Baxter International - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 delivered modest top-line growth and an upside EPS surprise vs company guidance: revenue $2.75B (+1% y/y; +2% cc) and adjusted diluted EPS from continuing ops $0.58 (vs guide $0.50–$0.53) as Novum IQ pumps, PN, Advanced Surgery and Specialty Injectables offset Hurricane Helene headwinds and a Front Line Care goodwill impairment on GAAP results.
• FY 2025 outlook reaffirms a return to profitable growth: reported sales +5% to +6% (operational +4% to +5%), adjusted EPS $2.45–$2.55; Q1 2025 guide calls for reported sales +3% to +4% and adjusted EPS $0.47–$0.50.
• Key operational drivers: pump platform momentum (Novum IQ) with share gains; high-single-digit growth in Pharmaceuticals (double-digit Specialty Injectables and strong Drug Compounding); U.S. CCS strength; hurricane impact smaller than feared; favorable tax rate.
• Strategic/capital catalysts: Kidney Care sale closed (net after-tax ~$3.4B; above prior view), proceeds earmarked for deleveraging toward ~3.0x net leverage by end-2025; CEO transition; quarterly dividend declared at $0.17 per share.

What Went Well and What Went Wrong

• What Went Well

  • “Our 2024 performance and related strategic milestones reflect Baxter’s growing momentum…”; Q4 and FY exceeded guidance, Kidney Care sale complete, positioning for profitable growth.
  • Novum IQ infusion pump rollout driving strong infusion systems growth and share gains; Advanced Surgery and PN also strong; Pharmaceuticals grew high-single digits with double-digit Specialty Injectables; Drug Compounding solid.
  • North Cove (IV solutions) production restored to pre-hurricane levels faster than expected; hurricane headwind smaller than feared aiding outperformance.

• What Went Wrong

  • GAAP results hit by $425M goodwill impairment in Front Line Care; Q4 GAAP diluted EPS from continuing ops was ($0.95) amid multiple special items ($908M after-tax) including Helene costs and amortization.
  • Healthcare Systems & Technologies declined low-single digits; Front Line Care down 8% on difficult comps, select product/market exits, supply constraints (~$15M impact) and international softness (China/France).
  • Hurricane Helene still meaningful: ~-$110M revenue and ~$0.10 EPS headwind in Q4; adjusted gross margin y/y slightly lower as Helene and FX partially offset mix and program benefits.

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and welcome to Baxter International's Fourth Quarter 2024 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 the star one on your touch-tone phone. If anyone should require assistance during the conference, please press star then zero on your touch-tone 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, Senior Vice President, Chief Investor Relations Officer at Baxter International. Ms. Trachtman, you may begin.

Clare Trachtman (SVP and Chief Investor Relations Officer)

Good morning, and welcome to our Fourth Quarter 2024 Earnings Conference Call. Joining me today are Brent Shafer, Baxter's Chair and Interim Chief Executive Officer, Joel Grade, Baxter's Executive Vice President and Chief Financial Officer, and Heather Knight, Baxter's newly appointed Chief Operating Officer. On the call this morning, we will be discussing Baxter's Fourth Quarter and full year 2024 results, along with our financial outlook for the first quarter and full year 2025.

With that, let me start our prepared remarks by reminding everyone that this presentation, including comments regarding our financial outlook for the first quarter and full year 2025, the anticipated impact of our strategic actions, the potential impact of various regulatory and operational matters, and the macroeconomic environment on our results of operations, contains forward-looking statements that involve risks and uncertainties, and of course, our actual results could differ materially from our current expectations.

Please refer to today's press release and our SEC filings for more detail concerning factors that could cause actual results to differ materially. In addition, on today's call, non-GAAP financial measures will be used to help investors understand Baxter's ongoing business performance. A reconciliation of certain non-GAAP financial measures being discussed today to the comparable GAAP financial measures is included in the accompanying investor presentation and available in our earnings release issued this morning, which are both available on our website.

As a reminder, continuing operations excludes Baxter's Kidney Care business and Baxter's former BioPharma Solutions business, which are both reported as discontinued operations. During the Q&A session this morning, Brent, Heather, Joel, and I will be available to address questions. Questions on our results and outlook will be addressed by me and Joel. Now I'd like to turn the call over to Brent. Brent?

