Baxter International - Q2 2023

Transcript

Operator (participant)

Good morning, ladies and gentlemen, welcome to Baxter International's second quarter 2023 earnings conference call. Your lines will remain in a listen-only mode until the question and answer segment of today's call. At that time, if you have a question, you will need to press Star, then one on your touchtone phone. If anyone should require assistance during the conference, please press Star, then zero on your touchtone phone. 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.

Clare Trachtman (VP of Investor Relations)

Good morning. Welcome to our Second Quarter 2023 earnings conference call. Joining me today are Joe Almeida, Baxter's Chairman and Chief Executive Officer, Brian Stevens, Baxter's Interim Chief Financial Officer and Chief Accounting Officer. On the call this morning, we will be discussing Baxter's second quarter 2023 financial results, along with our financial outlook for the third quarter and full year 2023. Please note, results in the current periods and prior periods have been adjusted to reflect the pending sale of our BioPharma Solutions or BPS business. While the closing of this transaction is subject to the satisfaction of customary closing conditions, that business is now reported as a discontinued operation. We have posted restated schedules reflecting that presentation for prior periods to our IR website.

In addition, we will be providing a walk to reconcile our prior guidance for full year 2023 to our updated financial outlook for continuing operations and in the aggregate. With that, let me start our prepared remarks by reminding everyone that this presentation, including comments regarding our financial outlook for the third quarter and full year 2023, new product developments, including the impact of pending regulatory approvals, the potential impact of our in-flight strategic and pricing actions, business development, regulatory matters, and the macroeconomic environment, including commentary on continuing supply chain challenges and evolving customer capital spending, contain forward-looking statements that involve risks and uncertainties. Of course, our actual results could differ materially from current expectations. Please refer to today's press release and our SEC filings for more detail concerning factors that could cause actual results to differ materially.

In addition, on today's call, non-GAAP financial measures will be used to help investors understand factors on ongoing business performance. A reconciliation of the non-GAAP financial measures being discussed today to the comparable GAAP financial measures is included in the accompanying investor presentation and in our earnings release issued this morning, which are both available on our website. Now I'd like to turn the call over to Joe. Joe?

Joe Almeida (Chairman and CEO)

Thank you, Clare, good morning, everyone. We appreciate you joining today's call. I will begin with an overview of Baxter's second quarter 2023 performance, followed by a look at the progress we're making across the strategic actions we announced earlier this year. I will turn it over to our Interim Chief Financial Officer and Chief Accounting Officer, Brian Stevens, who will walk you through our quarterly performance and outlook in more detail. Finally, as always, we will welcome your questions. Second quarter sales rose 3% on a reported basis and 4% on a constant currency basis, both measures exceeding our prior guidance of 1%-2% and 2%-3%, respectively.

As a reminder, and as Clare noted, we are reporting results of our BioPharma Solutions or BPS contract manufacturing business as discontinued operations in light of its pending sale, which I will touch on shortly. I would note there was no impact in the quarter on top line growth rates from discontinued operations on either a reported or constant currency basis. Our top line outperformance was driven by solid demand across the portfolio. On the bottom line, second quarter adjusted earnings per share from continuing operations totaled $0.55, and discontinued operations totaled $0.11. In the aggregate, adjusted earnings per share totaled $0.66 and exceeded our outlook range of $0.59-$0.61, driven by a combination of top line performance and operational efficiencies. Several factors combined to help bolster both top line and bottom line results.

First and foremost, I want to highlight positive demand and greater stability across most corners of the healthcare marketplace, following the erratic impact of the pandemic and its recurrent surges over the past few years. Overall, we are continuing to see sustained recovery in hospital admissions and procedural volumes, as well as in alternate sites of care, which are contributing to solid performance across the portfolio. The more stable inflationary environment is also contributing to an improved macroeconomic backdrop, further helping to steady our operational performance. While positive signs are emerging, we remain cognizant of the potential for inflationary disruptions, consistent with our approach this year and in general, we have tried to capture these potential risks in our updated financial outlook....Similar with last quarter, we are also seeing continued improvements in availability of key electromechanical components.

This reflects a combination of overall environmental impacts and steps we have taken to shore up supply within our own integrated supply chain operations. While there is still work to do, these factors and actions are contributing to enhanced cost management and greater predictability on the supply chain front. As we have previously commented, we continue to see a degree of caution in hospital capital spending, which has impacted our Patient Support Systems, or PSS performance. Encouragingly, we saw a significant sequential improvement in the second quarter for orders and are building momentum with the recent launches of our Progressa+ ICU bed and enhanced features to our segment-leading Centrella bed. Progressa+ is the latest version of our unique ICU-focused bed, which now offers a range of additional features developed to help healthcare professionals address the complex critical needs of ICU patients.

Our current expectation is for hospital capital spending to improve in the second half of the year as compared to the first half of the year, as hospitals reevaluate their budgets and reprioritize areas of spend. We're building momentum and making significant progress across the transformative strategic actions we announced to kick off 2023. The proposed spin-off of our Renal Care and Acute Therapies businesses into an independent, publicly traded company, the pending sale of our BPS business, and the implementation of a new operating model for the remainder of our Baxter businesses. As I noted at the time, these are three initiatives with a single agenda: enhance our focus on patients and clinicians with the goal of creating incremental value for our shareholders.

