Baxter International Inc. (NYSE:BAX) Q1 2024 Earnings Call Transcript

Baxter International Inc. (NYSE:BAX) Q1 2024 Earnings Call Transcript May 2, 2024

Baxter International Inc. beats earnings expectations. Reported EPS is $0.65, expectations were $0.61. Baxter International Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentlemen. And welcome to Baxter International’s First Quarter 2024 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, Senior Vice President, Chief Investor Relations Officer (sic) [Vice President, Investor Relations] at Baxter International. Ms. Trachtman, you may begin.

Clare Trachtman: Good morning, and welcome to our first 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 first quarter 2024 financial results along with our financial outlook for the second 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 second quarter and full year 2024; new product development, including the potential impact of recent regulatory clearances with 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 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?

Joe Almeida: Thank you, Clare, and good morning, everyone. We appreciate you taking the time to join us. I will begin with an overview of our first quarter results and then provide some updates regarding our ongoing strategic transformation. Joel Grade will follow with a closer look at our financials as well as our outlook for the second quarter and the remainder of the year. Then, as always, we’ll open it up to your questions. Baxter started the year on a positive note, delivering solid results, which exceeded previously issued guidance on both the top line and bottom-line first quarter sales from continuing operations with 2% on a reported basis and 3% at constant currency rates. This compares to our original outlook of approximately 1% reported and 1% to 2% constant currency.

Overall revenue growth was driven by positive demand and pricing for a broad range of Baxter products. On the bottom-line, adjusted earnings per share for continuing operations of $0.65 came in above our prior guidance range of $0.59 to $0.62 per share. This performance was fueled by top line results, combined with our intense focus on driving improved supply chain execution across our manufacturing network. Overall, performance is clearly benefiting from the streamlining and strategic clarity afforded by our newly implemented operating model, as we leverage the advantages of improved visibility globally, increased accountability and function of verticalization. Crisp execution of our margin improvement initiatives, along with a more stable macroeconomic backdrop, is driving enhanced performance across our integrated supply chain operations.

And as always, Baxter benefits from its emphasis on essential health care needs in combination with the diversity and durability of our portfolio. This is clearly affecting our overall performance this quarter as the strength of our results across Medical Products and Therapies, Pharmaceuticals and Kidney Care helped offset underperformance in our Healthcare Systems & Technology segment. Taking a closer look at our performance by segment. Medical Products and Therapies, or MPT, delivered first quarter growth of 6% above reported and constant currency rates. Growth was fueled by both pricing and volume gains amid stable market conditions globally. We believe we’re well-positioned to build on our momentum in MPT with the recent U.S. FDA clearance of our leading-edge Novum IQ volume infusion pump and Dose IQ Safety Software.

This integrated platform, which also includes our previously cleared syringe pump, comprises a single connected intelligent system offering a broad range of benefits for nurses, physicians and other clinicians as well as the patients who depend on them. Our Novum IQ technology is now available to order in the U.S. as part of our expanding portfolio of connected care solutions. Customers are excited about the Novum platform’s ability to advance connectivity and intelligent infusion therapy. And the team is already engaged with many customers interested in this new technology. In fact, the large existing Novum syringe from customer will begin implementing the full Novum platform in the next few months. In just last week, we secured a 100% competitive account conversion to Baxter pumps with a top-tier multistate health system.

As you may remember, Novum LVB clearance was not factored in our original FY 2024 outlook. Given the time of the approval, we expect the contribution from Novum launch to be more notable in the second half of the year, even as it displaces, to some degree, sales of our Spectrum IQ pump and the outlook we are sharing today reflects this expected benefit along with the outperformance in the first quarter. Also in late-breaking MPT news last week, we received FDA approval of an expanded indication for Clinolipid, our mixed oil emulsion that provides a source of calories and essential omega fatty acids for parenteral nutrition patients. Clinolipid is now indicated for use in pediatric patients, including preterm and term neonates. This is an example of our continued commitment to meeting the nutritional needs of patients of all ages and is expected to be a positive addition to our nutrition portfolio.

Our Pharmaceutical segment achieved a growth of 11% in the first quarter at both reported and constant currency rates. Results for the quarter reflect a benefit from our recent new product launches in the U.S., including five new injectables in key therapeutic areas, including anti-infective and antihypertensive medications. Together, these new product introductions demonstrate our continued focus on innovation and delivering differentiated products that address areas of need with proprietary ready-to-use presentations, they can simplify the preparation process and support patient safety. Our performance in this segment was also strengthened by heightened demand outside the U.S. for our drug compounding services. This overall momentum more than offset declines from inhaled anesthesia products.