Brent Shafer (Chair and Interim CEO)

Thank you, Clare, and good morning, everyone. I appreciate you joining us. As you know, I've recently stepped into the role of Chair and Interim CEO at Baxter. Joe Almeida led the business through a period of significant evolution over his nine-year tenure, and we're sincerely grateful for his dedication to the company. One of the board's top priorities, of course, is the identification of a permanent CEO. The board is actively engaged in the search process with the support of a leading firm, evaluating both internal and external candidates. We're moving expeditiously, but most importantly, we're taking a rigorous approach to ensure we identify the right candidate to lead Baxter into the future. During the transition period, I'm committed to helping ensure we remain focused on a crisp execution of our priorities and delivering strong, consistent results.

I'm pleased to be working with the entire leadership team on these shared goals. We're continuing to move the company forward into a new era, and as recently announced, we closed the sale of Vantive on January 31, 2025. This significant milestone was the final step of three strategic actions outlined in January of 2023 to transform the business. You'll recall these actions included the implementation of a new verticalized operating model. As a director and in my role as Interim CEO, I can confirm that this segment-driven approach has created increased focus and execution-related benefits, bringing greater clarity and agility to how we pursue opportunities globally. And as part of our transformation efforts, we completed the divestiture of Baxter's non-core BioPharma Solutions business in 2023.

Since joining Baxter's board in 2022, I've observed and supported these shifts in the company's strategic direction, and I'm extremely proud of the hard work and dedication of our teams to reach this stage. These actions have positioned Baxter to accelerate innovation for patients and customers and to drive profitable growth for our shareholders. Later in this call, Joel will provide details on our quarterly and full year performance, as well as our outlook for 2025.

As you have seen in this morning's release, we finished 2024 on a high note, meeting our fourth quarter guidance for continuing operations on both the top and bottom lines, and we're starting 2025 building on this positive momentum. During this interim period, I'll be working closely with Heather, Joel, and the rest of Baxter's strong leadership team to ensure we maintain that momentum.

I've been very impressed by what I've experienced in the last few weeks: an engaged, talented, highly motivated team that is squarely focused on Baxter's mission to save and sustain lives, a truly collaborative spirit, and an intense focus on delivering on our commitments. This includes initiatives focused on innovation and profitable growth to enhance performance, deliver increased value, and to better serve the needs of our patients and customers. To support these efforts, and as we've shared earlier this month, we've instituted a new Chief Operating Officer position as a next step in leveraging the potential of our vertical operating model. We're fortunate to have Heather Knight step into this role as COO.

Heather brings extensive experience and a proven track record to this position after a successful tenure as head of our largest segment, medical products and therapies, among other key leadership roles at Baxter and prior large healthcare companies. She'll be leading day-to-day operations across our three segments, encompassing global commercial operations, R&D, supply chain, and medical and regulatory affairs. Her leadership will be critical as we navigate the next phase of growth. Now, I'd like to turn it over to Heather to share her perspectives. Heather?

Heather Knight (COO)

Thank you, Brent, and good morning, everyone. I'm very pleased to be joining today's call. I look forward to building upon what we've achieved to date and helping to launch a new chapter of accelerated performance for the company. As Brent mentioned, over the last two years, I've had the privilege of leading Medical Products and Therapies, or MPT, which is Baxter's largest segment with over $5 billion in sales and operations spanning the globe. During this time, I've spearheaded numerous vital initiatives with the support of my talented colleagues, including the recent successful launch of our Novum IQ infusion pump platform in the United States. As the leader of MPT, I also helped oversee the North Cove recovery efforts following Hurricane Helene.

Given the essential nature of the products that are manufactured in North Cove, we spared no expense in our efforts to help address product supply for patients and customers, including importing products from Baxter sites globally. Thanks to the incredible dedication and resilience of the North Cove and broader Baxter teams, we were able to restart production on eight of the site's 10 manufacturing lines in the fourth quarter. Our final two manufacturing lines came online in January, and I'm very proud to report that we are now producing at pre-hurricane levels. This is just another critical milestone in our recovery as we continue to work to replenish inventory and support our customers' and patients' needs.

Additionally, I've served as the lead interface to many of our key customers and have been deeply involved in successfully renegotiating the recent renewals of select U.S. GPO contracts, helping to ensure we continue to meet our customers' needs while also delivering positive movement and pricing. As COO, I'm excited to build upon my deep knowledge and understanding of our markets and operations to enhance collaboration across our segments and create a more holistic Baxter experience for our customers and the patients they serve. I'm confident that by harnessing our combined strengths and expertise, we can unlock significant value and accelerate our efforts to drive customer-inspired innovation for all of our stakeholders. I look forward to partnering with Brent, Joel, and the entire Baxter team as we work to achieve our strategic objectives and deliver exceptional results.

I'll now turn it over to Joel to discuss our financial performance in more detail. Joel?