While all are still in progress, these efforts are already enhancing the strategic clarity across the company, increasing accountability and helping bring the businesses even closer to the patients, clinicians, and customers they serve. Our proposed Kidney Care spin-off is moving ahead on multiple fronts. Last month, we welcomed Chris Toth, who will ultimately serve as CEO of the standalone Kidney Care business upon its separation next year. I couldn't be more excited to have Chris on board, and I can assure you that our leaders and colleagues across our Kidney Care team feel the same. He's a passionate and proven leader, and his experience as a longtime executive at Varian, a Siemens Healthineers company, makes him an outstanding fit as the CEO of the new publicly traded company. I look forward to extending the opportunity for you to meet him at our upcoming investor events.

As you may also be aware, we have just announced Vantive as the name of our Kidney Care spin-off. Formalizing the brand name is an important milestone as it sets the stage for a range of necessary regulatory, legal entity, IT, and branding work that are essential to successfully establishing the new company. Separately, we are finalizing the organization structure and the financial model for the new company. We expect to file Form 10 publicly with the SEC by early next year, which will provide additional details on the financial structure and other important information for the new entity. As a standalone entity, it will benefit from increased management focus and the pursuit of its unique investment priorities, better positioned to accelerate growth and innovation, emphasizing its distinct market drivers. We continue to be on track to launch Vantive as a standalone company by July 2024 or earlier.

Moving on to the development in our BioPharma Solutions business. In May, we announced entry into a definitive agreement to divest BPS to private equity investors, Advent International and Warburg Pincus. BPS is an outstanding and profitable business, but as a contract manufacturer, it is not core to Baxter's strategic path forward. Our current expectation is that the transaction will close towards the end of the third quarter, subject to receipt of required regulatory approvals and satisfaction of other customary closing conditions. As previously stated, we intend to utilize the after-tax proceeds to reduce debt consistent with our capital allocation priorities. Lastly, in Q2, we initiated the launch of Baxter's new operating model, realigning our portfolio of businesses into four global, vertically integrated business segments: Medical Products and Therapies, Healthcare Systems and Technologies, Pharmaceuticals and Kidney Care.

Under this new reporting structure, each segment will have global profit and losses, accountability, dedicated commercial operations, and fully aligned research and development, manufacturing, supply chain, and functional support teams. While these are still early days, I believe that this approach is already driving clear, meaningful benefits, including enhanced market responsiveness through greater strategic clarity, tighter alignment, faster decision-making, and on an invigorated innovation mindset across all aspects of our operations. Not coincidentally, it has also yielded a streamlining and efficiency opportunities that I expect to benefit our bottom line. We plan to complete our transition to the new operating model and report under this new segment structure beginning in Q3, which will provide additional perspective on the financial metrics of each of the four segments. Assessing both our year-to-date performance and the progress of our strategic actions, I'm excited and optimistic about our trajectory.

We are responding to a rapidly evolving marketplace with fresh decisive thinking that will redefine how we operate and serve our stakeholders. We are positioning ourselves to emerge as two leading companies, emphasizing a range of medically essential products focused on delivering outstanding results for our patients, shareholders, and the many other stakeholders, communities that rely on us. Before concluding, I would like to point you to baxter.com, where you can review Baxter's most recent corporate responsibility report. Published last month, it highlights meaningful actions taken in 2022 in support of our goals to empower our patients, protect our planet, and champion our people and communities. Baxter's well-recognized emphasis on sound corporate citizenship is another important way that we advance our mission to save and sustain lives. I'll pass it on to Brian to provide more detail on our performance and outlook.

Brian Stevens (Interim CFO and Chief Accounting Officer)

Thanks, Joe. Good morning, everyone. I'm happy to be joining the call this morning to provide some additional details on Baxter's second quarter financial performance, as well as commentary on our updated financial outlook. As Joe mentioned, we are pleased with our second quarter results, which came in ahead of our expectations. Second quarter 2023 global sales included $3.71 billion from continuing operations and $142 million from discontinued operations. Sales in the quarter increased 3% on a reported basis and 4% on a constant currency basis and compared favorably to our guidance. Sales performance in the quarter benefited from better than expected sales across nearly every business line, with particular outperformance realized in Medication Delivery, pharmaceuticals, and Patient Support Systems.

On a year-over-year basis, we recognized solid growth across much of the portfolio, which was partially offset by a 1% decline in Patient Support Systems, primarily reflecting lower rental revenues and reduced hospital capital spending as compared to prior periods. We also generated lower sales in BPS, which is now reported in discontinued operations, due to a reduction in revenues from COVID vaccine manufacturing. On the bottom line, adjusted earnings in the aggregate, inclusive of both continuing and discontinued operations, decreased 24% to $0.66, reflecting the impact on our results of the increased cost of materials, labor, and freight we've absorbed due to the significant inflationary environment experienced over the past few years. Adjusted EPS for the quarter came in ahead of expectations of $0.59-$0.61 per share, primarily driven by sales and operational performance.

A lower than expected tax rate offset the negative impacts from foreign exchange and losses on equity investments. I'll walk through performance by our regional segments and key product categories, starting with sales by operating segment. Sales in the Americas grew 5% compared to the prior year on a constant currency basis. Sales in Europe, the Middle East, and Africa grew 3% on a constant currency basis, and sales in our APAC region increased 4% constant currency. As we look to the second half of the year, we expect performance in APAC to be negatively impacted by a decline in China sales, resulting from the effect of excess mortality on ESRD patient volumes due to the pandemic, as well as the impact from the ongoing implementation of value-based procurement initiatives. Moving on to performance by key product category.

