sales guidance reflects increased foreign exchange headwinds, a lower sales outlook for our pharmaceuticals business and the legacy Hillrom business. Moving down the P&L, we expect full-year adjusted operating margin to be between 17% to 17.5%, reflecting the impact of all the various macroeconomic dynamics discussed today. For the year, we now expect interest expense to total approximately $400 million, given rate increases and adjusted tax rate of approximately 19%, and a diluted average share count of approximately 510 million shares. In addition, we expect the incremental FX top line headwinds will negatively impact earnings per share by approximately $0.05 in the second half of the year. Based on these factors, we now expect 2022 adjusted earnings excluding special items of $3.60 to $3.70 per diluted share. With that, we can now open the call up to Q&A.

Robbie Marcus:

Jay and Joe, there's a lot of moving pieces. And we just had the Analyst Day in May. So I was hoping maybe you can bucket for us the biggest changes from when you first gave guidance in January, EPS is now about a 15% lower. How should we think about the biggest impacts? How many are transitory? And how much of that is, would you say, more semi-permanent or permanent?

Robbie Marcus:

And maybe just as a follow up, Jay, at the Analyst Day that you talked about in the new LRP that you think – floor of 75 basis points and margin expansion, I guess would be the floor over the LRP. Do you think that still holds, given the new environment? Or there may be some changes to that comment?

Operator:

Vijay Kumar of Evercore is on the line with a question.

James Saccaro:

The updated LRP is off the lower base. So, it was a relative improvement from 2022. Vijay, the factors that I listed, the $0.45, I suspect that a number of them will be transitory, okay? But as we've thought about the modeling, we really don't have enormous easing of some of these constraints that we've seen. So, let's see how that evolves over time. But for now, what we're able to do is confirm the growth against this lower level.

José Almeida:

Vijay, when we look at Baxter, let me take this in two portions. We have experienced significant shortages of semiconductors. And the semiconductors – and sometimes, we all read in the news, the semiconductor business may alleviate as consumer goods will decline due to recession, potential recession, inflation and so forth. We as a company and many, many people in the medical devices use chips that are not the same chips used in consumer goods, and that varies by nanometers. You probably know this as well. We use thicker chips, chips that have embedded software. Our suppliers – we have a half a dozen suppliers. And one of these suppliers has been a real problem. And coincidentally, this supplier is one that supplies most of our frontline care products. This is not an issue in our [indiscernible] but more so into our frontline care. And also affects our ability to make Sigma Spectrum pump, as Jay mentioned. So, we need to separate that. So when it comes to capital, we have not seen a widespread change in demand. What we saw in the second quarter are fewer accounts that moved the implementation and the justification was more on staff shortages and the ability to really deploy them to get the products installed, which requires manpower and they were short in that area. We look conservatively at this. We look at our business in many dimensions. We have a very healthy backlog at the moment. Very, very healthy. I can sit here today and say that, if I had enough chips, we could produce a significant amount of revenue due to pumps, monitors and other devices that we have. One of the things that bite us twice in this conversation is not having the chips is the ability to program and plan your factories accordingly because it becomes a real ramp at the end of the quarter when the supplier sends us a bunch of chips, and then we assemble them and we get them out of the door as soon as possible. So, it has been a real tricky situation. It seems to – that we see the light at the end of the tunnel as we start to make progress with some of our suppliers. But we're sitting here today, I would say the demand is strong. This is the headline. Second is the chip – the semiconductor situation is very fluent. Third is that we have the capability to put those products on the market and have the demand for them as soon as we've got the product, the components shipped to us. So, I want to make sure that those two things are separate. Capital has slowed down. We haven't seen that. Our backlog, as I said, has been all-time high in both business. However, we had people postpone installations in the second quarter due to staff shortage, as we were told.

Pito Chickering:

The first one is on the CapEx side. You talked about seeing some delays from customers who are pushing out orders on CapEx spending. Is this a [indiscernible] Hillrom, I guess any color you can give us on what parts of your book business you're seeing those delays of CapEx.

José Almeida:

As a matter of fact, we have significant demand for pumps. We just cannot take the orders and we cannot make the products because we don't have the semiconductors going in. But I want to also to underscore what Jay said. When it comes to capital, capital is not the same for every hospital system. The hospital systems, they are large, they have the capacity to move forward. So we are observing very rapidly what is happening. So, is this postponement of capital issue or supply or staffing issues. Right now, the information that we have is a staffing issue, and those are the smaller accounts that we saw in the second quarter. We have large installations coming in third and fourth quarter, will be a telling point how those go through in the third and fourth quarter.

James Saccaro:

Looking at that, I think there's a few things in play. First of all, the fourth quarter of the year is typically our highest margin quarter as a result of incremental sales. And so, if we look at the cadence between the third and fourth quarter of the year, we add well over $100 million in sales. And given that, there is a fairly substantial fixed cost base at a company like ours. Those sales tend to flow through at a much higher margin than the corporate average. So, if you look at the last few years, the fourth quarter is normally higher. Now, that's not always the case. But generally speaking, it's normally higher than the third quarter as a result of these incremental sales. The second thing is, listen, we take the preservation of the P&L very seriously. And so, while we weren't able to offset the extreme challenges that we've seen, we have offset a portion of those through some cost actions that we're taking. And many of those cost actions, the benefit of those accrues more to the fourth quarter than the third quarter. So, I think, perhaps, those are the two primary drivers that lead to the fourth quarter accelerated versus the third. And then, the final thing I would say is, we are ramping on the Hillrom synergy side throughout the year. That's been an area that's been going quite well. But each quarter that rolls on, we're adding synergies. So, that's another factor that comes to bear on the fourth quarter in excess of the third on our way to achieving the long term goal that we outlined at the Investor Day.

Travis Steed:

Jay, obviously, a lot of macro pressures right now, but maybe talk a little bit about some of the offsets, things that are in your control. You mentioned pricing a little more visibly, as other companies have as well, just maybe talk a little bit about how much of this inflationary pressures can you actually offset with price? And how long does it take to roll through the P&L, given contracts?

Travis Steed:

Jay, in an earlier question, I think to Robbie, you're still committed to the 75 basis point floor per year. Just curious, when you think about on earnings, does that still translate into low-double digits or is 2023 probably more likely to be more of a transition year with less than double-digit earnings growth for that one year? Any comments on there? And also, where divestitures might fit in the LRP? If you've got to wait on somebody as more macro pressures ease before you'd move into divestitures or you could do that more near term?

Travis Steed:

And then divestitures?

Operator:

Joanne Wuensch of Citi is on the line with a question.