Our Kidney Care segment delivered 3% growth at reported rates and 4% at constant currency. Growth was driven by pricing benefits as well as a strong demand for our Acute Therapies portfolio and steady gains of peritoneal patients in nearly all markets. Growth in this business was tempered by the impact from select product and market exits and reduced volumes in China due to government-based procurement initiatives and a lower patient sensors. As noted, positive results across these three segments helped offset disappointing performance in Healthcare Systems & Technologies, or HST, which declined 9% at both reported and constant currency rates. This decline was driven to some extent by order timing as well as operational factors. Our new operating model has been vital in helping us isolate underlying challenges affecting this segment.

The size of steps are already underway to address and enhance performance in this business and help realize our full opportunity in this space. These include forging a deeper partnership between the commercial and enterprise account teams focused on the value and quality of the broader portfolio. Implementing new tools and processes focused on increasing visibility to historical purchases, creating greater differentiation in customer engagement practices and related measures. We expect these steps collectively to improve operational performance for HST, particularly in the second half of the year. I remain excited about HST and the positive contribution it is expected to deliver to the overall Baxter portfolio. The team is working incredibly hard to address this challenge and turnaround performance in this business and I’m grateful for their dedication and efforts.

Before I pass it to Joel, I will share an update on our proposed Kidney Care separation as we announced in the March 4th 8-K filing, we are now pursuing dual pathways in the proposed separation of this business, including potentially selling the business to a private equity investor. The ultimate path forward will be determined consistent with our objective to accelerate performance for both entities and maximize shareholder value. We currently expect the separation to take place in the second half of 2024. Looking ahead, I want to express my excitement about Baxter overall trajectory. Our life sustaining mission is as always our North Star and our colleagues around the world making it come alive tenacious focus on execution and operational excellence.

Our progress against our strategic transformation initiative showcases our ability to deliver on what we set out to accomplish. The benefits are clear in our overall outperformance for the quarter. Our building momentum, our recent innovation milestones and the progress of our proposed Kidney Care separation journey. We will continue to maintain the pace and intensity of our transformation and take the necessary steps so that all of our segments are well-positioned to power our performance going forward. I will now pass it to Joel to provide more detail on our performance and outlook.

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. Performance in the quarter benefited from better-than-expected sales across all our product divisions, with the exception of those within our Healthcare Systems & Technologies segment. On the bottom-line, adjusted earnings from continuing operations totaled $0.65 per share, increasing 33% versus the prior year period and ahead of our prior guidance of $0.59 to $0.62 per share. These results reflect the meaningful operational improvements we are recognizing both commercially as well as within our integrated supply chain network, and these factors drove our outperformance in the quarter.

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 & Therapies, or MPT segment, were $1.2 billion, increasing 6%. Within MPT, first quarter sales from our Infusion Therapies & Technologies division totaled $966 million and increased 6%. Sales in the quarter benefited from strong growth internationally across the division, including in our IV solutions, nutrition and infusion systems portfolios. Solid demand in the U.S. for IV solutions also contributed to growth in the quarter. Sales of Advanced Surgery totaled $263 million and grew 8%, coming in ahead of expectations, and reflecting strong growth internationally. For our Healthcare Systems & Technologies, or HST segment, sales in the quarter were $667 million and declined 9%.

Within the HST segment, sales in our Care and Connectivity Solutions, or CCS division, were $402 million, declining 7%. Performance in the quarter was impacted by several factors, including the phasing of product installations, particularly for care communications, which is expected to accelerate later in the year by the timing of capital orders, which increased mid-single digits in the quarter but are expected to ramp more meaningfully over the course of the year. By lower rental revenues, which negatively impacted sales by approximately $5 million. And finally, by certain operational challenges, for which the team is in the process of implementing clear plans to improve performance and enhance commercial rigor. Given all these factors, we expect to see significant improvements for CCS in both orders and revenue in the second half of the year, which is similar to the — we experienced last year in this division.

Front Line Care sales in the quarter were $265 million, declining 12%. Growth in the quarter was impacted by a difficult comparison in the prior year as backlog reductions positively contributed to growth in the prior year period. Performance in the quarter was also affected by softness in the primary care market which negatively impacted sales in both our connected monitoring and intelligent diagnostics product portfolios. Similar to CCS, we expect performance to meaningfully improve in the second half of the year as market conditions for primary care are anticipated to ease, the pace of customer orders are expected to increase, and we anniversary the prior year impact from the backlog reduction. Sales in our Pharmaceuticals segment were $578 million, increasing 11%.

