Good morning, ladies and gentlemen, and welcome to Baxter International's Third Quarter 2022 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.

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? José Almeida: Thank you, Clare, and good morning, everyone. We appreciate your joining today's call. I will start with a look at our third quarter performance, including some perspective on the macro environmental factors impacting our near-term trajectory. Jay will provide a deeper dive on our financials and outlook, after which we will open up the lines for your questions. Q3…

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…

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 the Baxter International website for 60 days at www.baxter.com. Our first question comes from the line of Travis Steed of Bank of America Securities. Your question, please.

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?

Sure. Travis, I missed the first part of the question.

So the 2022 bridge for the EPS guidance.

Okay, great. So yes, let's walk through the different pieces. I think all of these are starting to set up well for 2023. But it starts with the third quarter. Overall, Q3 came in largely in line with our expectations. We were pleased to put $0.82 in the books. And really the commercial operations were off a couple of cents, in large part related to shortfalls in sales driven by supply constraints in certain areas. The tax rate and FX came in a little bit worse than our expectations. But offsetting this, and I think this is important to know, was better than anticipated performance in our supply chain. As you know, this has been an area of extreme volatility for us as we've navigated the complicated macro environment. So it was really nice to see our supply chain team deliver in the quarter and set the stage for the fourth quarter and beyond. Now, as we go to Q4, with respect to EPS, we now expect roughly a $0.05 headwind from foreign exchange, tax and interest relative to our previously issued guidance. On a year-over-year basis, these items impact us roughly $0.15. And so we expect a continued supply constrained environment on the sales line. This is an area that we're navigating very carefully. But overall, the real driver in the fourth quarter relates to this headwind from these non-operational items. So now as we transition to next year, what I previously shared with you all is a template which says 4% to 5% compounded sales growth, minimum 75 basis points of operating margin expansion in a given year. As we thought about 2023, the sales growth will come in on the lower end of the range closer to 4%, in large part because of lower levels of COVID…

Thanks, Travis.

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?

So as it relates to EPS, I think there's a little bit of EPS growth as we look at it based on some of the non-operational items impacting us, but we do expect some level as we look at it. And then I'm sorry, I missed the second part of your question. I couldn't quite hear that.

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

Okay. So from an inflationary standpoint, I think we're looking at kind of consistent levels today. So we're not anticipating significant price up in any commodities. We're anticipating some slight improvement in certain areas, but also some negatives related to utilities, for example, in Europe. Joe, you want to address the Novum question. 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.

Really helpful color. Thanks a lot for taking the questions. José Almeida: Thank you.

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

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? José Almeida: Robbie, good morning. We are actively looking -- first of all, I'm not going to comment on the rumors from the market. But I'm going to tell you what we are doing. We are actively looking at portfolio by the company. We will be ready to speak about that by early January, not at the moment. But I can tell you some bits of information what is going on. We are looking at every opportunity at the company to focus on the vision that we had set forth during our Investor Day back in May, which is connected care, the areas that will drive higher gross margin, areas of higher top line growth, software and the ability to be ahead of connecting the dots for clinicians and institutions. So when we look at that, we're looking at our portfolio. Some products will make sense for us to retain, some products will not. So we are looking to optimize our portfolio. We are in about three quarters of the way there in terms of understanding and we will make a decision with our Board of Directors and then come forward with what we think is going to be the new portfolio of Baxter going forward, as I said early January. So I want to just also underscore that any portfolio movement which implies sale of assets or any kind of transaction always takes into account number one, creation of shareholder value. It is never secondary. It is always primary and that is creation of improved return on invested capital with accretion of value through discount cash flows. So we're going through this process. It is being very, very intense. And we hope to have the new set of the businesses going forward and what we're going to deal with, and how we're going to suffice our mission and vision by as I said early January.