José Almeida:

Let me talk about the backlog and Jay will supplement my answer and go to the second part of the question, Joanne. Our backlog has been growing primarily in frontline care. So let me define what we think – how we define backlog because we have two things going on. One is backlog and one is back order. Our back border is all time high. And what is back order? It is when we take an order and we cannot fulfill 100% of that order. The order is still pending in the system. As soon as we get inventory in the warehouse, it gets shipped to that customer. So, that is all time high at the moment at most probably sevenfold what normally we would see. Backlog is something new actually because if we don't have to assemble pumps, those pumps don't get into a backlog system. Baxter never used that system, but backlog comes with Hillrom and it's very appropriate for them to look at their business such as this, which is future orders put in the system for delivery in the future. We've been accumulating significant backlog in our frontline care. Right now, we have significant demand, primarily now with the graduation of med school students and students going back. It's one point that we do with that part of the business, [indiscernible] business. There are other parts of our business, monitors as well, that we feel if we had those chips would have significant revenue increase in the future. So, we're planning, as we receive those chips, the situation eventually normalizes, the backlog will come back to normal levels. I would say that our backlog today are multiple times what was used to be called normal for Hillrom. And we have also a healthy backlog in our bed system, the traditional Hillrom. So I want to make sure that you all know that backlog is something new for us. We're going to be talking every call about that and we're telling you right now that backlog is multiple times what is considered normal for Hillrom and Baxter.

José Almeida:

I would just add that we're also excited about the syringe pump that may come faster in terms of approval. They are the large volume parenteral pump, which is the LVP. So, the update is that we are under active review with the FDA on Novum IQ syringe infusion pump. And the large volume infusion pump, it is pending, our response to the FDA additional information request, which we are expecting to respond within this calendar year. And hopefully, both pumps will satisfy the FDA's questions, and hopefully, we can get them approved. But we're excited about the launch of both.

José Almeida:

Yeah, we have about probably close to 20,000 Novum pumps, large volume pumps in inventory. Yet more will be made preparing for the hopeful launch this year and full next year sales. So, we're working very close to our suppliers, but this is very different. This is a next generation chip, a new generation chip versus what is in Sigma Spectrum.

Larry Biegelsen:

Jay, two to free you. First, simple, on interest expense, based on the $400 million this year, this run rate right now about $440 million, is that how we should think about it for 2023. Or maybe just some color on what you're assuming for rate increases and debt paydown. And then I just have one follow up.

Larry Biegelsen:

So, the math I did there, Clare, is probably not the right way to think about it?

James Saccaro:

There should be some paid down. Larry, wildcard, what does the Fed do with rate increases, but as we currently see it.

James Saccaro:

Larry, the answer is yes. We get benefits. So, we have been severely impacted by a lot of factors. So, the worldwide stress on the supply chain, the inability of our suppliers to supply and that shows up all over the operations of our company. If we do get alleviation of diesel rates, if we get alleviation of the global supply chain crunch, which would allow us to use less expedited freight, if we're able to see some improvement in material inflation, and finally, and perhaps most importantly, if we can run our plants consistently with the products and the inputs that they need, then, yes, the situation will be significantly better than it is today. Now, the way we've modelled this, as we look to the second half of the year, we are assuming some level of shutdown. We're assuming elevated rates, continued use of expedited freight. So we've got all that embedded. And that's embedded in much of our thinking for 2023. We should get this back at some point. And so, I'm optimistic that this will turn. I just don't know when, and we're not prepared to call that at this stage.

James Saccaro:

And to add to that, Larry, if we have normalized back order/backlog levels, that's another tailwind. And we're not there yet. We're not anticipating that we get there in the near term. But to the extent that we secure the critical components that we have, then we'll be able to see some sales uplift as well.

Joshua Jennings:

Just wanted to ask, it's only been a couple of months since the Investor Day, but just on the Hillrom sales synergy side of the forecast in the LRP, I know there's a lot of muddling with the supply constraints and then the current environment, but just any data points you can share just in the 2Q in terms of how your outlook of Hillrom synergies are advancing or is evolving? And then second, Jay, and I think you called here the guidance updates conservatively realistic. And that makes sense. Assuming that the environment stays consistent, have you baked into the guidance update? Where do you see areas of conservatism in this update? I think investors probably concerned about the potential for another revision. Clearly, if the environment gets worse, it will impact the entire group of large cap medtech players. But it seems like the capital spending slowdown that you're assuming by hospitals in the back half, particularly on the PSS and GSS businesses, there's some conservatism there. But are there any other areas of conservatism you've called out in this guidance revision?

James Saccaro:

So with that, I think we appreciate everybody joining us today and we will conclude the call and are obviously available as always for follow-ups. Thank you all very much for joining.

Clare Trachtman:

Good morning, and welcome to our first quarter 2022 earnings conference call. Joining me today are Joe Almeida, Baxter's Chairman and Chief Executive Officer; Jay Saccaro, Baxter's Chief Financial Officer; Giuseppe Accogli, Baxter's Chief Operating Officer; and Jim Borzi, Baxter's Chief Supply Chain Officer. On the call this morning, we will be discussing Baxter's first quarter 2022 financial results and full year financial outlook for 2022. On the call this morning, we will be discussing Baxter's first quarter 2022 financial results and full year financial outlook for 2022. 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 2022, the recent acquisition of Hillrom, new product development, business development and regulatory matters including ones related to the 510(k) review of the NOVUM IQ infusion platform contains 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 our earnings release issued this morning and available on our website. On the call this morning, we will be discussing operational sales growth, which adjusts for the impact of foreign exchange and the acquisition of Hillrom. Before I turn the call over to Joe, I wanted to let everyone know that the registration link for our 2022 Investor Conference, which is being held on Wednesday, May 25 in Glenview, Illinois is now available on our website. Please visit the Investor Relations section of Baxter's website to register for the event. With that, I'll now turn the call over to Joe. Joe?