Joel Grade (VP and CFO)

Thanks, Heather, and good morning, everyone. I'm happy to be joining the call this morning to provide some additional details on Baxter's fourth quarter and full year 2024 financial performance, as well as commentary on our financial outlook for 2025. As Brent mentioned, we're very pleased with our fourth quarter results and how we ended the year. Our results came in ahead of our prior guidance on both the top and bottom lines, driven by better-than-expected sales and solid operational performance.

Fourth quarter 2024 global sales from continuing operations of $2.75 billion increased 1% on a reported basis and 2% on a constant currency basis, and compared favorably to our previous guidance, which called for sales to decline in low single digits. Our performance in the quarter was broad-based and reflected positive sales across most of our product divisions.

As expected, during the fourth quarter, Hurricane Helene negatively impacted our sales by approximately $110 million, or approximately 400 basis points, although the overall magnitude was less than the previously anticipated, approximately $150 million, given the company's swift recovery efforts. For the full year, Baxter reported sales from continuing operations at $10.6 billion, increasing 3% on both the reported and constant currency basis. Hurricane Helene negatively impacted growth for the full year by just over 100 basis points. On the bottom line, fourth quarter adjusted earnings per share from continuing operations were $0.58 and came in ahead of our prior guidance of $0.50-$0.53 per share, driven by the favorable top-line results and solid operational performance. In addition, our tax rate came in favorable to our expectations, which offset a negative impact from foreign exchange.

On a year-over-year basis, adjusted earnings per share from continuing operations declined 11% in the quarter, primarily due to the negative impact of Hurricane Helene on our results. For the full year, adjusted earnings per share from continuing operations totaled $1.89 per share and increased 11% over the prior year, reflecting solid underlying operational performance and a benefit from non-operational items, including lower interest expense and tax rate. Now, I'll walk through our results by reportable segments. Commentary regarding sales growth will reflect growth at constant currency rates. Sales on our Medical Products and Therapies, or MPT segment, were $1.3 billion, increasing 1% in the quarter and coming in favorable to expectations. Full year 2024 sales totaled $5.2 billion, advancing 5% and ahead of the prior guidance of 2%-3% growth.

Adjusting for the impact of Hurricane Helene, MPT sales growth in the quarter would have been approximately 9% and approximately 7% for the full year. Within MPT, fourth quarter sales from our Infusion Therapies and Technologies division totaled $1.0 billion and decreased 1%. Sales in the quarter benefited from significant growth for our U.S. infusion systems portfolio as the rollout of our Novum IQ pump platform continues to build momentum, with orders coming in from both new and existing customers. Nutrition sales in the quarter advanced double digits globally, reflecting strength in the U.S. as we continue to build out our alternate site portfolio. Finally, as anticipated, IV solutions declined in the quarter due to the impact of Hurricane Helene. Q4 sales in Advanced Surgery totaled $292 million and grew 6% globally.

Results in the quarter reflected solid demand and positive pricing for our portfolio of hemostats and sealants across the globe. MPT's adjusted operating margin for the quarter was 16.5%, coming in better than expected due to the sales outperformance. Margins declined year over year, primarily reflecting the impact of the hurricane. In Healthcare Systems and Technologies, or HST, sales in the quarter were in line with expectations and totaled $784 million, decreasing 1%. Full year 2024 sales totaled $3 billion and declined 2%. Within the HST segment, sales in the quarter for our Care and Connectivity Solutions, or CCS division, were $504 million, advancing 3% globally.

Performance in the quarter was driven by 9% growth in the U.S. for CCS due to continued momentum in our patient support systems, or PSS business, which once again delivered strong growth and reflected a benefit from competitive wins in both our med-surg and ICU product lines, as well as upgrades for existing customers. Total U.S. capital orders for CCS rose 9% in the quarter and increased 15% for the full year. We are exiting the year with a healthy backlog and strong funnel and look to build upon this momentum over the course of 2025.

Performance for this division was partially offset by weaker sales outside the U.S., reflecting a difficult comparison to the prior year period, which saw growth of 12% as well as softness in both China and France in the current year. Frontline Care sales in the quarter were $280 million and declined 8%.

Consistent with commentary over the course of this year, performance in the quarter was impacted by the backlog reductions, which positively contributed to sales in the prior year period. Results in the quarter also reflected the impact of certain market exits and supply constraints, which collectively impacted sales by approximately $15 million in the quarter. We expect the supply constraints that impacted the fourth quarter to be largely resolved for most products in the first quarter of 2025.

We believe that performance for this division will also benefit from stabilization in the primary care market over the course of 2025, as well as the launch of several new products in the second half of this year that are expected to contribute to positive performance for FLC in 2025 and beyond. HST fourth quarter adjusted operating margins of 18.5% increased sequentially, continuing the trend of sequential margin improvements.