Global sales for Renal Care were $936 million, increasing 2% on a constant currency basis. Performance in the quarter was driven by mid-single-digit growth in our US PD business, partially offset by lower US in-center HD sales following the exit of a distribution agreement at the end of last year, consistent with our optimization plans for the mix. Sales in Medication Delivery of $761 million grew 7% year-over-year at constant currency rates, driven by strengths globally for both infusion systems and IV solutions products. We continue to experience healthy demand in the US for our Spectrum LVP pump. As we continue to work to improve the availability of components for Spectrum, we expect sales to ramp in the second half of the year, we also continue to focus on growing our Novum syringe base.

Pharmaceutical sales of $550 million increased 6% on a constant currency basis. Performance in the quarter reflected strength in our US injectables portfolio, driven by new product launches, including Zosyn, norepinephrine, room temperature, and bendamustine, as well as increased sales internationally for our hospital compounding portfolio. Total sales for Clinical Nutrition were $243 million, increasing 7% on a constant currency basis. Performance in this quarter was driven by a strong performance internationally, partially offset by declines in the US, reflecting a difficult comparison against the prior year period. Sales in Advanced Surgery were $272 million, advancing 4% on a constant currency basis.

Growth in the quarter reflects an improvement of surgical procedures globally, with particular strength internationally, partially offset by the impact from exiting a distribution agreement in the U.S., as well as select supply constraints that hampered performance in the quarter. Sales in our Acute Therapies business were $180 million, representing growth of 6% on a constant currency basis and represented a return to growth in the U.S. and strength in our APAC region. Sales in our Patient Support Systems business were $359 million, decreasing 1% on a constant currency basis, primarily driven by lower contribution from rental revenues and lower hospital capital spending as compared to the prior year period. In the quarter, we realized better-than-expected sales for ICU beds in the U.S., driven by the launch of Progressa+.

We have experienced positive demand for that new entrance to our smart bed portfolio since its debut. As Joe mentioned, we saw a significant sequential improvement in orders, increasing approximately 30%, driven by demand for our segment-leading hospital beds and Care Communications products. We currently expect this momentum to continue, with orders increasing in the second half of the year as compared to the first half. Front Line Care sales in the quarter were $307 million, increasing 9% on a constant currency basis. This growth reflects demand for our intelligent diagnostics, Respiratory Health, and Connected Monitoring portfolios. We saw continued improvement in supply availability of electromechanical components during the quarter, which enabled us to address a portion of the backlog associated with the Front Line Care business.

While we are pleased to see improvement in our supply constraints, the business continues to have an elevated backlog level, which we will continue to work down over the course of the year, as anticipated demand remains strong for this portfolio of products. Global surgical solution sales in the quarter were $77 million, increasing 9% on a constant currency basis. Performance in the quarter was driven by continued geographic expansion and increased hospital access. BPS second quarter sales, which are now reported as discontinued operations, were $142 million, decreasing 7% on a constant currency basis. This decline was in line with expectations due to lower COVID vaccine-related revenues of approximately $27 million compared to the prior year period. Underlying business momentum continues to build, with strong growth excluding the vaccine impact realized in the quarter.

Moving through the rest of the PNL, our adjusted gross margin from continuing operations totaled 40.4%, in line with our expectations, represented a decline of 160 basis points over the prior year. The year-over-year decrease reflects increased costs of goods sold, primarily driven by material and labor inflation, freight, and supply constraints, partially offset by favorable pricing in select areas of the portfolio. The impact of discontinued operations reduced Q2 2023 adjusted gross margins by 40 basis points and Q2 2022 adjusted gross margins by 50 basis points. Adjusted SG&A totaled $844 million, or 22.8% as a percentage of sales, a decrease of 40 basis points versus the prior year period.

Performance in the quarter benefited from our ongoing transformation initiatives to enhance operational efficiencies, partially offset by higher bonus accruals under our annual employee incentive compensation plans versus the prior year. On an aggregate basis, inclusive of discontinued operations, adjusted SG&A was 22.1% as a percentage of sales in Q2 2023, and 22.4% as a percentage of sales in Q2 2022. Adjusted R&D spending in the quarter totaled $165 million and represented 4.5% as a percentage of sales, an increase of 40 basis points versus the prior year. We have ramped up our R&D efforts, particularly increasing our investments in advancing our connected care technologies.

On an aggregate basis, inclusive of discontinued operations, adjusted R&D was 4.3% as a percentage of sales in Q2 2023, and 4.0% as a percentage of sales in Q2 2022. These factors resulted in an adjusted operating margin of 13.2%, a decrease of 150 basis points versus the prior year. On an aggregate basis, inclusive of discontinued operations, adjusted operating margin was 14.4% as a percentage of sales in Q2 2023, and 16.2% as a percentage of sales in Q2 2022. Operating margin came in ahead of our expectations, primarily driven by top-line performance and enhanced execution on our transformational initiatives, driving improved operational efficiency.

Net interest expense totaled $124 million in the quarter, an increase of $35 million versus the prior year, driven by the impact of increased interest rates on our variable rate debt. Adjusted other non-operating expense totaled $22 million in the quarter, compared to $33 million of income in the prior year period. Results were unfavorable to expectations and driven by losses in both foreign exchange and marketable securities compared to gains in the prior year. The adjusted tax rate in the quarter was 17.8%, compared to 20.5% in the prior year period. The year-over-year decrease was primarily driven by changes in geographic earnings mix. With respect to cash flow, in the first half of 2023, we generated free cash flow of $485 million, including discontinued operations, compared to $171 million in the prior year period.