Jay Saccaro:

Thanks, Joe, and good morning, everyone. As Joe mentioned, we're pleased with our first quarter performance especially in light of the geopolitical unrest and macroeconomic headwinds causing incremental supply chain challenges, inflationary pressures and elevated freight costs. We're working through these headwinds with consistent focus on operational efficiency and disciplined expense management. Turning to our financial performance. First quarter 2022 global sales of $3.7 billion advanced 26% on a reported basis, 29% on a constant currency basis and 3% on an operational basis. Sales came in at the high end of our guidance range this quarter, with growth reflecting recovery in hospital admission rates and elective surgeries, the benefit from revenues associated with the manufacturing of COVID vaccines and strength in our medication delivery business, which benefited from growth of IV therapies as well as lower customer rebate costs during the quarter. On the bottom line, adjusted earnings increased 22% to $0.93 per share. This compared favorably to our guidance of $0.79 to $0.82 per share, driven by better-than-expected gross margins, which was driven by product mix as well as disciplined execution on cost synergies associated with the acquisition. Now I'll walk through performance by our regional segments in key product categories. Note that constant currency growth is equal to operational sales growth for all global businesses and Baxter's 3 legacy geographic regions. Starting with sales by operating segment. Sales in the Americas increased 5% on a constant currency basis. Sales in Europe, Middle East and Africa grew 2% on a constant currency basis and sales in our APAC region were flat on a constant currency basis. Sales in our APAC region were negatively impacted in the quarter by the resurgence of COVID cases in the region particularly in China, we are continuing to monitor the situation in China and the potential impact on our operations from further lockdowns. Moving on to performance by key product category. Global sales for Renal Care were $894 million, increasing 1% on a constant currency basis. Performance in the quarter was driven by growth in our PD business as global patient volumes increased on a year-over-year basis despite persistent pressures from increased mortality rates in ESRD patients delays in new patient diagnoses and market-wide staffing shortages. This growth was offset by lower dialyzer sales in our international in-center HD business. Sales in Medication Delivery of $706 million increased 10% on a constant currency basis. Strong U.S. growth in this business reflects continued recovery in the pace of hospital admissions compared to pre-COVID levels as well as increased demand for IV administration sets and solutions. Sales also benefited from lower customer rebates in the quarter. For the quarter, we estimate that U.S. hospital admissions were down low single digits compared to pre-COVID levels. Pharmaceutical sales of $521 million declined 2% on a constant currency basis. Performance in the quarter was negatively impacted by increased competition for select molecules in our U.S. generic injectables portfolio lower sales of inhaled anesthetic and pandemic-related supply constraints driven in part by labor shortages at certain of our manufacturing facilities. Moving to Clinical Nutrition. Total sales were $227 million, increasing 1% on a constant currency basis. Performance in the quarter was driven by the benefit of new product launches within our broad multi-chamber product offering. Sales in Advanced Surgery were $228 million, advancing 8% on a constant currency basis. Growth in the quarter reflected elective procedure recovery in the U.S. and Europe. We've seen recovery stall in our Asia Pacific region with Australia, Korea, Japan and Taiwan experiencing somewhat depressed levels of surgical volumes. In the U.S., we saw surgical procedures come under pressure in January as a result of the Omicron variant, but the impact on volumes was short-lived with procedural volumes improving into February and March. Our current assumption is for U.S. surgical procedures in the U.S. to remain above pre-COVID levels for the remainder of the year. Sales in our Acute Therapies business were $188 million, declining 7% on a constant currency basis and reflecting a difficult comparison to the first quarter of 2021 when we experienced heightened demand for CRRT given the rise in COVID cases. BioPharma Solutions sales in the quarter were $156 million, representing growth of 21% on a constant currency basis, reflecting incremental sales related to the manufacturing of COVID vaccines, which totaled approximately $45 million in the quarter. For the remainder of the year, vaccine sales are forecasted to be approximately $60 million lower than prior year sales. Hillrom contributed $755 million in sales for the quarter, which included $383 million of sales and patient support services $294 million of sales in Frontline Care and $78 million of sales in Global Surgical Solutions. On a constant currency basis as compared to Q1 2021, when Hillrom was a stand-alone company, its sales were flat year-over-year, reflecting a challenging comparison as sales in the first quarter of 2021 benefited from COVID-related sales of approximately $40 million. Moving through the rest of the P&L. Our adjusted gross margin of 45% increased by 300 basis points over the prior year, reflecting the contribution of Hillrom within the quarter and lower rebate costs. Adjusted SG&A of $855 million, representing $23.1 million as a percentage of sales, an increase of 240 basis points versus prior year, driven by the addition of Hillrom as well as higher freight expenses. Adjusted R&D spending in the quarter of $149 million represented 4% as a percentage of sales, a decrease of 30 basis points versus prior year. Increased levels of SG&A and R&D spend reflect the contribution from Hillrom. We're on track with our cost synergies target for the year, and we're able to pull forward certain initiatives resulting in a benefit to operating expenses in the first quarter. Adjusted operating margin in the first quarter was 18%, an increase of 100 basis points versus the prior year, reflecting the various factors I just discussed. Adjusted net interest expense totaled $85 million in the quarter, an increase of $51 million versus the prior year, driven by higher outstanding debt balances related to the acquisition of Hillrom. Given the current interest rate environment, we now expect net interest expense to be higher than we had previously forecasted. Other nonoperating income totaled $16 million in the quarter, an increase of $21 million compared to the prior year period, driven by foreign exchange gains and amortization of pension benefits. The adjusted tax rate in the quarter was 20.8% as compared to 16% in the prior period. The year-over-year increase was driven by the addition of Hillrom as well as the prior year tax rate reflected a discrete benefit. The tax rate in the quarter was unfavorable to our expectations due to the mix of earnings within the quarter. And as previously mentioned, adjusted earnings of $0.93 per diluted share advanced 22% versus the prior year period. Let me conclude my comments by discussing our outlook for the second quarter and full year 2022, including certain key assumptions around phasing for the year. As Joe mentioned earlier, we have made the decision to remove any NOVUM IQ Infusion System sales in 2022, which is reflected in our updated sales outlook. At this time, we are not able to offset the expected NOVUM sales with Spectrum as we are supply constrained on certain electromechanical parts for the spectrum pump. In addition, the global macro disruptions emerging from new COVID outbreaks in China, the war between Russia and Ukraine and continued supply chain constraints across our network have created challenges to our ongoing operations. While we continue to evaluate opportunities to drive better efficiency in our integrated supply chain as well as pass through some of these costs to our customers. These factors have resulted in increased expenses, which are expected to negatively impact our results throughout the remainder of the year. These incremental expenses, which are primarily related to higher oil prices and increased inflationary pressures are reflected in our updated financial outlook. For the second quarter of 2022, we expect global sales growth of approximately 26% on a reported basis, 29% to 30% on a constant currency basis and approximately 4% operationally. And we expect adjusted earnings, excluding special items, of $0.86 to $0.89 per diluted share. For full year 2022, we now expect global sales growth of 23% to 24% on a reported basis, 25% to 26% on a constant currency basis and approximately 3% on an operational basis. As mentioned earlier, operational growth for Baxter excludes the impact of foreign exchange and Hillrom. Moving down the P&L. We expect full year adjusted operating margin to be similar to the prior year period. For the full year, we now expect interest expense to total approximately $375 million and adjusted tax rate of 19% to 19.5% and a diluted average share count of 508 million to 510 million shares. Based on these factors, we now expect 2022 adjusted earnings, excluding special items, of $4.12 to $4.20 per diluted share. With that, we can now open the call up to Q&A.

