Good morning, ladies and gentlemen and welcome to Baxter International's First Quarter 2019 Earnings Conference Call. Your lines will remain in a listen-only mode until the question-and-answer segment of today's call. [Operator Instructions] As a reminder, this call is being recorded by Baxter and is copyrighted material. It cannot be recorded or rebroadcast without Baxter's permission. If you have any objections, please disconnect at this time. I would now like to turn the call over to Ms. Clare Trachtman, Vice President, Investor Relations at Baxter International. Ms. Trachtman, you may begin.

Thanks, Candace. Good morning, and welcome to our first quarter 2019 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 2019 financial results and our updated financial outlook for full year 2019. A supplemental presentation to complement this morning's discussion can be accessed on our website. This presentation, along with related non-GAAP reconciliations, can also be accessed on Baxter's external website in the Investors section under Events & News. With that, let me start our prepared remarks by reminding everyone that this presentation, including comments regarding our financial outlook, new product development, 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 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 is available on our website. On the call this morning, we will be discussing operational sales growth, which adjust for the impact of foreign exchange and generic competition for cyclophosphamide in the U.S. With that, I'd now like to turn the call over to Joe. Joe? José Almeida: Good morning and thank you for joining us. We are pleased to share our first quarter results with you today and to discuss our updated expectations for 2019. I will begin with a quick review of our performance in the quarter and…

Thanks, Joe and good morning, everyone. As Joe mentioned, our first quarter results which exceeded our expectations, position us well for accelerating growth throughout the year. I will start by discussing our first quarter results before providing our updated financial outlook for 2019. Beginning with the first quarter, global sales of $2.6 billion decreased 2% on a reported basis but increased 2% on both a constant currency and operational basis reflecting global strength across several of our businesses. On the bottom-line, adjusted earnings increased 9% to $0.76 per diluted share. This exceeded our guidance of $0.66 to $0.68 per share driven by solid operational performance, phasing of certain R&D investments and a lower tax rate. Now, I’ll walk to you through performance by our geographic segments and global businesses. Note, for this quarter, constant currency growth is equal to operational sales growth for all businesses and segments except for our Pharmaceuticals business and the Americas region for which we will provide operational growth in addition to constant currency growth. Starting first with sales growth for our three geographic segments. Sales in the Americas declined 1% on a constant currency basis and were flat operationally. Sales in Europe, Middle East and Africa grew 4% on a constant currency basis and sales in our Asia Pacific region advanced 7% on a constant currency basis. Moving on to performance by global businesses, global sales for Renal Care were $851 million, advancing 3% on a constant currency basis. Performance in the quarter was driven by continued momentum for PD therapies, partially offset by lower sales in the U.S. for select in-center HD products including the recently exited Bloodline business. Adjusting for this impact, underlying growth in the Renal Care business was approximately 6% in the U.S. and 5% globally. Sales in Medication Delivery is…

[Operator Instructions] And our first question comes from Robbie Marcus of JPMorgan. Your line is now open.

Great and thanks for taking the question. There is obviously a lot of investor focus on Medication Delivery and Nutrition. But we are also seeing really good results out of Pharma. So, maybe you could just spend a minute and discuss some of the puts and takes in the quarter in Medication Delivery and what your stand? But also some of the offsets and the benefits you are seeing in Pharma? And any commentary you could give us on expected cadence for the balance of the year given the focus there? José Almeida: Good morning, Robbie. I will start and then I’ll pass on to Jay. Well put, investors tend to focus on things that they feel discussed about, which not necessarily is how the management feels. So, probably it answers about 50 questions that I am going to get on the same thing that you just answered. So, I feel comfortable with our ramp up in Medication Delivery. Why is that? First of all, the first quarter last year, we had close to $50 million of net cash purchases. The LVPs and SVPs that were not necessarily needed but were purchased because the hurricane affected, the flu that was very hard and people stocking up all those products. Consequently, the other quarters that we had were – to start with the quarter two, and then culminating with three and four were really, really destocking, severe destocking. So when I compare Q1 this year with Q1 last year, what I get is a negative growth rightly, so. Now, why do I believe that we can get to the guidance in Medication Delivery? Why now I have no indication otherwise? First of all, we have a good pipeline of pumps either conversions or replacements in the horizon. So, we feel good…

That’s great color Joe. Maybe, Jay, just one quick question. We saw R&D tick down a little bit and SG&A tick up a little bit in the quarter. But you felt confident enough to raise the bottom-end of the operating margin guidance for the year. Maybe just give us a little color and why it was postponed in R&D? And what the investments are in SG&A?