Margins declined year over year, primarily reflecting higher investments. Moving on to our Pharmaceuticals segment, sales in the quarter came in favorable to expectations and totaled $643 million, increasing 8%. Full year 2024 sales were $2.4 billion, advancing 7%. Fourth quarter sales within Injectables and Anesthesia of $383 million grew 8%. Performance in the quarter reflected mid-teens growth in our Specialty Injectables portfolio and anticipated rebound from the third quarter, which was impacted by the timing of some orders. Growth is driven by strong demand for U.S. premixed products and the continued rollout of new products, as well as the benefit from targeted sales and marketing initiatives that have been implemented.

As expected, lower sales of Inhaled Anesthesia, which declined mid-single digits, slightly tempered overall performance for the Injectables and Anesthesia. Within Drug Compounding, continued demand for services resulted in strong growth of 9% for the quarter.

Pharmaceuticals' adjusted operating margins were 15.9% for the quarter, increasing 600 basis points sequentially. Adjusted operating margins decreased 370 basis points compared to the prior year, reflecting the impact from the MSA entered into following the BPS sale and increased operating expenses to support the new and upcoming launches. The Pharmaceuticals team remains focused on expanding margins to improve mixed, stabilizing the anesthesia business, driving cost improvements, compounding business, and executing on margin improvement initiatives in integrated supply chain.

Other sales, which represent sales not allocated to a segment and primarily include sales of products and services provided directly through certain of our manufacturing facilities, were $12 million in the quarter and totaled $67 million for full year 2024. Before moving on to the rest of the P&L results, I wanted to make some comments regarding our continuing operations reporting going forward.

As mentioned last quarter, due to the change of moving kidney care business results to discontinued operations, corporate costs that had previously been allocated to the kidney care segment that would not convey with the kidney care business in the sale are now reported in unallocated corporate costs. As we previously commented, we plan to offset a large portion of these expenses in 2025 through income to be received from Vantive under the transition services agreements, or TSAs, as well as cost containment initiatives the company is already in the process of undertaking.

Our goal remains to fully offset the impact of these stranded costs and the loss of TSA income by the end of 2027. Fourth quarter adjusted gross margin from continuing operations was 44.5%, coming in favorable to expectations and reflecting a sequential improvement of 80 basis points.

On a year-over-year basis, adjusted gross margins declined slightly by 10 basis points, driven primarily by the impact from Hurricane Helene, higher spend within selected manufacturing plants to support product growth, as well as the impact of the manufacturing supply agreements following the sale of VPS. Positive contributors to margin in the quarter were ongoing benefits from our margin improvement programs within our integrated supply chain network, as well as favorable product mix and pricing initiatives in select markets. Adjusted gross margin from continuing operations for the year totaled 43.5%. Fourth quarter adjusted SG&A from continuing operations totaled $679 million, or 24.7% as a percentage of sales, an increase of 190 basis points from the prior year period as we continued to make select investments to support our growth objectives and new product launches.

This increase also included approximately $30 million of select discrete items that are not expected to repeat, including increased employee healthcare expenses due to high-cost medical claims incurred during the quarter, fees associated with our tax optimization program, and phasing of stock compensation expenses. These higher expenses were offset by benefits from lower stranded costs. Full year 2024 adjusted SG&A totaled $2.66 billion and represented 25% of sales. Adjusted R&D spending from continuing operations in the quarter totaled $131 million and represented 4.8% as a percentage of sales, an increase of 10 basis points compared to the prior year period, and reflects our continued investments in advancing new products across the portfolio and bringing innovation to patients across our segments. 2024 full year adjusted R&D totaled $510 million, or 4.8% as a percent of sales.

These factors resulted in an adjusted operating margin of 15.2% on a continuing operations basis, coming in favorable to expectations and improving 70 basis points sequentially. Compared to the prior year, adjusted operating margins from continuing operations decreased 190 basis points, driven by the factors I just discussed, as well as the unfavorable impact from foreign exchange. Full year 2024 adjusted operating margin from continuing operations was approximately $1.5 billion, or 13.9% of sales.

Net interest expense from continuing operations totaled $90 million in the quarter, an increase of $18 million versus the prior year period, reflecting lower interest income. For the full year, net interest expense totaled $341 million, decreasing $98 million, and reflecting the benefit of our debt repayment initiatives. Adjusted other non-operating income totaled $4 million in the quarter compared to income of $10 million in the prior year period.