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. José Almeida: Robbie, I'll let Jay really comment on the numbers. I'll tell you about a couple of aspects. While we are seeing supply chain is performing well against the very difficult sets of circumstances, as we said, labor inflation and material inflation has been significant to Baxter, and they're doing a great job navigating through that. Our procurement group is doing a great job getting the products to us. What is happening is there is a significant amount of backlog and backorder for the company on products depending on semiconductors. And it's not one company or two. It is several. It's a plethora of companies that produce products for us, and we source semiconductors from them. A couple of things that we are doing that I feel are more confident that throughout 2023, the situation will be to keep more will be better is that we are developing long-term relationships directly with the manufacturers of the chips instead of going to distributors or going directly to board assemblers. The second thing is, the amount of decommit that companies are coming forward during the quarter makes sometimes very difficult for us to predict what we can assemble and ship at the end of the quarter is getting better into 2023, as our supply chain now has a full view of commitments into 2023 of what we need to make our growth. Business has been very effective by the use of front line care, which is our business under our acquisition Hillrom, our PSS, patient support systems, the ability to make more funds, we have very good demand for our current pump, our SIGMA Spectrum pump, we can’t make more because we’re missing two or three key components that are in shortage in the marketplace due to high demand from other sources, in the automotives and other areas. So what I can tell you is we are doing everything we can and the supply constraint is really what has impacted Baxter’s performance in the top line. Now VIPs, our value improvement programs, have been a significant driver of cost reduction for us in our operations group. I’ll pass on to Jay to give you more clarity on numbers that you asked.

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.

Great. Thanks a lot.

Thank you.

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

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. José Almeida: Rick, I'm going to have Jay answer that. And I'll close answering the question, but Jay should start.

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. José Almeida: Yes. Rick, we have done as a company a very thorough integration job here. Our synergies are coming higher, much higher than we had estimated in the first year of the integration. Our supply chain people had to come into Hillrom and do a lot of work to reestablish lines of supply into the business. When the semiconductor prices hit, Baxter was better prepared to handle the Hillrom loss. And what we did is we put our best to handle issues, primary front line care. The supply chain really came through for us and today is doing a much better job as a matter of fact. We had better performance that we planned in front line care in the third quarter, because we're able to get the products out of the door. We also have extremely competent management in both businesses. We have Reaz Rasul, the Head of Front Line Care. We have Andy Frye, the Head of GSS and PSS. So we are very confident in the business we purchased. The business has the ability to perform. We will fix the supply chain issues as we're currently doing. And we'll be able to get back the Hillrom that we made assumptions to buy. As you heard from Jay, our growth would have been ex supply chain what we had expected to be. So I think Baxter brought to Hillrom a combination of great portfolio. Hillrom brings with great management and discipline than Baxter has to replace the team that was there and was able probably to do in the long term a better job of this combination.

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. José Almeida: Rick, they are great questions. So we're going to split Jay and me here. But let me start by saying that we do not comment in pricing on general course of business. But as Baxter has taken so much into input costs that went up significantly in the last two years, we are very focused in recouping a portion of that, if all possible. So we already had, as I mentioned, price actions throughout the year. But I would say that beyond what I have said, I'm not going to comment on any specifics about pricing discussions or agreements with our customers. But I can say to you, in my opening remarks, as I said, we strongly prefer to build on our long-term relationships with our customers to reach agreements on how best to share an increased cost of delivering products to them, which causes a significant amount of more money, because the cost of oil, the cost of logistics, cost of raw materials, cost of labor and everything that goes in. We have made significant process -- I’m sorry, I’d rather say we have made significant progress towards that end. But to the extent that we do not reach agreement with any customer, we will, of course, continue to evaluate the options in front of us to recover the increased costs of our delivering and on our mission to serve patients. That's very important to us, because Baxter -- if you ask any of our 65,000 employees, it’s all about the mission of the company. It is an incredible company. I came here seven years ago almost to the date and I’m continuing to be impressed by the dedication of our employees. But we took a significant amount of cost increase in the last two years in our input costs and supply chain has done a great job trying to defray that and offset, but as you can see by our margins, it’s not possible. We would like there to be a partnership with our suppliers that continue to understand that for us to deliver what we're delivering to them and the innovation in the products, we need that partnership to continue on. So I'll end there and pass on to Jay.