We expect to remain on track to more than double our free cash flow year-over-year in 2023. As previously mentioned, adjusted earnings from continuing operations totaled $0.55 and declined 25% versus the prior year. Adjusted earnings, including discontinued operations of $0.66 per diluted share, declined 24% versus the prior year period, reflecting the increased cost of raw materials, freight, and labor, as well as the impact of higher interest rates on variable rate debt, foreign exchange headwinds, and higher bonus accruals. With respect to our original guidance, earnings favorability was driven by better-than-expected sales and SG&A savings, as the benefit from the lower tax rate offset the negative impacts from FX and losses on marketable securities. Let me conclude my comments by discussing our outlook for the third quarter and full year of 2023, including some key assumptions underpinning the guidance.

As mentioned, we are pleased with the operational performance to date and positive momentum we have seen through the first half of the year. While we continue to work to mitigate the macroeconomic challenges that have impacted our results to date, the latest signs are reassuring. Our business fundamentals remain solid and demand for the portfolio is broad-based. Taking into account our positive second quarter results, I'll now walk through our updated guidance. Our current expectation is that the pending sale of BPS is likely to close towards the end of the third quarter. However, as the ultimate timing of completion is uncertain, we're providing adjusted operating margin and EPS guidance for full year 2023 that contemplates two scenarios. One, where the deal does not close in 2023, and another that assumes it closes at the end of the third quarter.

For full year 2023, Baxter now expects total sales growth from continuing operations of 1%-2% on a reported basis and approximately 2% on a constant currency basis. We now expect foreign exchange to be a 50 basis point headwind to reported results on a full year basis. Assuming that BPS were to remain a part of Baxter through year-end 2023, our outlook for sales growth in the aggregate, including discontinued operations, would be the same as continuing operations growth on both a reported and constant currency basis. If BPS were to remain a part of Baxter through year-end, we would continue to expect full year adjusted operating margin in the aggregate, including discontinued operations, of 15.5%-16%.

On a continuing operations basis, we expect full year adjusted operating margin of 14.1%-14.6%, which would not be significantly impacted by the timing of the pending BPS closure. If the pending BPS transaction does not close by year-end, we would expect to incur interest expense of approximately $500 million for fiscal 2023. If the BPS transaction closes by the end of September, as currently anticipated, we would expect a reduction of interest expense of approximately $40 million, which would result in a benefit to continuing operations in the fourth quarter. We now anticipate a full year adjusted tax rate of 20.5%-21% on both an aggregate and continuing operations basis.

Given current foreign exchange rates, we expect to absorb a negative earnings impact of $0.05-$0.07 per share in the second half of the year relative to prior expectations. Lastly, we expect a diluted average share count of 508 million shares. Under this scenario, where BPS remains a part of Baxter through year-end 2023, we now expect 2023 adjusted earnings on an aggregate basis, including discontinued operations, to total $2.92-$3.00 per diluted share, which includes adjusted earnings from continuing operations of $2.49-$2.57, and adjusted earnings from discontinued operations of $0.43.

If the pending BPS sale were to close at the end of the third quarter as currently anticipated, we would expect full year adjusted earnings in the aggregate, including discontinued operations, of $2.87-$2.95 per diluted share. Adjusted earnings from continuing operations of $2.54-$2.62, and adjusted earnings from discontinued operations of $0.33. This outlook excludes estimated fourth quarter adjusted earnings attributed to BPS, consistent with the assumed September 30 closing date, and includes a benefit of approximately $0.05, primarily due to reduced interest expense after giving back to the anticipated debt repayment plan associated with closing of the pending BPS sale.

Specific to the third quarter of 2023, we expect global sales growth from continuing operations of approximately 2% on a reported basis and 1% on a constant currency basis. We expect adjusted earnings from continuing operations, excluding special items, of $0.65-$0.67 per diluted share. We expect adjusted earnings of $0.13 per diluted share from discontinued operations. Taking this into account, we would expect adjusted earnings in aggregate of $0.78-$0.80 per diluted share. With that, we can now open up the call for Q&A.

Operator (participant)

Thank you. We will now begin the question and answer session. If you have a question, please press star one on your touchtone phone. If you wish to remove yourself from the queue, again, press star one. If you are using a speakerphone, please lift the handset to ask your question. That we may be respectful of everyone's time, please limit your comments to one question with one follow-up question if necessary. We appreciate everyone's patience and would like to provide as many of you as possible the opportunity to ask a question. We will pause for a moment while the list is being compiled. 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. Your first question comes from the line of Robbie Marcus from JPMorgan.

Your line is open.

Robbie Marcus (Medical Devices & Services Senior Analyst)

Thanks for taking the question and congrats on a good quarter. Joe, maybe to start, you know, it looks like the recovery is progressing nicely, beat and raised, but it's a bit complicated with discontinued and continuing operations. Would love to get a sense of, you know, how did the pro forma, the combined company, do in the quarter on margins? You know, so we can compare it apples to apples, what's the expectation for the back half of the year and your confidence in, you know, regaining the margins?

Joe Almeida (Chairman and CEO)

Thank you, Robbie. Good morning. I'm ask Brian Stevens to ask. We will make sure that everything you guys need to know is clarified, as we had a very solid quarter. I want to make sure that the information is clearly understood, and that we can talk about the other things that drove our success this quarter.

Brian Stevens (Interim CFO and Chief Accounting Officer)

Thanks very much, Robbie, for the question. You know, as you mentioned, you know, due to the signing of our agreement to sell BPS, which right now we expect is going to close likely in about two months, at the end of September, although that's subject to customary closing conditions, as you can imagine, this has triggered discontinued operations reporting. One thing I did want to highlight is that at the end of our investor presentation, we have gone back and recasted our recent quarters to show our adjusted results on a discontinued operations basis, to provide some visibility, apples to apples, going forward.