For the full year, adjusted other non-operating income totaled $38 million, compared to $5 million of income in the prior year period, primarily reflecting lower foreign exchange losses. The continuing operations adjusted tax rate for the quarter was 10.8% and came in lower than expected. For the full year, the continuing operations tax rate was 17.5%. Both the full year and fourth quarter tax rates reflect the benefit of initiatives we have undertaken to optimize our global tax rate. As previously mentioned, adjusted earnings from continuing operations were $0.58 per share for the quarter and decreased 11% versus the prior year. Positive contributions to earnings included improved commercial performance for new product launches and positive pricing.

In the quarter, these drivers were offset by the negative impact of Hurricane Helene, which we estimate impacted our results by approximately $0.10 per share and an unfavorable impact from foreign exchange and interest expense of approximately $0.06 per share. Full year 2024 adjusted earnings per share from continuing operations totaled $1.89 per share, an increase of 11% as compared to the prior year period. Let me conclude my remarks by discussing our outlook for the full year 2025 and the first quarter of 2025, including some key assumptions underpinning the guidance. All guidance provided excludes the impact of kidney care discontinued operations. For full year 2025, Baxter expects total sales growth of 5%-6% on a reported basis.

This guidance includes an approximate 200 basis points negative impact from foreign exchange based on current rates, as well as approximately $345 million of anticipated MSA revenues from Vantive. Operationally, Baxter expects sales to grow 4% to 5%. This guidance excludes the impact of foreign exchange, MSA revenues, and the planned exit of IV solutions from China as the company continues to focus on driving profitable growth. The negative impact from exiting the IV solutions business in China is approximately 50 basis points to growth. Operational sales guidance for the full year by reportable segment is as follows. For MPT, we expect sales to increase approximately 5%, driven by continued momentum with our Novum LVP launch, the benefit of positive pricing in the U.S., and other underlying business momentum.

This guidance excludes the impact of exiting the IV solutions market in China, which is estimated to impact sales growth by 120 basis points. Sales on our HST segment are expected to increase approximately 3% and is expected to be balanced across both CCS and FLC. We expect pharmaceuticals to increase approximately 5%-6%, driven by mid-single digit growth in both specialty injectables and drug compounding. Now turning to our outlook for other P&L line items. As previously shared, we expect full year adjusted operating margin from continuing operations to total approximately 16.5% and includes TSA income of approximately $125 million.

We expect our non-operating expenses, which include net interest expense and other income and expense, to total between $250-$270 million. On a continuing operations basis, we anticipate a full year tax rate of approximately 19.5%.

We expect our diluted shares count to average approximately 515 million shares for the year, which does not contemplate any share repurchases. Based on all these factors, we now anticipate full year adjusted earnings on a continuing operations basis of $2.45-$2.55 per diluted share. This outlook includes an estimated negative impact of approximately $0.03 per share from foreign exchange based on current rates. A couple of other quick comments I'd like to make regarding our outlook for 2025. First, I'd point out that our current guidance includes a slight impact from tariffs enacted in China, but does not reflect any impact from potential tariffs that are contemplated for Mexico and Canada, given the fluidity of the situation and potential for further delays to implementation and possible exemptions.

Second, in 2024, costs that had previously been allocated to kidney care that did not convey with the discontinued operations presentation were reported in unallocated corporate costs. Starting in 2025, these costs will be allocated to the three segments along with related TSA income. Specific to the first quarter of 2025, we expect continuing operations sales growth of approximately 3%-4% on a reported basis and approximately 4% on an operational basis. For the first quarter, foreign exchange is expected to negatively impact the top line by more than 200 basis points, and MSA revenues are expected to total approximately $60 million.

The China IV solutions exit is expected to impact top line growth by approximately 60 basis points in the first quarter. On a continuing operations basis, we expect adjusted earnings per share of $0.47-$0.50 per share.

This guidance reflects the impact of closing Vantive on January 31st, which negatively impacted earnings per share by approximately $0.04 in the quarter as compared to the closing to sale on December 31st, had we been able to close on that date. With that, we can now open up the call for Q&A.

Operator (participant)

Thank you. We will now begin our question and answer session. If you have dialed in and would like to ask a question, please press star followed by the number one on your telephone keypad. If you would like to withdraw your question, simply press star one again. If you are called upon to ask a question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question.

So that we may be respectful of everyone's time, please limit yourselves 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 the 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. Thank you. Your first question comes from the line of Robbie Marcus with J.P. Morgan. Please go ahead.

Robbie Marcus (Analyst)

Oh, great. Good morning and thank you for taking the questions. Two from me. First, Joel, how should we think about, with all the moving pieces on the top and bottom line, the cadence for 2025? Sure.