Performance in the quarter reflected double-digit growth in both our U.S. and international injectables portfolio, driven by new product launches as well as continued strong demand for services within our drug compounding portfolio internationally. Moving on to Kidney Care. Sales in the quarter were $1.1 billion, increasing 4%. Within Kidney Care, global sales for chronic therapies were $888 million, increasing 2%. Solid PD growth in the quarter was partially offset by the negative impact from certain products and market exits in our in-center HD business as well as reduced sales in China due to government procurement initiatives and lower patient census volumes following the pandemic. We estimate that these items negatively impacted sales by approximately $50 million in the quarter.

Sales in our Acute Therapies business were $214 million, representing growth of 15%, driven by strong demand and competitive wins in the U.S. and solid performance internationally. Other sales, which represent sales not allocated to a segment and primarily includes sales of products and services provided directly through certain of our manufacturing facilities, were $16 million and declined 47% during the quarter, in line with our expectations and reflecting reduced demand for certain contract manufacturing volumes. Now moving on to the rest of the P&L. Our adjusted gross margin totaled 42.5% and represented an increase of 170 basis points over the prior year and was favorable to our expectations. 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’re 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. First quarter margins also reflected a benefit from the closure of our dialyzer facility as production in the facility was increased in advance of the closure, resulting in better absorption and lower costs for these dialyzers. This benefit is expected to be isolated to the first quarter. Overall product mix in the quarter did partially offset margin expansion in the quarter. Adjusted SG&A totaled $856 million or 23.8% as a percentage of sales consistent with the prior year period as ongoing transformation initiatives to enhance operational efficiencies were offset by higher spend in select investments in sales and marketing initiatives. SG&A leverage is expected to improve as sales ramp over the course of the year.

Adjusted R&D spending in the quarter totaled $160 million and represented 4.5 as a percentage of sales, similar to the prior year period and reflects our continued investments in advancing new products across the portfolio and bringing innovation to patients across our [Technical Difficulty]. These factors resulted in an adjusted operating margin of 14.3%, an increase of 180 basis points versus the prior year. Net interest expense totaled $78 million in the quarter, a decrease of $39 million versus the prior year period, driven by debt repayments in the fourth quarter of 2023 with 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 totaled $7 million in the quarter, compared to income of $2 million in the prior year period.

The adjusted tax rate in the quarter was 25.0% compared to 23.1% in the prior year period. The year-over-year increase is primarily driven by a valuation allowance recognized in the quarter. And as previously mentioned, adjusted earnings from continuing operations totaled $0.65 per share and increased 33% versus the prior year, primarily driven by commercial performance and operational efficiencies within our integrated supply chain. Let me conclude my remarks by discussing our outlook for the second quarter and full year 2024, including some key assumptions underpinning the guidance. For full year 2024, Baxter now expects total sales growth of approximately 2% on a reported basis and 2% to 3% on a constant currency basis, which is an increase from prior guidance of approximately 2% on a constant currency basis.

Constant currency sales guidance for the full year by reportable segments is as follows; for MPT, we expect sales growth of 4% to 5%. This is an increase from the prior guidance of 3% to 4% and reflects the first quarter outperformance and the inclusion of Novum, which is currently expected to contribute an incremental $25 million to infusion pump sales and reflects some cannibalization of prior planned sales of Spectrum. Sales in our Healthcare Systems & Technologies segment are expected to be flat to the prior year as compared to previous guidance of approximately 3%. As mentioned earlier, we expect performance to meaningfully improve in the second half of the year, driven by the factors discussed, including timing of installations, order phasing and improved operational execution.

We expect pharmaceutical sales growth of 6% to 7%, which compares favorably to prior guidance of 4% to 5% and reflects the strong start to the year and continued momentum for our new product launches. Collectively, sales for these Baxter businesses are expected to increase 3% to 4% in 2024. For Kidney Care, we expect sales growth of flat to 1% as compared to 2023. This also compares favorably to prior guidance and reflects the underlying momentum of this business. Now, turning to our outlook for other P&L line items. We continue to expect adjusted operating margin to increase by at least 50 basis points in 2024. We expect our nonoperating expenses, which include net interest expense and other income and expense, to total approximately $350 million in aggregate during 2024.