One thing to point out, though, that what that does is while it takes out the contribution from BPS in the comparable periods, that recasting does not reflect the benefits that we expect to get going forward from interest expense savings. I think if you're looking at EPS for the full year, while we expect about a $0.43 impact from discontinued operations, after you net in the interest savings and things like that, we really think the headwind on an annual run rate basis is probably closer in the range to $0.15-$0.18. Specific to your question, as far as where our operating margins landed, we reported, on a discontinued operation basis, adjusted operating or adjusted operating margins of, in, in the ballpark of, about 13.2%.

Including the full company, we came in for the quarter at 14.4%, which was a little bit above where we were expected to land. On a full year basis for the entire company, as if we own BPS for the full year, we would expect our operating margin or adjusted operating margin to come in at 15.5%-16%, which is consistent with the prior guide that we gave last quarter. You'll note that this guide implies a 300 basis point margin expansion in the second half of the year. There's really three main drivers of that. The first driver is sales growth.

As you know, our sales tend to be very back-end loaded in the second half of the year, which gives us greater absorption against our fixed cost base, and that is what the largest driver of the sequential operating margin improvement that we see and that we continue to be on track for. The second component really relates to integrated supply chain. You know, as you recall, we had adverse manufacturing variances coming into the year, that rolled out during the first part of the year as the related inventory was sold. Additionally, a lot of the margin improvement initiatives that our integrated supply chain and manufacturing teams have been working on, have been overshadowed by the high levels of inflation.

As we've seen inflation start to stabilize in recent periods, we're now expecting in the back half of the year, benefits from the savings from those initiatives is now we're starting to lap the inflation we're seeing, such that we're expecting that's gonna drop to the bottom line with expanded margins. Finally, we're seeing benefits from cost savings. As you'll recall, we had some significant cost savings initiatives earlier this year in connection with our reorganization to a new operating model. Those cost savings already benefited and contributed to our beats this quarter, which, as you saw, we came in $0.05 above the top end of our guidance range for EPS on overall company. Even more of those cost savings initiatives are gonna flow through in the second half.

Really good traction we're seeing, and we're confident about where we're landing on the operating margin side.

Robbie Marcus (Medical Devices & Services Senior Analyst)

Great, that's really helpful. Maybe as a follow-up, your competitor recently got approval for their infusion pump platform in the U.S. I know you resubmitted Novum, large volume pump in early June. Was just wondering if there's any update there or any comments you could provide? Thanks a lot.

Joe Almeida (Chairman and CEO)

Robbie, we have, we believe we have successfully resolved the open issue that was primary subject of the FDA's last additional information that they requested. Additionally, we have proactively implemented software changes that we had planned in consultation with the FDA. We have regular communications with the FDA during the review. We are committed to resolving any questions or issues that come up during the process and through learnings in connection with the recent launch of Novum LVP in Canada and related regulatory issues. We are working on software upgrades to our current version of the Canadian pump. As we work through this in the next few months, we work out alongside the FDA to tell them what's going on, and we are cautiously optimistic.

We have a very good pump platform, and we want to get this thing done and through with the FDA. We wanna make sure that the best and most recent updates to the product are implemented before in Canada. We can communicate with the FDA properly. We are in constant communications with them. I just also wanna add that our SIGMA Spectrum pump is doing extremely well. We are augmenting the supply chain of that pump to make sure that pump continues to be available. We need that pump to be available. We have hundreds of thousands of these pumps on the market, and by doing that, we're able actually to give continuity to hospitals which own that today. As a matter of fact, that growth has been great.

This year, we upped our forecast twice since the beginning of the year as the supply chain became better. We're making sure that in the next 12 months, that pump will be backward integrated into the new gateway system that Novum uses in hospitals. We have really alternatives for everything. I tell you, we've been gaining market share steadily year-over-year, and we'll continue to do that. Of course, we're looking forward to have Novum LVP in the US market. Just a little plug for our syringe pump, which has done extremely well, and we are actually exceeding by far our expectations for this year.

Robbie Marcus (Medical Devices & Services Senior Analyst)

Appreciate it. Thanks a lot.

Joe Almeida (Chairman and CEO)

Thank you.

Operator (participant)

Your next question comes from the line of Larry Biegelsen from Wells Fargo. Your line is open.

Larry Biegelsen (Senior Medical Technology Analyst)

Good morning. Thanks for taking the question. Congrats on a nice quarter here. Joe, or sorry, or Brian, yeah, I wanted to ask about the guidance. You put up a nice 4% growth number in the second quarter, but I believe that the third quarter, you're guiding to about 1%. Joe, you talked about improving trends. Maybe talk about what you're assuming in the second half, and why growth might be lower in the second half than what we've seen here in the second quarter, and I have one follow-up.

Brian Stevens (Interim CFO and Chief Accounting Officer)

Sure. I'll get this started, then Joe can add anything. Thanks very much for the question. As you saw in the current quarter, we're really excited about our growth. We came in at 4% on a constant currency basis, which reflected really strong contributions and outperformance from our MPT business, which came in around 7%. Our pharma business, which was at around 6%, reflecting some of the recent launches we've had in the US, including Zosyn and room temperature norepinephrine. Our Front Line Care business, you know, came in around 9% as it worked down some of the backlog, and we saw strong demand for intelligent diagnostics and Respiratory Health.