Joel Grade (VP and CFO)

Good morning, Robbie. Thanks for the question. So, I'll start on the sales line. And as you know, we normally have some ramp of our business over the course of the year, but there's a couple of things I'd call out this year specifically. First and foremost is, I'd say, the first quarter, we're taking a somewhat more conservative approach in the sense that we're still recovering from the hurricane. And so we've given ourselves a little bit, I'd say, conservatism to see how that all plays out. And so again, I'd say despite what should be a relatively easier comp with HST, certainly there's going to be an element of that that's built into the first quarter from a conservatism standpoint.

I would say the other thing I would call out over the course of the year is that in the fourth quarter, we do anticipate that being a larger quarter in the sense that obviously we're comparing up against the impact of Helene. So those are a couple of things that I'd probably call out from a cadence perspective on the top. From an earnings perspective of OI, I think the main thing I'd call out there is that we do anticipate a continued ramp over the course of the year, mostly driven by the impact of our stranded cost work that will be kicking in and continued improvements over the course of the year. And so obviously that's work we've already started to do, but obviously that will continue to build over the course of the year.

And so therefore, you can expect some ramp from an earnings perspective for that reason.

Robbie Marcus (Analyst)

Great. Maybe a quick follow-up. The HST business, especially Frontline Care, was still negative growth this quarter. What's the latest you're seeing there, the confidence you could turn it around in 2025 and your level of visibility to it? Thanks.

Joel Grade (VP and CFO)

Yeah. So, I'd say a couple of things there. I mean, first of all, we are anticipating a stabilization of the Frontline Care markets, and we certainly have seen some of that and are starting to see that even as we head into the first quarter. So I think that obviously had a substantial decline in 2024. And so from that perspective, I think the stabilization of that market is an important piece of this. Secondly, as you know, we do anniversary some difficult comps over the course of the year.

For example, things like some of the government orders, some of the things that were, again, some of the stimulus packages, some of the spending things in the backlog we're up against in 2024 versus 2023. We don't have those headwinds to the extent that we did, obviously, as we head into 2025. So I think that's another important piece of this. And then I think some of the things that we called out in the prepared remarks around some of the things of supply constraints, I think that we're looking to resolve that, I think, by Q1 of this year. And so I think, generally speaking, some of the impacts that we had last year, we won't be up against in the same way this year.

In addition to that, in a little bit of a longer-term perspective, we do have some interesting new product launches that are coming out with that will impact us certainly more later in the year than 2026. But that's the reasons we feel confident in that. I know you asked about FLC, but just from the perspective of CCS as well, one of the other differences this year versus last year was, as you recall, we headed into last year with an order book that actually had quite a bit of softness in it and had an impact in the early part of the year last year. As we've talked about in the second half of this year, our order book in CCS has remained quite strong, particularly in PSS US.

And so we head into this year with certainly a lot better momentum in that business as well. So I think the combination of those things, you, Robbie, give us a perspective on why we think there's a good opportunity for some recovery this year in HST overall.

Robbie Marcus (Analyst)

Appreciate it. Thanks a lot.

Joel Grade (VP and CFO)

Yep. You got it.

Operator (participant)

Your next question comes from the line of David Roman with Goldman Sachs. Please go ahead.

David Roman (Managing Director)

Thank you. Good morning, everybody. Heather, congratulations on the new role. I'm looking forward to working with you in this capacity. And Clare, thank you and the finance team for the extensive financial information here. Super helpful as we look at the company post-Vantive.

I guess my first question, the past several years for Baxter have been characterized by exogenous events like Hurricane Helene, elevated inflationary pressures, the transition with the Hillrom deal, and the strategic actions you've taken with BPS and Vantive. Can you help us think about the direction of the company from here and how you're thinking about strategic priorities? And maybe at the same time, give us a flavor for how that fits into the profiling characteristics as you go through the CEO search.

Joel Grade (VP and CFO)

[crosstalk]. I'll start and then Brent can add anything if he'd like to on the second piece of that. And obviously, David, you're right. There certainly has been a lot going on here at Baxter. But what I would say, first of all, this company has done an amazing job of working through these transformational efforts here over the last couple of years.

It really sets us up in a good place for this company moving forward. So how do I think about priorities for the company? Again, certainly we'll roll more on this at a capital markets day sometime after a new CEO has been named. I would say it starts with customer-inspired innovation. These are things that we, as a company, want to make sure that we are driving innovative products and opportunities, obviously inspired again by our customers. We're certainly going to have a focus on targeted markets. I would say it's one of the kind of grow with the growers. How do we find those opportunities where we can actually invest our capital in places that's ultimately going to drive growth for the organization?