Travis Steed:

Jay, I'd love just to get a bit more of a bridge on the guidance changes here for the full year, both on the top line and the bottom line. It looks like a 1 point reduction in the revenue guidance. I'm just curious how much that's NOVUM IQ, how much of it's supply shortages and the same thing on the bottom line as well. It looks like $0.25 difference if you account for the Q1 beat?

Travis Steed:

That's great. I'd love to hear a little bit more color on some of the pricing actions that you're taking that you just mentioned and kind of where in the portfolio you're doing that and more shipping and freight cost that you're charging customers or actual price increases?

Operator:

We'll move next to Robbie Marcus at JP Morgan.

Jay Saccaro:

So Robbie, thanks for the question. Overall, we feel very good about the durability of the business, the long-term potential to outgrow our markets. If you think about the first quarter performance, that really is a classic illustration of how we perform, right? We delivered solid sales growth 3%. We were able to deliver ahead of our expectations on the bottom line, which was great. All the while, continue to pursue the integration, which as Joe described, and we -- I'm sure we'll get into later, is going quite well. Very happy with the acquisition of Hillrom, very happy with the opportunities that it opens up to us in terms of synergies and some of the end markets that it exposes us to. So all of that is really a nice story. We are faced with 1 of the most complicated supply chain environments, I have personally seen the war in Ukraine, coupled with an already fraught supply chain creates very significant short-term factors impacting our performance. Do I think we'll be talking about supply chain in 2 years? I certainly hope not, nor do I expect that, that will be the case. But at least for the next 9 months as we see it, there will be continued pressure on the supply chain. And if you think about our mission, that's our primary focus, but it's more costly to do that in the short term. I think over time, we'll see oil prices eased. I think over time, the complexity of moving product around the world will decrease. And all of those things will accrue to the benefit of the long-term story for Baxter. Right now, it's some choppy waters that we're navigating. And I think all of the teams, including in particular, our supply chain team are doing a tremendous job working through all of that. Joe, I don't know if you want to add anything to that.

Robbie Marcus:

Great. And maybe 1 more to follow up on pricing. This is -- your business has a lot of different products that go through a lot of different channels and contracts. Some are capital items, some are drugs. Some are more supplies historically, this has been a very difficult market to take pricing in. But given the inflation, the shipping, et cetera. What's the ability by each of the different businesses you participate into put through pricing? And is there any -- do you foresee any change in the go-forward pricing environment due to this?

Operator:

Larry Biegelsen with Wells Fargo has our next question.

Jay Saccaro:

Larry, you are thinking about the cadence of margins correctly. And if you think about Baxter overall, historically, we see first half margins lower than second half margins looking at 2021, the margin went from 17% first half to 20% second half, despite some significant issues with respect to inflation that impacted the second half of last year. And a lot of that comes down to significant incremental revenue that we see in the second half of the year. So as we fast forward to 2022, you're right, we'll see a several hundred basis point step-up from first half to second half. And there's really a few contributing factors. One, the revenue step-up that we anticipate seeing in the second half. Second, incremental synergy capture that accrues to the benefit of the second half and then finally, our manufacturing team is hard at work, accelerating the pace of what we call VIP programs. But what are really about is increasing the efficiency of our manufacturing facilities. And really, we'll see some of those benefit more in the second half than the first half. So you add those 3 factors together, and the cadence of margin as you correctly point out, will be similar to what it's been in past years.

Joe Almeida:

Sure. I can start, Jay, and you can please come in. We have a long-range plan in the company that is drawn and takes into account several different factors, including the short-term disruptions that affect in 2022 in terms of supply chain. We have a forecast that we're going to tell you what our assumptions are going into the meeting. We're going to tell -- this is what we're assuming things are happening. So what we present, you have all the all the numbers, we have a footing on what are the assumptions that we are making in this world today in terms of supply demand pricing and other things, including commodities and other things. So we will be prepared to disclose that at the time of the meeting, game.

Operator:

We'll come next to Pito Chickering with Deutsche Bank.

Jay Saccaro:

We really have not forecasted relief this year. We've taken roughly $100 barrel of oil and are looking at that through the rest of the year, and we're also anticipating some level of complexity with respect to the supply chain, along with challenges procuring components and raw materials for the balance of the year. The way we see it, there could be some easing of oil prices over time, but we think probably that benefits more 2023 than 2022. The other fact that you have to keep in mind is there is a lag between alleviation of oil price and when we see that in the P&L. Said another way, our Q1 -- our Q1 was not that negatively impacted by the movement in oil price that occurred during Q1, that really impacts the period from Q2 to Q4. So I think the way we see it, Pito, we're going to assume challenging levels for the balance of the year. And then we're optimistic that this sorts itself out towards the end of '22 and into '23, but we're cautious about that.

Jay Saccaro:

Sure. We don't really get into backlog by specific product area. What I can tell you, and nor we get into product line availability and components impacting specific product lines. What I will tell you is we're very tight in terms of spectrum parts, as I commented in my prepared remarks. And as a result of that, we're not able to see some of the offsets that perhaps we've seen in the past with respect to NOVUM delay. So that's 1 factor. In the first quarter, we did have some backlog with respect to the Hillrom products. We expect those things to sort out over the course of the coming months. But again, with availability of product, we're always careful and cautious about watching this closely. As it relates to China, the big -- the lockdowns that we've seen there, we expect roughly a $15 million to $20 million impact to sales. Obviously, our hearts go out to all of our employees in China who are really doing yeoman's work trying to ensure that we get product out of the manufacturing facilities, and we have folks that are staying in plans overnight so that they can secure product and get product out but from a demand standpoint and a supply impact, we're seeing roughly $15 million, perhaps $20 million in impact as it relates to those measures. We expect those -- some of that occurred in Q1. We expect some more of that to impact Q2 and then we are expecting that to alleviate later in the year that's really the story on China.

Danielle Antalffy:

Hey, good morning, everyone. Just 1 question on the NOVUM platform. I'm just curious, Joe, if you -- this delay here, if that changes your view of the potential longer term or even in the midterm, once the platform does launch in the market share gains that Baxter should be able to get? And then I have 1 follow-up.

Danielle Antalffy:

Okay. Got it. That's good to hear. And then just on Hillrom, I was wondering if you could touch a little bit more. I know it's early days still, but how it's been from a sales synergy side or maybe how you guys are seeing any changes in the sales process with Hillrom as part of the product portfolio today, just broadly speaking?

Operator:

Joanne Wuensch, Citi has our next question.