We continue to anticipate a full year adjusted tax rate between 22.0% and 22.5%. We expect our diluted share count to increase slightly and average 511 million shares for the year. Based on all these factors, we now anticipate full year adjusted earnings, excluding special items, of $2.88 to $2.98 per diluted share, which also compares favorably to prior guidance of $2.85 to $2.95 per diluted share and reflects the outperformance we realized in the first quarter. Specific to the second quarter of 2024, we expect global sales growth of approximately 1% on a reported basis and 2% to 3% on a constant currency basis. And we expect adjusted earnings, excluding special items, of $0.65 to $0.67 per diluted share. With that, we can now open up the call for Q&A.

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 the Baxter International website for 60 days at www.baxter.com. Our first question comes from Vijay Kumar of Evercore ISI. Your question please.

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Q&A Session

Vijay Kumar: Hey guys. Thanks for taking my question. 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 2024, 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 your share loss within that part of the business?

Joe Almeida: Vijay, we are committing to a 4% — around 4% exit rate for the year. We see what happened in HST in the first quarter as a postponement of orders and some operational issues that we have, that we’re addressing very diligently. We’re starting to see good results coming out of it. What gives me confidence in the second half of the year for HST is that the orders that we have, have improved in the exit of Q1 into Q2 with a healthy funnel of opportunities over the rest of 2024. We have commercial and operational challenges that we identified and we have very specific action plans in place. We also are executing on the existing backlog and we also saw some typical seasonality. The first quarter is always the weakest quarter for HST, and the fourth quarter is the highest quarter for HST vis-à-vis 2023, we exit Q4 with 7% growth.

So, what I want to make sure to our investors that we are — we will exit Baxter around 4% this year — 4% to 5%, actually, 4% to 5%, and we will have a recovery of HST based on their operational results and the good funnel that we have established and we’re time to see. This is ex Kidney. I want to make sure that you know. When I talk about Baxter 4% to 5% is ex Kidney. So to your question, there’s good confidence in exiting the business 4% to 5%, good plans in place and starting to see the recovery in HST. This is the headline.

Vijay Kumar: That’s helpful comments, Joe. One on maybe margins here. Q1, both gross margins and operating margins came in above. What drove that gross margins? Are we seeing benefits of cost actions or is this any timing element? Are we seeing pricing contribution? Because when I look at the second quarter EPS, it’s below 3. So, was there any timing element here on that margins? Thank you.

Joel Grade: Yes, good morning. Thanks. 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. Our pricing also had, I’d say, a modest, but partial part of that is well in terms of enhancing our margins. There’s a little bit of a mix impact that was offsetting some of that, but I think that’s really — those are some of the really primary drivers in the first quarter. I think from a second quarter standpoint, there’s a couple of things I’d just call out there. Number one is there was some favorability in the first quarter that was related to the closing of our dialyzer facility.

And we had production that was increased. So we had better absorption there. And so from a timing standpoint, those — that benefited the Q1 margins to some extent that you won’t see as much in Q2. And I think the other thing I would call out in Q2, while we certainly continue to have positive contribution from the IHC, positive contribution from pricing, and in particular, some OUS markets, but we also did have a pharma MSA that was part of our BPS divestiture that has — is impacting the pharma margins in the second quarter as well. So those are a few of the puts and takes from the Q1, Q2 margins.

Vijay Kumar: Thanks guys.

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

Pito Chickering: Going back to the softness in Healthcare Systems & Technology, can you give a little more detail on what exactly were the operational factors that impacted the first quarter? And why it should ramp sort of in the back half of the year? And also on the capital orders, I guess, why did those not flow through in the quarter as you guys were expecting? And then finally, kind of why you saw lower rental revenues you’re expecting? I guess I’m just trying to understand that the delta and the guidance you’re seeing sort of today is down 300 bps for the year versus 3 months ago. And what changed so dramatically?

Joe Almeida: I will take the first part of your question and Joel will take the second part of your question. We saw the operational issues were more related to how we were integrating our enterprise accounts and our folks who are every day in the field. We had made significant changes halfway through the quarter but did not catch up fast enough. We’ve been seeing a great deal of large orders being signed today. As a matter of fact, a couple of them are full conversion, competitive conversions. We have a very effective and large enterprise account that now is fully integrated with HST. And those were the things that we saw and didn’t start in the first quarter, you should have been integrated and done a better job in probably in August, September last year.