Sure. So, as I referenced during the call, one of the things we are incredibly excited about is a new product pipeline that we have. We are launching probably more products this year than we have in many years, but attending with that, we want to make sure that we have the right commercial teams and commercial investments on the ground to support successful launches. So, this was a rare quarter on the phase of it, SG&A grew 0%. But on a constant currency basis, we did see a few points of growth adjusting for TSAs, maybe 3% growth. And really what it comes down to is, some of those select marketing investments. I'll stop short of delineating actually where those investments took place. But from an investment standpoint again, we just want to make sure that the markets are ready to successfully launch. Now, from an R&D standpoint, it’s always difficult to get the exact timing of specific milestone payments outlined in a quarter we planned. And so, one of the things we found, as we looked at results for this year is certain of our payments were shifting from Q1 and Q2, future quarters and so we expect an acceleration as we move through Q2 to Q4 in terms of some of these payments and frankly, we have reflected in our guidance roughly a $0.03 shift of R&D spending from Q1 to later quarters. It’s not specific to one program. And I think from my standpoint, most importantly, it does not impact the launch timing of any of the products that we put forth. So there is no change to timeline and we can talk more about it. But we are as bullish as we’ve ever been about the pipeline, but we did see some phasing and we did not want to reduce R&D spending on a full year basis. We are going to see that spending come through in future quarters. The only other comment I would make is, or one of the things we’ve been really focused on is improving the efficiency of our R&D spending. So there have been a number of global initiatives in terms of consolidation and simplification and you are seeing some of that yield dividends in the overall performance of the spend category.

Thanks a lot.

Thank you. And our next question comes from Bob Hopkins of Bank of America Merrill Lynch. Your line is now open.

Hi, thanks and good morning. Just to follow-up on that last train of thought on the pipeline, Jay or Joe. Could you just talk a little bit about key pipeline time lines or launch dates for the rest of this year? Just kind of refocuses on what you think is the most important things as we look forward over the next six to twelve months on the pipeline perspective? And how that drives your confidence not only in the outlook for this year, but in the outlook for acceleration for next year as you’ve expressed in the LRP? José Almeida: Well, let’s start with Pharmaceutical. As we have a couple of molecules that we're launching. We are expecting a good size molecule for sometime early next year. So, like about six to 12 months from today. We also have the version 9 of our pump we launched last year, but we have a new pump platform coming out next year and we are going to have two pumps coming out right out of the gate which is a large volume pump and syringe pump, all integrated, 2-way integration with EMR. All the stuff you should have plus the Baxter drug library in the market. We will have later that year which is next year we will have the PCA pump which is a third leg of the stool. And then, in another six months after that, we will have the ambulatory pump. So we have a four pump platform. We also continue to experience a significant uptake in demand for our Kaguya cycler in Japan. That is going well. We just crossed 1000 patient mark and we’ve seen this business for the first time since I’ve got here with growth in Japan. We also have PrisMAX which I just spoke about. PrisMAX for the U.S. is a big deal. We hope to get approval probably within six months to eight months depends upon the FDA review timeframe. And so, we have over 20 products actually coming up for launch in the next 12 months. So, some are small, some are more relevant, some are more long-term, some more durable like the pumps and PrisMAX. We continue to look at a look at a lot of different molecules. And so, we feel comfortable with the Baxter shifting a bit now from its operations excellence and efficiency as you – all of you know we’ve been doing for the last 3.5 years to starting to see the fruits of the innovations coming through.

Thank you for that. And then, just one quick follow-up for Jay. Jay, can you just comment on the puts and takes impacting the gross margin? This quarter was a little weaker than we anticipated and then, your expectations for how gross margin flows over the course of the rest of the year?