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.

Thank you very much.

Thanks.

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

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? José Almeida: We have seen sporadic cancellations of orders in institutions that are small and have labor issues in implementing CapEx projects that sometimes are large. But for the most part, we haven't seen that wave of retraction of capital programs. As a matter of fact, if we could make 3x, 4x more infusion pumps, we would have sold I believe those pumps. If we had made twice as many of our monitors, we would have sold the monitors. So it becomes a little different when it comes to beds. Beds are a larger implementation. And software, software like nurse call buttons, software like phones becomes more elaborate. Those are the ones that sometimes we see postponement. Not because the price for more, because of the labor, not because of the cost, I should say, but more because of the labor. So at the moment in time, I don't believe we're seeing a retraction in the capital market. We're seeing a high cost of labor for hospitals and a shortage of labor that makes difficult for them to undertake large programs sometimes.

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?

Sure. So a couple of things I would say related to this question. First, the vast majority of the sales impact relates to semiconductors. I would say that over 90% of the challenges that we've faced relate to semiconductors. There are other select areas where we have seen meaningful impact. For example, in our nutrition business, there are certain ingredients and vitamins that we're unable to secure due to supplier challenges. And that's had an impact as well, but the majority relates to semiconductors. Now, as it relates to your semiconductor question, the type of semiconductor used in medical devices is a little bit different than standard semiconductors that are used in the highest tech products available today. And so while there has certainly been a curtailment of demand for some of these consumer products, the size of the semiconductor that we use does not benefit from this curtailment of demand and normalization of supply. And I would even say, for some semiconductor manufacturers, they are seeing inventory levels build of the super thin semiconductor. And so we just have not yet seen this normalize in our case where we are all hands on deck working to secure the components that we need. And we'll continue to do that. But this is something that, as I've said, we don't have a pathway for this getting resolved in the immediate term. Joe, I don't know if you'd like anything to that. 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…

Okay, great. And Joe, just to sort of follow up on the first question just to make sure I have this right. You're saying that new orders for capital equipment in the last 90 days in 2022 is in line or better than it was at this time in 2021 for new orders? Thanks so much. 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.

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

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

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.

Sure. So from a backlog standpoint, overall, we are seeing those orders for the most part stay in place. We're not seeing others take share as a result of these constrained supply environment that we have in place. Frankly, a number of manufacturers have similar challenges. Now, the question is how long will those orders remain? In some cases, if they're short-term needs, then those are things that perhaps might be impacted. But as we think about longer term for the most part, I think that these sales will represent some level of opportunity in the future. As it relates to Hillrom, we feel very good about where things are trending with the exception of the constraints that we have in place. And so we highlighted increased incremental cost capture at the May Investor Day and we're still trending along those lines, very much in line with that with increasing confidence. I think it's important because we have some big step ups as we move to 2023 and 2024 in terms of incremental cost synergies. What's great at this point is, as we sit here today, we feel we have clear line of sight and continue to make progress towards those numbers. So I think, as far as that goes, it's a very good story.

Thanks.

Thank you, Joanne.

We have time for one more question.

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

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. José Almeida: Josh, good morning. So we are seeing several programs where we are working across divisions in the connected care. We established a new group that is actually under Andy Frye, one of our executives who is also the Head of GSS and PSS, patient support systems. And we are seeing several programs from basic creating unified portals to access EMR systems in hospitals, to features that can be enabled by commonality and connecting the devices. So there's a lot going on. I think we should give an update to investors probably in the first quarter of 2023 about where we are with this connected care programs. So we have a brand new group that is now across Baxter that is looking at this and creating opportunities. So we're making good progress in this area. I’ll pass on for Jay for answering the other question.

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.

Thanks a lot.

Thank you very much.

Ladies and gentlemen, that is all the time we have today for questions. This concludes today's conference call with Baxter International. Thank you for participating.