We did catch up to that, and we see that better. We also have integrated some of the sales systems with more rigor than we had before, and we are making some changes at the mid-level management in that operation so we can get more rigor in how we sell product. But I have to tell you that we’re already seeing the momentum that Baxter brings to HST, the part of the two companies and how the connectivity of our, for instance, a new Novum pump and how that works with the beds and the monitors how that makes a difference. So that is one part. There were operational issues in frontline care completely different than our CCS business. Frontline Care were related to government orders is slowed down by the government, also primary care issues with the payment system [indiscernible] in the first quarter that was a division of United Healthcare that affect the primary care physicians offices, therefore, affect how they’re ordering the products and getting paid.

So that affects us as well. And there is a temporary contraction in the primary care physicians market, which we have very high market share. As a matter of fact, we probably gained share in that business instead of losing, we actually have proof that we gained share. So we see that as a temporary blips in the Frontline Care. In the CCS business were pure operational issues, a lack of better integration in our key account management or enterprise accounts. So the headline of the answer is, we are executing much better right now. We’re starting to see the effect in the CCS. We have converted couple of very large accounts from the competition and our offering of launches from last year, Progressa Plus and Centrella CLR with a continuous lateral rotation have done very, very well.

As a matter of fact, that was the reason why a Midwest system converted from the competition to us. In terms of Frontline Care, we’re starting to see the rebound. I think we hit the bottom in the primary care office. And what we saw there in terms of all the things coming together, the payment system and the slowdown of the market and we’re starting to see that is starting to pick up. So, I feel cautiously optimistic that our actions are starting to provide results and Baxter, in general, has a pretty strong portfolio that bringing together, as you could see by the results of the quarter. Now, passing on to Joel on the second part of the question on the revenue.

Joel Grade: Yes, I would say your question around the second half of year, why are we not recovering fully all the way to the 3%. I mean, I guess what I would say, the first quarter was a fairly sharp decline relative to expectations. And I think more than anything, it’s simply that we’re not fully anticipating making that up throughout the rest of the course of the year. Having said that, to Joe’s point, we certainly do remain optimistic about the growth prospects in this business. We have a number of new product launches that are coming in, they are going to continue to enhance our growth. As Joe pointed out, the improvement in Frontline Care, we had a lot of issues. We had gone through a lot of backlog last year and so there was actually a lot of difficult comparisons in the first half of the year that we’re going to be lapping in the second half of the year.

We certainly expect our orders from CCS to continue to meaningfully accelerate. And as Joe said, we’ve taken specific actions to ensure that commercially and operationally, we’re executing better as we head into the back half of the year. So, I guess, again, in summary, I don’t know that we’re planning that — we’re not going to be able to make up the entire impact that we had in the first quarter of the year, but we’re still confident in how we’re moving forward. And I would say this, we started to see some modest improvements even starting in Q2 in that business as well.

Pito Chickering: Okay. And then a follow-up question on the gross margin. Is it just such a key part of the Baxter story here? Can you quantify the impact of the closing of the dialyzer facility in the quarter looking at the rest of the gross margin improvement year-over-year, what’s the split between the inflationary pressures easing versus increased pricing versus just simple operational efficiencies? And should inventories rolling through the balance sheet on the P&L be a tailwind to margins this year? And any seasonality around that occurring? Thank you.

Clare Trachtman: So, Peter, I’ll take that. There are a lot of questions in there. What I would say is that the key is within our integrated supply chain, a lot of this comes down to the execution on our margin improvement initiatives. They’ve always been designed to offset inflation. So, even this year, we do have normal inflationary pressures within our organization, but the MIP that the team is executing against are more than offsetting that and driving the savings both on a year-over-year basis and relative to our expectations. Now, in the first quarter, we did benefit from some of the positive and favorable manufacturing variances that Joel was referencing. So within the fourth quarter, we did have better volumes than we had anticipated that did — so those favorable manufacturing variations rolled off in the first quarter giving us a benefit inclusive of what Joel referenced on Opelika, where we were preparing for the closure of that dialyzer facility down in Alabama.

So, that’s really what I would say. Pricing is a benefit. It’s a benefit on a year-over-year basis and it’s a benefit relative to our expectations. And this is pricing again across the organization on a net basis. And what we’re doing is really outside the U.S., we’re looking at those businesses and driving a lot of targeted actions within those markets outside the U.S. So, I think this is collective. This is in line with what we said earlier that a lot of our margin improvement this year would be coming from gross margin.

Pito Chickering: Okay. Thanks so much.

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

Larry Biegelsen: Good morning. Thanks for taking the question. 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.