Yes. So, from a gross margin standpoint, that was principally in line with my expectations in large part because of the significant headwinds we experienced in some high margin products in the first quarter. And so, if you look at the first half of the year, we have a big drag related to Brevibloc. It’s basically $30 loss in Q1. It’s another $30 million in Q2 and that comes through at a much higher margin than the corporate average. Furthermore, we had a little bit of a FX headwinds. In the quarter, we also have a cyclo headwind year-over-year again in the first quarter. And so, those were particularly pronounced year-over-year headwinds that impacted the first quarter. As we move to the balance of the year, we will see the normal cadence of improving gross margins throughout the year. So, typically, Q4 is our strongest gross margin quarter. Q1 is typically our lightest. So we’ll see that uptake as we normally do. But then we will also have the benefit of a accelerated sales growth in the second half of the year which lends itself to a higher gross margin, both from a mix standpoint, but also from a utilization in our manufacturing facility standpoint. If you look at the first half of the year, our overall guidance operationally is in the 2% to 3% range. As we move to the back half of the year, based on easier comps, but other accelerations as well, you start to see a much faster sales growth and an uptick in overall sales. So, I think, those are few of the drivers that impacts gross margin. But like I said, this is largely in line with my expectations.

Helpful. Thank you.

Thank you. And our next question comes from David Lewis of Morgan Stanley. Your line is now open.

Thank you. Good morning. Just two quick questions from me. The first just one focused on cash flow and capital deployment, maybe Jay, as a question for you, the cash flow got off to a slower start here in the first quarter. So, what’s the pacing? What drove that in the first quarter? What’s the pacing for the balance of the year? And then related to that Joe, I just wonder if you take a second and talk about capital deployment. Obviously, you are still continuing to purchase dramatic amounts of stock. I think $600 million this quarter. What are you thinking in terms of the pace of capital deployment relative to buyback versus M&A for the balance of the year? And I have one quick follow-up.

Sure. As it relates to cash flow, cash flow came in, in line with our expectations. Q1 is typically the lowest quarter of the year for a number of different reasons one of which is incentive payout from the prior year, occurs once a year in the first quarter. We also had a large vendor payment that we had anticipated in the first quarter of this year that impacted the number. So, by and large came in very close to our expectations. So, what that implies, David, to your point is a significant ramp as we approach the back – or a portion of the year. I mean, we will start to see improvements in Q2. Now, looking at the balance sheet and so what will happen, what will drive this improvement is operating margin and earnings growth of course. But then you transition to look at working capital. And on the working capital side, two categories we don’t expect to change too much. Our days payable for the first quarter will be in the mid-50s. Our days receivable will be in the low to mid-50s. So those two categories are exactly where we want them to be and we’ll continue to manage those aggressively. Where we expect to see a significant improvement in working capital relates to inventory. This is an area that has disappointed us over the last year. The inventory build up as a result of different sales mix than we anticipated has been a real problem and something that we focused on correcting but it’s not something that corrects overnight. And in the first quarter of the year, the days inventory on hand will end at roughly at 107 days. By year end, we will expect to see roughly a 10 day improvement in that particular…

Okay and just – thanks, Joe. And then, with my follow-up here I take a step back here. If I think about the debate into this year, it really was focused on the ability to drive earnings and your ability to deliver on Med Delivery. I think in the first quarter you jumped over the hardest margin quarter of the year raising operating guidance and obviously raising earnings. So I think that’s sort of asked and answered. Just to come back to Medication Delivery, Joe, I think you did a nice job sort of outlining how from a share capture perspective, customer recapture you are doing as well as you expected. The key question I think is just, for the Medication Delivery underlying fundamentals the demand equation in the channel and where you see inventories in the channel? How comfortable are you that those signals and what you are seeing in the channel are stable base that you can build on and sort of benefit from this recapture you are discussing? Thanks so much. José Almeida: So, David. I can see where our investors feel uneasy looking at a performance of the last year, a couple quarters, some in the first quarter and said how can you get there and it’s one of the things that is our credibility. Right, so, what we are saying to you that we can do that because we can see through it and we have the numbers, we have the reviews. But let me give a little bit more color. The market is quite stable, meaning, there are not shortages out there. There is not a company that is out of the market. There is nothing like that. So, what plays – what is important to our customers that you have continuity of supply…

Thank you. And our next question comes from Danielle Antalffy of SVB Leerink. Your line is now open.

Hey, good morning everyone. Thanks so much for taking the question. Just wanted to ask a question about how to think about the different business segments and their growth profile, specifically in Q2? Last quarter you guys did a great job, I thought of calling out some of the quarter-specific headwinds. Can you help us think about how to think about that for Q2? And I guess, specifically as it relates to some of the more controversial businesses like Medication Delivery? And then I have one follow-up. Thanks.