Joe Almeida:

Daniel -- Joanne, how are you?

Joe Almeida:

We are experiencing a moment of reduction in the patients in renal due to the 2 years of COVID that affected the number of patients who died, who are at risk and for ESRD patients or potential patients. So we started to see the pickup of the patients in PD at the moment. We see that continue on primarily in the U.S. and Americas. We still need to see that coming in through Europe. The HD patients, we see that more as a more lingering effect of the pandemic. So PD separate PD from HD or peritoneal dialysis from hemodialysis we see PD recovering throughout this year and picking up for momentum probably in 2023.

Joe Almeida:

We see the recovery coming in and it's going to be a rebound. So we project to see a rebound in surgical volumes and hospital volumes in most places that we do business today ex-Asia. I think in China, we need to watch what's happening in terms of their lockdown and how we're able to react to that as well as in Japan. But ex those 2 large markets, we see other markets picking up momentum and the demand that was suppressed coming back up in -- with volumes above last year and probably at or above pre-COVID times.

Drew Ranieri:

Just to go back on Hillrom for a second. If you adjust out for the COVID benefit, it's growth. And even in the Patient Support Systems business, it looks like it was closer to 7% growth. So kind of better than expected. But within PSS, can you maybe go into some detail about what you're seeing from the hospital bed component and the connected care component as well, just kind of given the light that some hospitals might be pulling back on capital expenditures. Just kind of curious what you're seeing in this quarter and kind of what you're expecting for the remainder of the year in those franchises?

Giuseppe Accogli:

Yes. So I think when it comes to BSS, what we see is continuous and strong amount on the care communications side. Care communication is a very strong platform with unique unique features that come from the nurse coal system to the bold system. So over there, we see a strong demand. This demand is difficult to implement being difficult to implement due to the COVID impact. So our access to the hospital has impacted that code -- but what we see is a very healthy backlog when it comes to care communication and to the overall PSS business.

Matt Miksic:

Just a couple of follow-ups, if I could, Jay or Joe, on how you're thinking about some of these factors in your guidance. One is China, you talked about it a couple of times. So if maybe you could give us a sense of how your -- what assumptions you're baking into the sort of easing and lockdowns there? Does it happen in the second quarter? Or is that sort of happened in the back half by your estimation and guidance. And then the other is FX. We've seen significant moves in FX, expected some folks in our universe more than others and just would love to get a sense you have some other major moving parts that you described, Jay, that make up the guide change, but maybe talk a little bit about how you're managing through or what the impact of changing FX has been?

Operator:

And we'll take our final question from Vijay Kumar with Evercore ISI.

Jay Saccaro:

Great. Thanks for the question, Vijay. The -- as it relates to the second half versus first half sales guidance, what I will tell you is that the primary drivers are a reduction in vaccine sales as anticipated, along with the removal of NOVUM with no offset because if you think about last year, we have very strong spectrum sales in Q3 and Q4 of last year. And we don't have that available that lever available to us as we look at the second half of this year, which is why Joe's comments around our intense focus to get NOVUM approved, that's really a core focus of our organization and our R&D team. So those are really the drivers as far as changing of cadence. Most other factors I would say, are kind of moving along similarly, although we did see some heightened level of medication delivery sales in the first quarter of this year. That was a bit anomalous and we do expect that to lower as we approach the back portion of the year. So really, that's the story on the sales line. As it relates to supply chain costs that we're experiencing inflationary pressures that we're experiencing over the last several years from 2019 or '20 through to today. We're talking about $0.5 billion of incremental costs that we're experiencing. And really, it's things like increased labor costs, increased material costs and freight costs that is driving this substantial uptick. What's interesting is, despite that very significant number, we've been able to offset an enormous amount of that through manufacturing VIPs, as I described earlier through operational performance, some of the pricing mechanisms that Joe described earlier. So this is -- Vijay, this is a really significant number that we're faced with and frankly, what I am somewhat optimistic and even excited about is as those pressures alleviate, you'll get to see the momentum with respect to all of the operational efficiencies and enhancements that we're undertaking without that offset. So that's what we're working towards. As Joe and I mentioned, I don't think -- I think we're going to contend with some of these pressures for the rest of the year, but I am hopeful that we start to see some benefit as we move to next year. So thank you very much for the question.

Clare Trachtman:

Good morning and welcome to our fourth quarter 2021 earnings conference call. Joining me today are Joe Almeida, Baxter's Chairman and Chief Executive Officer; Jay Saccaro, Baxter's Chief Financial Officer; and Giuseppe Accogli, Baxter's Chief Operating Officer. On the call this morning, we will be discussing Baxter's fourth quarter and full year 2021 financial results along with our financial outlook for 2022. With that, let me start our prepared remarks by reminding everyone that this presentation, including comments regarding our financial outlook for the first quarter and full year 2022, including the anticipated impact of COVID and inflationary pressures on this outlook, the recent acquisition of Hillrom, including anticipated cost synergies from future net leverage targets, new product developments or launches, business development and regulatory matters, 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 details 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 our earnings release issued this morning and available on our website. As mentioned in our press release this morning, following Baxter's acquisition of Hillrom on December 13, 2021, Baxter's fourth quarter and full year 2021 financial results include Hillrom financial results for the last 19 days of the quarter ended December 31, 2021. Hillrom financial results for these periods are reported as the new operating segment in addition to Baxter's existing three geographic segments. On the call this morning, we will be discussing operational sales growth, which for the fourth quarter and full year 2021 adjusts for the impact of foreign exchange, the December 2021 acquisition of Hillrom and the February 2021 acquisition of the rights to Caelyx and Doxil for specified territories outside of the U.S. Later in the call, Jay will discuss our guidance for the first quarter and full year 2022. Operational sales growth for 2022 will exclude the impact of foreign exchange and the acquisition of Hillrom. Historical 2021 quarterly sales for Hillrom have been posted to the Investors section of our website. Now I'd like to turn the call over to Joe.