Clare Trachtman: So, Larry, maybe I’ll start with that and let folks. I would say most of it — we did see some strength within our Kidney Care that came in favorable to our expectations. So, I think that we are still anticipating that to slow in the second half of the year as we get the impact from some of the government-based pricing initiatives in China, also just the impact of some of the market exits that we will be incurring for the rest of the year. So, that’s probably one of the biggest differences if I think about kind of the rest of the year. In addition, within our Pharmaceuticals business, we had really strong performance from our hospital pharmacy compounding business outside the U.S. We are continuing — we have strong demand for that business.

But we are also really focused on improving the profitability of that business. So, as we look at it going forward, being very disciplined about some of the business and demand that we’re taking on for that. So I’d say that’s probably the other impact. Besides that, I think most of the other businesses really kind of continue to perform in line. But those are the two big drivers of what changes between the first half and the second half.

Joe 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. We also see tremendous demand for our IV solutions. In our nutrition — IV nutrition doing pretty well. And our Pharmaceutical is doing extremely well with the five launches. We put those gains into the forecast, into the guidance going forward. However, we see this — us seeking profitability ahead of sales growth. So, we will make some of the decisions to be markets where we can actually improve the bottom-line. So, it’s a combination. You saw what happens. We beat the top, we beat the bottom and we continue to seek for opportunities to hopefully overperform.

Joel Grade: And if I could just add one thing on the kidney piece for a little bit just one order of magnitude. That business that we talked about going from flat to 1% from a guidance perspective would be closer to mid-single digits without some of the market exits. So, to Clare’s point, that is a fairly sizable impact as we head into the remaining part of the year is on a Holdco basis.

Larry Biegelsen: That’s helpful. Just 1 quick follow-up. Joe, on the plan for Kidney Co a 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?

Joe Almeida: Larry, we will be separating the business in the second half of 2024. And I don’t want to comment at the moment in which option is a better option than the other. We’re contemplating both options, and we have said that before that we will maximize shareholder return for the option. So, whatever option we choose is going to be one of the two, we will separate first of all. Second, when we separate, we will separate with maximization of shareholder return in mind.

Larry Biegelsen: Thank you.

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

Robbie Marcus: Great. Thanks for taking the questions. Maybe one on R&D. This is one of the first years in a while that R&D is growing slower than sales. How do you think about your R&D investment and where it’s going? And are we just seeing some of the benefits of the Hillrom integration here?

Joe Almeida: Robbie good morning. 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 2024, but also in 2025 to continue to increase the dollar’s value, not as a percentage of sales, the dollar’s value that we put there. So we have not reduced the dollar value of R&D for 2024, we actually increased that. As a percentage, that number may show a slowdown, but it has dollar-wise improved. There’s no — there are no savings that we are requiring from research and development. As a matter of fact, we continue to hire folks.

We are right now exploring alternate sites for more R&D centers in one in Ireland and another one in the East Coast of the United States, we are actually increasing that. So, our objective is to drive our goal to 4% to 5% top line growth with innovation, and that’s going to be fueled by R&D. You’re going to see the Novum which we just had clinical approved in the U.S. for neonate and term babies utilization. We also had — we have significant pipeline coming in from HST. We have wireless communication device. We have new monitors, new thermometers. We have a significant amount of new technology. So, there’s no slowing down in R&D. It’s the other way around.

Robbie 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. How do we think about the trajectory of this business? It’s one that keeps growing double-digits year in and year out and the expectations it always will slow, but it hasn’t yet. So what are your views here on how to think about this for the rest of the year? Thanks a lot.

Joe 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. Drug compounding is not an area — a strategic area for Baxter, but it’s strategic in specific markets that we do business. I would look at the performance of injectable pharmaceuticals, which has been — was 8% this first quarter, we’re starting to see the new products really taking shape and helping offset the price erosion headwinds as well as the gross margin that got eroded during the pandemic. So, I would say to you that I’m always optimistic on the second half of the compounding business volume.

It is an opportunity that we have to continue to grow. But it’s more important to us to grow the new products that we’re launching because for every dollar that we sell of a new molecule or a new launched premix, the gross margin is one of the highest in the company, and it goes between 70% and 85%. So, that’s the focus. Compounding is a good all-around business in Australia, New Zealand, U.K., Canada, Ireland to bring the IV solution volumes and some of the pharmaceuticals, but it’s not the driver of the business in pharmaceutical. The new product launches and the volume is.