Sure. Q1 was interesting, right, because we had a number of headwinds that were specific to the quarter and some of those go away, some of those persist in Q2. And so I referenced earlier Brevibloc, that was like $33 million in the first quarter. It will be around $30 million in the second quarter. So that is a real headwind operational pharmaceutical sales growth that we are mindful of and we have tremendous work coming from this group in terms of all the activity and the new launches. But that’s going to be a specific headwind for the second quarter. We’ve talked in the past about the Bloodline’s headwind which is on a full year basis around $50 million. We will see continued decline related to this particular item impacting our Renal growth in the second quarter. But there are a couple of headwinds that subside. One is, you will see a normalization of the acute growth, because the flu headwind of roughly $10 million moved away in the second quarter. So we will see a solid performance at improved performance out of that group in the second quarter. And then, the IV buy in that we have described in the past which impacted the first quarter of this year again subsides. Now, interestingly enough, that headwind becomes an actual tailwind in Q3 and Q4. Because our Q3 and Q4 were depressed by this amount as Joe referenced earlier. Q2 is fairly neutral. So, as we think about the growth profile in Q2, you will see Renal growth kind of consistent with overall annual growth. We expect to see acute growth closer to the annual rate that should be in line with that. Medication Delivery will increase in the second quarter, but not to the extent that we’ll see in the back two quarters of the year as we look at all of the efforts that Joe described. Many of those benefits accrue to the second half of the year. Pharmaceuticals will have a lower rate for the Brevibloc reason that I mentioned and then we expect to see some Nutrition growth in the quarter as well. Advanced Surgery, again should have a solid quarter largely in line with full year expectations, maybe a little bit better. So that really kind of walks you down the overall components of the growth in the second quarter, like I said, the biggest change in overall growth rate occurs in the second half. So, we go from this operational growth of 2 to 3 accelerating to 4 to 5-ish in the second half of the year.

Okay. That’s super helpful. And maybe we can talk about, I thought there were two really bright spots in the quarter, Pharmaceuticals and the Advanced Surgery business and I know you called out contract manufacturing, but also curious how much contribution was from new products for Pharma and Advanced Surgery, because to me it feels like maybe the pipeline is really starting to take hold. Any color you could get there would be great. Thanks so much guys.

Yes, we don’t really break out new product contribution by quarter, by business. But what I can tell you is, in the case of the Pharmaceutical business, we were definitely excited with the launch of dexmedetomidine. That has been well received in the market. It’s a novel presentation and that should be a continued solid growth engine for us for the balance of the year. As we think about biosurgery, we did have the benefit in our operational growth numbers of the Mallinckrodt assets. Roughly $15 million of RECOTHROM and PREVELEAK featured in our numbers in the quarter and so that annualizes as a comp moving into the second quarter. So, the growth rate will return to a lower rate. But we did see a very solid benefit in the first quarter in particular in U.S. As we look forward, biosurgery has been an area that has been performing well. The team is executing with the core hemostats and sealants and we are seeing good momentum there. So, we will expect continued positive progress in those areas. And you know, as we think about business development, I do think the assets that we acquired from Mallinckrodt really are a great example of the kind of business development that we can be incredibly successful with. It leverages the same sales call point, same sales team and we are seeing that really resonate well as we look to commercialize that product.

Thank you. And our next question comes from Matt Taylor of UBS. Your line is now open.

Hi, thank you for taking the question. So the first question I wanted to ask was just on Renal market dynamics. So I was wondering if you had seen any shift. It seems like that PD volumes are relatively healthy and I was wondering if you could part that how much of that you think is coming from the cyclers - are being helped by the cyclers or if you are seeing any market shift that push patient towards PD? José Almeida: Matt, I think, what we see is, the number of patients are related to penetrate. A couple of things. One is the penetration of the therapy. Our renewed partnership with DaVita. And lastly is, also may be related to length of stay in terms of durability of the revenue, right, on therapy. So, I would say, to the number of patients, I attribute it mainly by the excellent relationship that we have with DaVita where we seek the best therapies for the patients and the organizations are aligned and Baxter has – is making investments in its plants to provide more capacity for growth in PD, right now, as we speak, we are investing dozens of millions of dollars in our facilities to be able to support DaVita. We had this agreement with them. So I find this to be the result of that execution.