Jay Saccaro:

Thanks, Joe, and good morning, everyone. As Joe mentioned, we're pleased with our fourth quarter results, particularly in light of ongoing pandemic and global supply chain disruptions that we experienced during the quarter. Fourth quarter 2021 global sales of $3.5 billion advanced 10% on a reported basis, 12% on a constant currency basis and 4% operationally. Sales came in at the high end of our guidance range, which is in line with the commentary we shared in early January and underscores the essential nature and durability of our portfolio. Sales growth this quarter reflects the benefits of revenues associated with the manufacturing of COVID vaccines, strength in Medication Delivery, Renal Care, OUS sales of Caelyx, Doxil, which totaled approximately $35 million in the quarter, and a contribution of $212 million from Hillrom. On the bottom line, adjusted earnings increased 30% to $1.04 per share. Results in the quarter reflected a contribution of $0.08 per share from Hillrom, inclusive of incremental interest expenses related to the transaction as well as unplanned foreign exchange losses totaling $0.04 and higher than expected freight costs of $0.05. As Joe mentioned, we incurred significant expedited freight costs late in the quarter as cases of COVID-19 surged. Now I'll walk through performance by our regional segments in key product categories. Starting with sales by operating segment. Sales in the Americas increased 5% on both the constant currency and operational basis. Sales in Europe, Middle East and Africa grew 5% on a constant currency basis and 1% operationally and sales in our APAC region advanced 6% on a constant currency basis and 5% on an operational basis. As Clare mentioned, Hillrom's financial results are reported as a new operating segment in addition to Baxter's existing three geographic segments. Moving on to performance by key product category. Note that for this quarter, constant currency growth is equal to operational sales growth for all global businesses, except for our Pharmaceuticals business, for which we will provide both constant currency and operational growth adjusting for the acquisition of rights in select territories outside the U.S. for Caelyx, Doxil. Global sales for Renal Care were $1 billion, increasing 4% on a constant currency basis. Performance in the quarter was driven by global growth in both our HD and PD businesses. PD benefited from year-over-year improvement in global patient volumes despite persistent pressures from increased mortality rates in ESRD patients, delays in new patient diagnoses and market-wide staffing shortages. Patient growth improved sequentially throughout the year, with Q4 representing the highest patient growth in 2021. Renal Care sales in the quarter also benefited from mid-single-digit growth in our HD business primarily driven by increased international sales of dialyzers. We expect that higher mortality rates and delays in new patient diagnoses resulting from the pandemic will continue to somewhat dampen the rate of new patient growth in 2022, although we do anticipate these rates to improve from 2021 levels. Sales in Medication Delivery of $784 million increased 6% on a constant currency basis. Strong global growth in this business reflects continued recovery in the pace of hospital admissions compared to pre-COVID levels as well as increased demand for large volume infusion pumps and small volume parenterals. For the year, we estimate that U.S. hospital admissions were down mid-single digits compared to pre-COVID levels. Pharmaceutical sales of $604 million advanced 8% on a constant currency basis and 2% operationally. Performance in the quarter was driven by demand for our international pharmacy compounding business, growth in anesthesia as our international markets continue to recover from COVID-19 and the contribution from OUS sales of Caelyx, Doxil. This growth was partially offset by declines in our U.S. generic injectables portfolio business related to lower surgical procedures and increased competitive activity for certain molecules. Moving to Clinical Nutrition, total sales were $249 million, increasing 4% on a constant currency basis. Performance in the quarter was driven by the benefit of new product launches within our broad multi-chamber product offering. Sales in Advanced Surgery were $255 million or flat on a constant currency basis. Within the quarter, we saw a strong growth in some of our international businesses, but this was offset by performance in the U.S. as surgical procedures, particularly in the second half of December, came in below our expectations due to the impact from pandemic along with staffing shortages. Sales in our Acute Therapies business were $202 million, declining 7% on a constant currency basis, reflecting a challenging year-over-year comparison. Despite this, performance in the quarter did exceed our expectations as we continue to see elevated demand for CRRT given the rise in COVID cases associated with new variants. BioPharma Solutions sales in the quarter were $145 million, representing growth of 31% on a constant currency basis, reflecting incremental sales related to the manufacturing of COVID vaccines, which totaled approximately $50 million in the quarter. While our results only include Hillrom's financial results for the final 19 days of the quarter, for transparency and completeness we're providing some sales commentary for Hillrom's full quarter ended December 31, which would have represented their first quarter of fiscal year 2022. Unaudited Hillrom sales for the full quarter were $724 million. Sales in the quarter reflect a difficult comparison from prior year period following the exit of the international surgical OEM business as well as significant supply constraints, which impacted Hillrom's ability to ship products within the quarter. Moving to the rest of the P&L. Our adjusted gross margin of 44.3% increased by 290 basis points over the prior year, reflecting the favorable product mix, operational improvements in manufacturing and the contribution from Hillrom to our financial results. Adjusted SG&A of $710 million increased 14% as compared to the prior year and represented 20.2 as a percentage of sales. Adjusted R&D spending in the quarter of $133 million increased 1% versus the prior year and represented 3.8 as a percent of sales. Adjusted SG&A and R&D spend both include the incremental contribution from Hillrom. In addition, adjusted SG&A expense in the quarter reflects the higher freight expenses we absorbed in the quarter as well as higher bonus accruals compared to the prior year under our annual employee incentive compensation plan. Adjusted operating margin in the quarter was 20.3%, an increase of 260 basis points versus the prior year, reflecting the factors I just mentioned. Adjusted net interest expense totaled $44 million in the quarter, an increase of $6 million versus prior year, driven by higher outstanding debt balances related to the financing of the Hillrom acquisition. Other non-operating expense totaled $21 million in the quarter compared to $5 million in the prior year period. Fourth quarter 2021 reflects [indiscernible] expenses related to foreign exchange losses from our subsidiary in Turkey as a result of the devaluation of the Turkish lira as well as an unrealized loss on an equity investment. The adjusted tax rate in the quarter was 18.5%, above our expectations driven primarily by the mix of earnings in the quarter. The tax rate in the quarter also reflects the inclusion of Hillrom's income, which carries a higher tax rate than legacy Baxter. And as previously mentioned, adjusted earnings of $1.04 per share advanced 30% versus the prior year period. Turning to full year 2021. Sales of $12.8 billion increased by 10% on a reported basis, 7% on a constant currency basis and 5% operationally. On the bottom line, adjusted earnings increased 17% to $3.61 per diluted share. On a full year basis, we generated operating cash flow from continuing operations of $2.2 billion and free cash flow of approximately $1.5 billion. Throughout 2021, we remain focused on strategically redeploying capital to advance our performance and position Baxter for future success. We returned approximately $1.1 billion to shareholders through dividends and share repurchases and deployed over $12 billion to inorganic investments to fuel growth, including our acquisition of Hillrom. With the acquisition now closed, our capital allocation priority will be to aggressively delever through the next two years to reach our net leverage target of 2.75 times by year two post close. Let me conclude my comments by discussing our outlook for the first quarter and full year 2022, including some key assumptions around phasing for the year. We currently anticipate that many of the factors that impacted our fourth quarter results, including increased inflationary fractures, supply chain disruptions, staffing challenges across our manufacturing network and ongoing impact of the pandemic, will continue to weigh on performance with the anticipated impact expected to be most pronounced in the first quarter. We're working expeditiously to address order backlog and anticipate a strong ramp in sales into the second quarter and the remainder of 2022 driven by new product launches and easing of COVID-19 dynamics globally. In addition, we're continuing to implement actions to increase operational effectiveness within our integrated supply chain network as well as evaluating opportunities to pass through certain costs in select geographies. We anticipate these actions, coupled with the improving sales performance, will result in meaningful margin expansion and earnings growth for the company, particularly in the second half of the year as compared to the first half of 2022. Given these dynamics for the first quarter of 2022, we expect global sales growth of 24% to 25% on a reported basis, 27% to 28% on a constant currency basis and low single-digit revenue growth on an operational basis. And we expect adjusted earnings, excluding special items, of $0.79 to $0.82 per diluted share. For full year 2022, we expect global sales growth of 24% to 25% on a reported basis, 26% to 27% on a constant currency basis and approximately 4% on an operational basis. Moving down the P&L, we expect adjusted operating margin for the year of approximately 19% with first half margins below this estimate and second half margins above as we expect performance to significantly improve throughout the year. For the year, we expect an adjusted tax rate of approximately 19% and expect diluted average share count to stay consistent with 508 million shares exiting 2021. Based on these factors, we expect 2022 adjusted earnings, excluding special items, of $4.25 to $4.35 per diluted share. With that, we can now open the call up to Q&A.