I'd say the third thing really I would think about it is how do we optimize the structure of our company? Obviously, with the sale of the kidney business, optimizing both our cost structure from a standard strictly cost perspective, but also optimizing our supply chain and some of the things that allow us to take advantage of some of the, I'll call it, more simple supply chain opportunities without having to have our home deliveries of the kidney business. So that's the third thing. I'd say fourth is really around this concept of commercial excellence and how do we drive consistent execution as a company. That is, again, a key focus of ours.

The last I'd say is really around disciplined capital allocation, those things that allow us to both focus on driving growth both organically and, again, in a fold-in, tuck-in way inorganically, but then also balanced with returning value to shareholders. And so I would call those things really out as how to think about our company moving forward. And again, I'll turn it over to Brent in terms of just how does that really fit into the process of the CEO search. Brent?

Brent Shafer (Chair and Interim CEO)

I'd just add, in this transition period, certainly, I'm looking for stability, predictable, consistent, strong results. And Joel, I give tremendous credit to this organization for all the things they have worked through, many of them very complex projects, time-consuming, etc.

So directionally, starting to move the organization to more of an emphasis on growth, both through innovation and through commercial execution, is in the short-term moves we can make that accelerate progress in the company. And as far as CEO search and how we're looking at that at the board level, that work is already underway. And as you can imagine, there's a pretty good profile of Baxter, Baxter's portfolio, where we are at this point in time. So the experience that we're looking for would be appropriate with the company's situation and opportunities in front of us. So the candidates need to have that experience and a vision that can lead the company forward to its next chapter.

Having been here and now being on the board and just working with this management team, I just think there is phenomenal opportunity here because so much heavy lifting has been done over the last few years to streamline and to put this new vertical organization in place, which I think is a real winner, honestly. It's a great opportunity.

David Roman (Managing Director)

Thank you. Maybe just a quick follow-up on the financial side. Joel, can you walk us through the post-Vantive sale capital structure of the company and maybe update us on target leverage ratios and the timeframe to achieve that?

Joel Grade (VP and CFO)

Yeah, absolutely. Maybe I'll start with the leverage ratio. Certainly, what we've talked about, we're continuing to be committed to is a target leverage ratio around three times net debt to EBITDA.

I think that is a level that gives us, again, this opportunity to both balance strategic investments in the company and as well, again, return value to shareholders in a way that I think balances out our capital structure. We anticipate being able to achieve that target leverage by the end of 2025. We'll certainly have it sometime in the later part of the second half of the year. Feel good about that. Obviously, since the deal closed with Vantive, we've paid down nearly $3 billion of debt. The first part of it was taking out our Delayed Draw Term Loan that we had taken out earlier in 2024. And then we also paid off a portion of about $1 billion of a 2026 term loan that was actually our highest coupon debt.

So I guess I would say between that work and our continued efforts in terms of driving free cash flow on the organization, I feel comfortable with the fact that we're heading towards that target. That'll allow us then, again, really to adjust our capital allocation priorities from what's been mostly paying down debt to those areas that would allow us to get to invest in, get continued investments in driving organic growth, continued opportunities for fold-in, tuck-in opportunities, if that makes sense. And the opportunity to restart a buyback program. Certainly, initially, the offset option dilution, and then I would say opportunistically from there.

David Roman (Managing Director)

Terrific. Thanks so much.

Joel Grade (VP and CFO)

Thanks, David.

Operator (participant)

Your next question comes from the line of Matt Miksic with Barclays. Please go ahead.

Matt Miksic (Equity Researh Analyst)

Great. Thanks so much for taking the questions. Congrats on a nice end to this busy, busy year.

So I wanted to follow up on some of the comments you've made on new product investments and product pipeline. If you could talk a little bit about which business lines, those which you'd highlight, and then maybe timing as to when we might start to see some of the benefits of these investments, then I have one follow-up.

Joel Grade (VP and CFO)

Sure. So really, let me start with the fact that it's really across our portfolio where we actually have, again, really some innovation happening. And again, certainly, I would start with Heather's business at MPT. Obviously, the Novum pump has been a resounding success. It's a differentiated product that, again, has gotten a great customer response. The launch has gone extremely well. Obviously, we got a partial year of that growth last year in 2024. We'll have a full year of that growth heading forward here in 2025.

So certainly, Novum is obviously a huge key part of our innovation and, again, really a great success story. Certainly, in pharma, one of the things that you've heard from us talk about is our need and our opportunity to continue to accelerate with new product launches in pharma. This past year, we've launched nearly 10, and we anticipate another double-digit year heading into 2025. That is something you should expect from us to continue to do.