Finally, we started to see some traction in PSS in recent periods, which, you know, as we talked about before, we had seen some softness in capital orders. That appears to be stabilizing, and we're seeing, you know, good traction going into the second half of the year as our order volume has picked up, although that business is still facing some headwinds from lower rental revenues, following following COVID, where our demand for rental beds was high. Really the story for the sequential deceleration in our growth going into into the third quarter, where we're expecting it to slow down a bit to around 1%, is really, you know, driven most significantly by the headwinds facing our PD business in China.

You know, as we mentioned, you know, within that business, we have excess mortality that has reduced our patient census counts, following some of the impact of the pandemic that they've had over there. Also in the second half of the year is where we're starting to see a little bit more of the impact of volume-based procurement in China. I think net-net for that Kidney Care business, which includes Renal, as well as Acute, we're seeing about a 250, you know, basis points impact from some of those headwinds. You know, additionally, there's some discrete items that happened in the prior year period that we've highlighted currently or previously, that we're gonna be lapping, which is driving down our sequential growth a little bit. I think overall, we've still been able to offset those headwinds, with strong performance across the rest of our portfolio.

Joe Almeida (Chairman and CEO)

Yeah.

Larry Biegelsen (Senior Medical Technology Analyst)

That's super helpful.

Joe Almeida (Chairman and CEO)

I just wanna.

Larry Biegelsen (Senior Medical Technology Analyst)

Go ahead, Joe, sorry.

Joe Almeida (Chairman and CEO)

Augment the part on the concerns in the beginning of the year that we had with capital. We've seen that alleviating, and I have to say that the launch of Progressa+ has been a tremendous success. We've seen good momentum, a very strong update in quotations and also conversion from quotations to PO and to delivery. That, as a matter of fact, we're starting to see competitive conversions, which is we're taking market share for competitors, from competitors. This has been a good track record for the company when we launch new products, and now with a very good team in place, we are able to actually execute on the plan above and beyond the great performance of our Front Line Care and our Medication Delivery business as well in the US. Just a little bit of more color to Brian's comments on our excitement around that business.

Larry Biegelsen (Senior Medical Technology Analyst)

Yes, that's super helpful. Just one quick follow-up for me. Obviously the Pfizer injectable plant, the damage to that plant got a lot of media coverage the last couple weeks. It seems like it was more just a warehouse that was negatively impacted. Do you see any potential benefit from that, or is, or is it your understanding, it was more the warehouse, not the manufacturing that was impacted? Thanks for taking the question.

Joe Almeida (Chairman and CEO)

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

Clare Trachtman (VP of Investor Relations)

Larry, just to clarify that we have not included any upside in the guidance that we provided. Obviously, we're continuing to evaluate the situation. As Joe mentioned, we do believe there is some overlap. The team is working on how we can address and fill those gaps in the marketplace to ensure the customers get those products.

Larry Biegelsen (Senior Medical Technology Analyst)

Thank you.

Operator (participant)

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

Danielle Antalffy (Senior Analyst)

Good morning, guys. Thanks so much for taking the question. Not to be too greedy here, I know we just have updated 2023 guidance and tough to talk about 2024 at this point, given, you know, all the moving parts here. I would love to get some thoughts, maybe at a qualitative or high level, as we look ahead to 2024 in the, you know, RemainCo piece of the business, ex-Renal.

What the key growth drivers will be? Obviously, hopefully, Novum IQ is one of them. Beyond that, Joe or Brian or Clare, if you can talk about sort of, over the next 12 months, what you see as the key growth drivers beyond Novum IQ that we should be focused on here for the business. Thanks so much.

Joe Almeida (Chairman and CEO)

I wanna highlight what we call HST, which is our former called Hillrom business, but HST. I think there is a great opportunity, is still in the Front Line Care. Front Line Care is, is, is really driving high single-digit growth. I think that will continue. And I think the recovery and the and the potential gain of market share in beds is a is, is, is a good possibility for us, looking at the performance of our new bed launch to date. I think another one is Advanced Surgery. We have PERCLOT coming in, the demand is high. The product is superior in side-by-side testing that we've seen to competitors.

I'm not claiming anything on the label, I'm just saying that when we do, it looks like the product has a performance that pleases the customer by the speed and completeness of the hemostasis products. This is the first product that is Baxter's passive hemostat. We don't have a passive hemostat, and we're now constrained just by the capacity of the company to make the products, but we are working with supply chain to get a second supplier, which is gonna come in line hopefully in 2024. The demand is really good, and that's a good driver for it. We have in the pharmaceutical business, we have new launches.

Our new management in pharmaceuticals has really improved our ability to launch products and get the time to peak sales. We have some really good stuff happening, and clearly, we would like to count on Novum. We're gonna do everything we can to get that on the market. As a backup to that, we have a very solid platform with Spectrum that's still taking market share. The syringe pump really makes it easier for us to penetrate hospitals that otherwise were never available to us before.

I think Baxter, all in all, as we execute all those changes, the sale of BPS, then the spin-off of Renal, is to create a company that is smaller, driven by innovation, and the ability to actually impact lives of our patients is what we're targeting for 2024.

Brian Stevens (Interim CFO and Chief Accounting Officer)

Maybe if I could add to that a little bit, Joe. You know, another item that we're really excited about is the recent launch of our Progressa+ ICU bed. We're seeing really good demand from that, even though it's in the early stages. We're also excited about some of the new features that we just came out with for our Centrella bed platform as well. The other item I'd like to highlight that's a big internal focus for us in terms of driving growth going forward, is really the impact of the new operating model that we're transitioning to.