Robbie Marcus:

Hello. Good morning, everyone.

Jay Saccaro:

Good morning.

Jay Saccaro:

Sure. Robbie, there are a few impacts that we're seeing in 2022 relative to previous LRP expectations. The good news from my perspective is a lot of these issues are short term in nature, many of them related to the Omicron variant and some of the challenges that's created in our manufacturing facilities and supply chain. So, if you think about it, over the last six weeks, we've seen increases in our expectations around expedited freight. We've seen some increases in expectations related to supply chain labor costs, in part related to absenteeism in the plants. We've also seen a bit more inflation. And then finally, we've had a back-order situation that really is some of the highest levels of back orders, both on the Baxter side and the Hillrom side that we've ever seen. And so, from my standpoint, we have weathered a very challenging short-term environment, some of that featured in our Q4 results. But it clearly impacts our Q1 and as a result, the full expectations for 2022. And so, what's interesting is we are seeing improvements in absentee levels at our plants. We are also seeing supply chain situation improve as we speak. So, all of these things, we believe, are short term in nature, but they definitely impact the first quarter and then also the second quarter from a margin standpoint before we get back to a trajectory which is much more normal and much more in line with our expectations in the third and fourth quarter. I think as we take a step back, look, we acknowledge there is some disruption in the short term, but really, really like the durability of the business along with the pathway we have going forward over the course of this year and then the future years. So really that – and then as it relates to Q1, the issues are most pronounced and really centered on Q1. We won't resolve the back-order issues until at some point in Q2. Furthermore, we won't get out of an expedited freight situation for a few more months here. So that's really why Q1 is where it is, and then we start to see improvements as we move forward.

Joe Almeida:

Thank you.

Operator:

Vijay Kumar of Evercore ISI is on the line with a question. Please state your question.

Jay Saccaro:

Sure. Good question, Vijay. The Hillrom business, our expectation is mid-single digit constant currency growth. As I said earlier in my prepared remarks, Baxter is approximately 4% operational growth with the real [indiscernible] it's not a demand-related item, it really is related to back orders in the first and second quarter. And as I said, we hope to resolve those throughout the year. So, the Baxter side, we're talking about approximately four. Hillrom is mid-single-digit constant currency. And then the reported growth, I think, that there's some rounding going on, on both the Baxter side and the overall reported revenue growth side that leads you to the numbers that you're looking at. But as we look at it, we see Hillrom in the mid-single digits.

Joe Almeida:

Vijay good morning. We are working on those opportunities, and we'll have more on that when we speak to the – to our investors at our Investor Day. But let me give you three different examples. The first one is a short-term opportunity that we have is our home peritoneal dialysis and [indiscernible] remote monitoring. Bringing them together is a very short-term opportunity that we have, will give us insight into fluid overload and also the workflow of current PD patients and allows us to do Bluetooth-enabled vitals and analytics integrated with a share source, reducing then the potential burden for patients and more proactive and accurate management of patients. This is a very short term. The [indiscernible] alarm systems, midterm one to two years, bringing together delivery of digitalization of alarms from the Baxter infusion pumps, CRT devices. Starling is our monitoring platform to both. Bringing that together improves the workflow in med search, for instance, ICU, pharmacy and other parts of the hospital. Just some benefits would be fatigue reduction transition from reaction to proactive. So, you can see things ahead of time, creates a much better environment for the nursing staff who will be focused on what actually matters versus alarm overload. So, we think that is a good opportunity to bring to get both the platforms and both these are very important part of the platform that Hillrom has. And then on a long term, we're going to closed-loop fluid management system, which is how do you actually monitor from a series of inputs, including hourly urine output, to the infusion pumps output, and alarms and types of drugs, bringing our monitoring together and all the information that comes out of the smart beds. How do we create an environment that reduces significant load to the clinician and alarms to the clinician when problems are really arising and preventing, eventually preventing some of the bad outcomes to happen? Those are just three examples of things that we are working on, and there is much more that we had a significant amount of workshops that one is specific with a significant amount of ideas. So, I'm very excited about that.

Vijay Kumar:

That's helpful.

Vijay Kumar:

Thanks guys.

Operator:

Pito Chickering of Deutsche Bank is on line with a question. Please ask your question.

Jay Saccaro:

Sure. From an EPS standpoint, there is definitely a good contribution from Hillrom as we look at it year-over-year. And if you think about 2021 Q1 actual $0.76. But really between some price impact, some inflationary impacts and freight, we're talking about roughly $0.15 of negative impact. And what we would normally expect to see on the Baxter side is really substantial organic volume growth to offset that. We see some of that, but it's not sufficient enough to really carry the day in terms of driving the normalized levels of earnings growth and power that we expect from the business. So, we're not seeing that organic volume pick up in part because of the supply chain situation, which, as I said, should normalize throughout the year. And then Hillrom is north of $0.10 in terms of contribution in the quarter, which is something that is – it's a great add. The business is impacted is well thought by some of these supply chain issues. And so Hillrom's growth accelerate throughout the year as well.

Joe Almeida:

Pito, this is something that we comment very little. Our pricing is a strategy that the company has. We have pricing built into our contracts. What we're looking at here is an exceptional amount of extra cost the company has to carry on the expedited freight, the ability to get components in the door, inflation and labor as well as the components that are coming in. So we will selectively decide where we're putting those costs – those price increases. They will come in different forms, but we're not going to specifically speak about geography. We know that we have put them in our plan, and we'll be executing on to them.