Okay. And then, flowing at the 50th question here on the delivery. I just wanted to understand the dynamic a little bit better. You called out $50 million of excess purchasing that you had in Q1 2018. And from the outside and it’s hard for us to think about the pace of destocking. Could you offer any specifics on the next couple of quarters to help us model how the comps are going to play into your recapture in the stocking?

So, Matt, it’s $15 million, one five was the stocking impact for U.S. LVPs in the first quarter of last year. We did see, some elevated purchases in the first couple of months of the second quarter and then, in June of last year is when we started to see the destocking that then occurred throughout the rest of the year. So that’s really how it relates to the progression of kind of that stocking impact for the U.S. LVPs. And again, as Joe was saying, with respect to small volume parenterals, we are on track with that and those will continue to ramp throughout the year as well. So, our recapture efforts are going there. We are doing really well with our Mini-Bag Plus, particularly with single packs. So we will continue to drive those efforts really focused on education, about the safety and efficiency of using Mini-Bag Plus to reconstitute drugs. So our sales reps are armed with that and are out there working with clinicians on that. I think Joe talked about pumps. So we will continue to see both Spectrum IQ and Evo IQ as well ramp throughout the rest of the year. And in addition, our reallocation of volume to international markets will continue to pick up over the course of the year, as well. So, I think those are all the dynamics. Again, it’s more – the growth will be more back-end weighted as we face those easier comps with respect to destocking in the U.S. LVP market.

Okay. That’s really helpful.

Thank you. And our final question comes from the line of Matt Miksic of Credit Suisse. Your line is now open.

Hi. Thanks for taking the questions. I’ll spare you the umpteenth Med Delivery question and just ask if you could maybe elaborate on a couple of the other businesses. The first on the PD side. If you could talk maybe just remind us what some of the drivers are of that growth. If there was any macro or economic or reimbursement dynamics that are driving that strength in PD? And then I have one follow-up on Pharma. José Almeida: Matt, the government announcement that they would initiate a move to take patients from clinics to home is too new to have caused any significant impact on our numbers. Our numbers, as I said are driven primarily in the U.S. by a strong relationship with DaVita that continues to get stronger. Our availability of products which is most importantly. We are making investments in our plants to supply the market with product. So we will have availability of products for the longer-term. We are investing in technology point-of-care. For instance, our first patient just came off successfully from the three month clinical trial period. We continue to enroll more patients on that technology. So, all in all, the U.S. has done well because our renewed effort in partnership. When I look at the Asia Pacific, the growth in patients would be 6.6%. Don’t forget that Asia, but primarily China, we are 70 plus percent market share holding in China and in China we have twice as many patients in PD that we have in the U.S. And the areas that we need to continue to improve is Europe has always been behind PD penetration compared to the U.S. and parts of Asia. So, all in all, 5.1% growth in patients for PD is a pretty healthy number. And consequently, our outlook for the year is a little more than that. So we continue to see a very strong outlook in the U.S., Asia Pacific, as well as Canada.

That’s great. I appreciate that. And then, just on Pharma, again, impressive growth. Can you talk a little bit about, maybe remind us or update us just to the kinds of additional assets, businesses, size of these molecules, the strategy there and how it compares to sort of the traditional specialty injectable businesses as folks may know it’s – and perspective would be helpful. José Almeida: Yes. So, if you compare like Brevibloc, and cyclophosphamide, we will not see drugs like that in our portfolio not to that extent anymore, because those are drugs they were semi-specialty drugs. They were – they had patents and they had things that we had and it was a different Baxter at that time. Our intent in Pharmaceuticals is to launch three to four molecules a year which are injectable mostly, mostly premixes, which is Baxter’s strength, it’s premix. It’s our Galaxy technology that comes to light. We will launch some APIs, primarily when once we get the warning letter resolved out of Ahmedabad. There will be some APIs launched out of that facility. But if you look at our objective is to launch in five areas of care, oncology, anesthesia, antibiotics, specialty antibiotics, and a conglomerate of small parts of therapy, as well as the premixes. So we are going to take those areas of therapy and launch specialty products, three to four molecules a year. Some are going to be $70 million, $80 million, some are going to be $3 million, $4 million. It’s going to be a mix of them. Our objective by 2023 is to more than double the number of molecules that we currently have as we are ahead of plan to get there.

Great. Thanks so much. José Almeida: Thank you, Matt.

Thank you. That concludes our question-and-answer session. Ladies and gentlemen, this concludes today's conference call with Baxter International. Thank you for participating. Everyone have a great day.