You know, as we've talked about previously, earlier this year, we started the process of shifting from a regional, focused organization to really a vertical-focused organization, where we have leaders of our new segments that are really like mini CEOs that own the entire business from top to bottom, including the supply chain aspect of that. I think as we mentioned before, we're planning to transition to our new segment reporting in the second half of the year. Right now we're actually expecting that that's gonna be coming up this coming quarter, so we're really excited to be able to share some of the financial performance at that cut with all of you at that time.

As part of this transition, our new segment leaders are very much focused on developing portfolios of initiatives, that we're looking to really grow the business going forward.

Danielle Antalffy (Senior Analyst)

Thank you, guys.

Operator (participant)

Your next question comes from the line of Patrick Wood from Morgan Stanley. Your line is open.

Patrick Wood (Managing Director of US Medical Technology Equity Research)

Amazing. Thank you so much for taking the questions. I'm just curious, in Renal, you know, if we make the adjustment obviously in HD for that distribution agreement, how you're seeing the relative performance of PD versus HD, if you're seeing any kind of a shift there, or if you're seeing, you know, comparatively similar trends in patient flow across those two sort of verticals? Very curious there.

Joe Almeida (Chairman and CEO)

Our PD business, with exception of China, which I think we, in the prepared remarks, we spoke about the two things affecting them being the VBP and also the mortality due to COVID. If you isolate that, the rest of the business is starting to recover from the COVID. We're starting to see patient growth, some geographies with mid-single digit growth, some others with low single digits, but coming up from negative growth last year. We're starting to see that going well. We also took other initiatives to augment that business. We see HD as a portfolio rotation for us. We're looking at where to be, how to make that business accretive to Baxter, and we are in full-fledged optimization process.

We have, we're looking at our dialyzer business, we're looking at our HD monitors, and making sure that we are in the right place at the right time, competing the right way. We wanna make sure that that is a supplemental business to Baxter that is profitable and is growing. But we're starting to see with optimism with exception of China, growth and recapture of the PD market. You remember, this is a business that we post-COVID project long-term to be a mid-single digit growth business in terms of patients. We wanna make sure that as the situation stabilizes in China, we are prepared, 100% to continue to grow in that market.

Patrick Wood (Managing Director of US Medical Technology Equity Research)

Amazing. Super helpful. Thank you.

Joe Almeida (Chairman and CEO)

Thank you.

Operator (participant)

Your next question comes from the line of Travis Steed from Bank of America Securities. Your line is open.

Travis Steed (Managing Director of Medical Techology Equity Research)

Hey, thanks for taking the question, and good quarter. I did wanna follow up, Joe, on Novum. It sounds like you have to upgrade the Canada pump first, and that takes a few months, and then after that's finished, then you can work with the FDA? I just wanted to make sure I understand the nuances there from your earlier response.

Joe Almeida (Chairman and CEO)

Yeah, Travis, the pump in Canada is on market. Novum IQ's not approved. To your point is, we had some software updates we're making, we have some available to go through working with Health Canada to make sure they are okay with us moving forward. We also have other changes that we're gonna be making in the next couple of months to make sure that that pump is, is, all the potential upgrades and improvements are in place. As we work with the FDA, our application has those changes factored in. We wanna make sure that we execute them in Canada, and we work with the FDA. I wanna tell you that we don't speak on behalf of the FDA, neither Health Canada.

We work with both of them, trying to, and we will address all those problems, as we're confident that our technology and our platform is solid. We continue to upgrade, like we would have done to any other products, to address any concerns on the market.

Travis Steed (Managing Director of Medical Techology Equity Research)

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

Joe Almeida (Chairman and CEO)

Well, first of all, we have Brian doing a great job here, sitting in for CFO, and as always, a great contributor to Baxter. During this quarter, a tremendous amount of work our teams were able to do to be able to provide you guys with discontinued operations, all the reconciliation. We are in process, continue to interview internal and external candidates, and we will be hopefully in a position in the next 30 to 45, 60 days to make a final call.

Clare Trachtman (VP of Investor Relations)

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

Joe Almeida (Chairman and CEO)

This is not a legacy pump, which is decades old on the market. They had issues to be remediated. This is a brand-new pump, like Clare said. It is a complex technology, and we have the competency in Baxter to address those issues. As I said, I'm very confident in the technology, and we are cautiously optimistic about how we get this approved.

Travis Steed (Managing Director of Medical Techology Equity Research)

Great. Thanks a lot.

Joe Almeida (Chairman and CEO)

Thank you.

Operator (participant)

Your next question comes from a line of Vijay Kumar from Evercore ISI. Your line is open.

Vijay Kumar (Senior Managing Director)

Hi, Joe. Congrats on good print here. Maybe my first question on the product side, Joe. I think you mentioned 30% orders growth. How does it translate to revenue growth for your PSS segment? You know, US pharma up double digits. Are we seeing, you know, pricing being stable in the US at this point in time?

Joe Almeida (Chairman and CEO)

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

Clare Trachtman (VP of Investor Relations)

So.

Joe Almeida (Chairman and CEO)

In this product line.

Clare Trachtman (VP of Investor Relations)

Yeah. Well, here's what I would, let me augment that a little bit. To Joe's point, we did see, you know, around 30% sequential improvement across all of PSS, which obviously is both our furniture plus our Care Communications products. In the third quarter, Hillrom did have their year-end in the third quarter. We do face, obviously, as we continue to kind of anniversary that, we do face a little bit more of a challenging comp from just an overall sales dollar in the third quarter. The order rates are improving, and as we go to the second half, we expect the second half orders to be ahead of what the first half is. We're kind of seeing that continued momentum second half versus the first half of the year.

I think the key is that both on the Progressa+ and the Centrella SLR, we're seeing a lot of positive momentum there, and we're gonna continue to augment that with a lot of the features that we have within the connected care space, for the HST business.