Operator:

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

Joe Almeida:

Larry, good morning. We want to file this last set of documentations, which the FDA will have 31 days to provide a response to us, okay? So this is not the beginning of the application. This is the end. So to that end, we want to make sure we have some new set of eyes. We looked at the whole application, it looks really good. But there were areas that we think we could do better. Cybersecurity is one of them that we want to be always top decile when it comes to that. So we went back and made some adjustments and improvements, and that took time. So we will be filing with the FDA hopefully soon. And we're expecting that to be 31 days after that, we'll have the answer on our large volume parenteral LVP pump. And they are following that, we're going to apply the same 31 days at the end of it for the syringe pump and related software that will be our enterprise software as well as software controls, the pumps, the way they work with the networks. So that's pretty straightforward. We are doing the best we can to get the best chance to get this product. I don't speak on behalf of the FDA, I never do. I don't have any control on the internal process. One thing that we can control is the quality of the application that we have. And to that end, we want to make sure that we increase our probability to be high as possible before it goes in for those 31 days.

Joe Almeida:

Larry, we – when we started transformation on Baxter, we had three very specific areas of improvement. I would say four, not three, four. First is to bring the company into profitability state, put us with – close to our peers and transform the company's ability to generate free cash flow. The second was most importantly, the culture of the company bringing the right talent to get the culture going. The third was innovation, and we just spoke about it getting a bump with the FDA that was unthinkable when I first got here because we did not have any internal programs or any devices within the company other than few that we acquired through Gambro. And the fourth piece was the one that we haven't touched much. We did some tuck-in acquisitions. And then we thought about how do we transform the portfolio, the company changed the CAGR, the direction, the innovation, go where the puck is going. That was the acquisition of Hillrom brings that part into Baxter. Conversely, we do have a couple of areas that we don't believe are the right businesses for Baxter to own. And to that end, we are in the middle of analysis and we should have more in that area either by May or a little later than that in how we're going to adjust our portfolio. What we want to do is always look at the portfolio in a way that can increase the CAGR of the markets we serve, increase the profitability of the company and remove businesses that have been sometimes legacy businesses. They are sitting here with probably not a right capital allocation and bring that to people who can bring that capital allocation to them, freeing up the cash flow for Baxter to invest in what really we want to invest, which is in our connected care, digital health and then to double down on parts of Hillrom, they're doing so well.

Operator:

Joshua Jennings of Cowen is on the line with a question. Please state your question.

Jay Saccaro:

Sure. As far as revenue synergies go, we have included none in our numbers for 2022. So there's no revenue synergies. Now having said that, we're incredibly excited, and Joe highlighted some of the work, and I'll let Giuseppe talk in a second about some of the progress that we're making because we're really excited about the opportunity for revenue synergies long-term. And I think as we learn more about the Hillrom business, and then we also see how the Baxter business has weathered a very volatile environment, I think we're very confident about our long-term ability to drive growth across this combined platform. So Giuseppe, why don't you talk about some of the revenue synergy ideas and some of the excitement we're generating there?

Jay Saccaro:

We will have the opportunity to share more about this at the upcoming Investor Day, including some quantification of revenue potential and some refreshment of the financial long-term outlook for the combined company.

Operator:

Matt Miksic of Credit Suisse is on the line with the question. Please state your question.

Jay Saccaro:

So on the cost side, we previously shared $250 million in expectations by year three as part of really focusing on certain G&A areas and procurement opportunities and so on. And what I will tell you is we are very comfortable with that number and as we learn more, we're getting increasingly comfortable. So there have been no negative surprises as we think about the cost synergy opportunity. So this one has been very much according to plan. I think we've been really pleased with the talent that we've seen at Hillrom, the processes. So there's a lot of great opportunity there and thoughts that we can leverage. But as far as the cost synergy goes, its right in line with where we hoped it would be, if not trending even more positive.

Joe Almeida:

Matt, I will start. I want Jay to actually also supplement my answer. I see this in two different buckets. I see the short-term or the COVID impact, and then what is the long-lasting effect of having those inflationary costs. So the first is labor availability created by Omicron was significant, didn't take much, you could read the news and how it affects the country and the curve and acceleration of that infection, took a lot of people from our plants. They were either infected or had contact with people infected very much in number one priority of the company's patient safety and quality as well as employee safety. So we did not allow people to come to work, and we follow the guidelines with [indiscernible]. To that end, we end up with significant disruptions that caused all this air freight that we have to actually incur, which came actually towards the end of the fourth quarter as we will never let patients other products. As soon as we found that we start flying products despite, in fact, some of the products in value of ships that were going in because the rate and escalation of that. That problem of the labor availability and absenteeism is starting to subside; we have significant efforts in place and we start to see our plants filling up with people, and the situation will be resolved. Also, part and parcel to that was the fact that you have to attract employees to your plant. And there is an inflationary cost to the labor cost of the company and that is the one that we also are upping our salaries and making sure that we retain people. Those cost of inflation will go on for a long time. You don't reverse salary increases. What you do actually is create more cost reductions and automation to offset that. And our supply chain has a pretty healthy cost reduction program in 2022 and beyond to offset this inflationary cost. The component availability is nothing new. We've been signaling that for a long time. We're working very hard to get to our components, buy in advance, buy large loss and things like we're managing that, and that is in Baxter being managed. And we just acquired Hillrom, they had similar issues. We are resolving those along the way, and we believe the alleviation of our back quarter and backlog will happen throughout 2022. One last point I want to add is that the demand is very strong for our products from two different things. One is the Omicron variant itself, but also a lot of consumption of product that happened, and shelves are empty. So you're probably going to have replenishment of those products going out throughout the year. So we don't see demand at this moment, from our vantage point, abating. So we have some short-term capacity issues that we're taking care by adding shifts and other things that will alleviate that. So we're doing everything we can always with the first thing in mind to serve the patient. Secondly, to do it in a cost-effective manner. So I think we have managed this to the best of our ability and done pretty well based on our footprint and the size of our company. Going into 2022, we will alleviate these pressures throughout the year, and it's not an immediate solve in the component issue. It's going to go through our second quarter and continues to improve throughout Q3 and Q4. And we want to make sure – we want to make sure that our cost reduction and we just verified that is very healthy. As a matter of fact, I would say our cost reduction program for 2022 is the largest the company ever had in terms of integrated supply chain.

Joe Almeida:

You are welcome.

Joanne Wuensch:

Good morning and thank you for taking the question. In your 2022 guidance, could you share with us what your COVID vaccine revenue is?