Joe Almeida (Chairman and CEO)

And in terms of pricing, I think you referred to pricing in general, or you're talking about pricing of PSS?

Vijay Kumar (Senior Managing Director)

Sorry, for U.S. pharma pricing.

Joe Almeida (Chairman and CEO)

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

Clare Trachtman (VP of Investor Relations)

You know what I would say to that, Vijay, is within our U.S. injectables business, I mean, this business is really growing, double digits, low, you know, kind of low double digits, really driven on the success of these launches. We have been able to now fully offset that price erosion. That will go on, but we will be offsetting it with our new product launches.

Vijay Kumar (Senior Managing Director)

That's helpful. Maybe one on margins, your back half, 300 basis point step up. How much of that is related to the volume leverage on higher revenues versus your supply chain and cost actions? Those supply chain cost actions, should we assume those are structural and should flow through for next year?

Brian Stevens (Interim CFO and Chief Accounting Officer)

If we're looking at our overall operating margin improvement, you know, I think just sales growth alone is contributing close to 200 basis points of that improvement. I think on the supply chain side, with some of the stabilization of inflation and the continued, savings initiatives, I think we're seeing roughly about 70 basis points of improvement. On the cost savings initiatives that we've been undertaking, the impact for the back half of the year, you know, we're expecting is gonna drive around 80 basis points. Those three items are actually offset by the impact of FX versus where we're at when we gave our prior guidance, which is coming back about 50 basis points.

Vijay Kumar (Senior Managing Director)

Extremely helpful. Thanks, guys.

Clare Trachtman (VP of Investor Relations)

We have time for one more question.

Operator (participant)

Our final question comes from the line of Matt Miksic from Barclays. Your line is open.

Matt Miksic (Equity Research Analyst)

Hey, thanks so much for squeezing me in. I guess, you know, I'd love to ask just a couple of broad questions, if I could. The first, I think the perception may be that, you know, one of your pump competitors got a pump approved. You have not yet got your new pump approved. As, you know, the perception is that this is skewing the sort of the competitive landscape in a way that's maybe disadvantageous to BAX or Baxter in the near term. I know you've just stepped through a little bit of this, but I'd love to get your sense of, you know, having Sigma Spectrum on the market.

you know, and this being your next gen pump, if you could talk a little bit about what the current competitive dynamics look like on the pump front, and what you expect them to look like from now until when you're able to introduce your sort of next gen platform. I had one follow-up, if I could.

Clare Trachtman (VP of Investor Relations)

Yeah. So, I'll let Joe, you know, weigh in on this, Matt. As I just reiterated again, Novum is a brand-new, innovative platform. We also do have Spectrum, Sigma Spectrum, in our version nine, and we've been successfully selling that Spectrum IQ. We are ramping up production of that. To Joe's point, we are going to make it backward-compatible with our gateway, so that it will have all the features and be able to integrate within the hospital EMR, similar to what Novum was going to do. Joe, do you want to?

Joe Almeida (Chairman and CEO)

I think we've said this multiple times, Matt. It is, we have an on-market pump, and we've been converting market share. As a matter of fact, we just converted accounts from a competitor for the reasons of the merits of Spectrum by itself. We do have that opportunity. Do we have greater opportunity with Novum? Of course, we do, because it's a platform that has some safety features and integration that is a great opportunity for customers to have other software that we have come into play.

We're looking forward to that approval, but until then, we continue to do well with the current platform, and it's gonna make that even more friendly by backward integrated into our new gateway, which is also, you know, developed by Baxter for our new platform that makes it easier to integrate between the syringe and the Sigma Spectrum.

Matt Miksic (Equity Research Analyst)

That's super helpful. Just on, on growth. you know, I think we, we understand, you know, the sale of BioPharma and the deleveraging opportunity that that's provided and, you know, change, positive change year to your capital structure. In terms of the Hillrom business and the growth trends, I think, you know, we get the question often, like, what can that business grow? I mean, it looks like it's already kind of accelerated from, you know, maybe down 1% in the first quarter on a combined basis to, like, up 4% or something like that here in the second quarter, if I'm looking at the numbers right.

Is that, you know, are we on our way to is that current growth rate a representative growth rate of, you know, based on, you know, what you would say, what you know about the business now? Do you think there's more room to lift that business into the back half and into 2024? Any color there? I know, sorry, you touched on these topics also during the call. I just wanna be clear about, you know, the growth potential as it as you look at it right now. Thanks.

Clare Trachtman (VP of Investor Relations)

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

Joe Almeida (Chairman and CEO)

Yeah, I think not only the product launches in PSS, but also, some of the success that we have in cardiology, which is smaller still, in our Front Line Care, as well as some other new products that we have in store for 2024. I believe this business is, their growth is above the Baxter weighted average growth rate. That is augmented, it's an augmented growth for us. I'm excited about that. That's the reason why we acquired Hillrom, was to create that differentiation in growth rates, to be able to get to mid-single digits for our businesses. With the portfolio moves we're making, we're gonna get there. Has been a really. Now, last year was all about supply chain, and was a real difficult period for both businesses.

As we see us making significant progress in creating resiliency to the business, I see that PSS with great opportunity. Don't discount our surgical business, our GSS business, which also is a great potential source of growth in the future. We are excited about that business, and we have the potential to transform even further Baxter with even more growth in adjacencies through that business.

Matt Miksic (Equity Research Analyst)

Great. Congrats on the quarter. Thanks.

Joe Almeida (Chairman and CEO)

Thank you.

Operator (participant)

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