And while there's not necessarily one large molecule that you can tie something to, that level of activity is something that we are committed to and have a great pipeline of opportunities ahead of us. I would tell you that the effect of that, you've seen the growth we've had in our pharma business. And so, you're seeing the impact of some of that that's already happened.

And we anticipate, as we head into next year, again, another solid year from pharma in terms of their innovation as well. From an HST perspective.

Matt Miksic (Equity Researh Analyst)

Great. Yeah. That's super helpful. The one other comment I wanted to make as maybe a follow-up on Robbie's on HST is just the environment for sort of capital and some of the patient support devices and other things that you're selling, fleets of beds, etc., that you're selling into hospitals. Just maybe a general comment on that environment, demand cycles, sector trends, anything that can help us gauge where that business is going. Thanks so much.

Yeah, absolutely. Thanks for the question. Yeah. So I would say, generally speaking, the capital environment is quite good.

Joel Grade (VP and CFO)

I think as we've talked about this year, our capital orders, particularly in PSS in the US, especially the second half of the year, have actually been very consistent. And year over year, we've had about a 15% growth in those orders, which obviously, there's a timing element in terms of when the orders turn into cash or turn into a sale. But we certainly head into this next year with some good momentum, and we expect to continue to build on that momentum as we head into 2025. So, I would say, generally speaking, the capital environment is quite good, both from the, I'd say, the patient monitoring devices as well as from the bed's perspective. Obviously, we've had continued success with our Progressive Plus model as well. So, I think overall, the environment is healthy.

We're encouraged by some of the competitive wins that we've had in those areas. And as I said, we're anticipating some new products coming out that will benefit us as we get particularly in that area as we head into 2026.

Brent Shafer (Chair and Interim CEO)

And maybe, Joel, this is Brent just add a comment here. I believe, from what I've seen, there's been a significant improvement in the commercial organization in the U.S., particularly in those categories. And so I think we're seeing the benefit of upgrades made in that area and real rigor around the commercial processes there. So a credit to those teams.

Matt Miksic (Equity Researh Analyst)

Excellent. I appreciate the color.

Brent Shafer (Chair and Interim CEO)

You bet.

Operator (participant)

Your next question comes from the line of Vijay Kumar with Evercore ISI. Please go ahead.

Vijay Kumar (Equity Research Analyst)

Hi guys. Good morning. And thank you for taking my question. Joel, maybe my first question was on margins here.

I know the optics, these are apples to oranges comparison rate, but the year on year, it does look margins are up 250 basis points. If you can just break that down, right? What is TSA? How much of this was stranded costs, which were there in fiscal 2024 and that's going away? What is pricing elements here? And did the China IV fluid exit? Is that a headwind or a tailwind to margins?

Joel Grade (VP and CFO)

Okay. Yeah. Thanks for the question, DJ. Let me start with the, I guess, I think the easiest way to bridge our what ended the year at our 13.9% to our target that we've talked about and guided to of 16.5%.

I think the way to think about that is that if you take the 13.9 and you add about 40 basis points for the 2024 impact of Helene and then you add about 220 basis points of what would be the stranded cost impact, and then you take about 100 basis points of what I'm going to call operational improvements as we head into 2025, those are things like pricing, particularly in the U.S. in our MPT business. Those are things like product mix. One of the things that we talked about is the improvement of our injectables portfolio, the higher growth in our advanced surgery, the improvement in HST. All those are mixed elements that add to our positive there. We talked about some of the leverage that we get from volume growth.

And so I think, and again, obviously, some of the things we talked about, new product launches, that's where you get that 100 points of benefit. And obviously, we're reinvesting some of that, but that's a key element of it. And then there's two elements of the stranded cost and the MSAs that are the opposite direction. And so there's 40 basis points, I'll call the net impact of stranded costs that hasn't yet been addressed in 2025, and about a 60-basis point impact of dilution from MSA revenues that are obviously generating a lower margin, low single-digit margin from a gross profit perspective. So that really is the bridge. And so that takes you from the 13.9 to the 16.5. So hopefully, that gives you some perspective on that. Can you repeat your second question?

Vijay Kumar (Equity Research Analyst)

No, that was extremely helpful, Joel.

My second one was on if I look at the performance in the quarter, it looks like the beat was this was just more than the headwinds from Hurricane Helene coming in slightly better than expectations, right? Can you quantify what the headwind from Helene was in the quarter and what drove the beat ex the hurricane impact? It looks like pumps was very strong. So maybe some commentary around pump performance.

Joel Grade (VP and CFO)

Yeah. Well, I'll start with the quarter, but then I'll pass it over to Heather to talk a little bit about the performance of the IV and pumps in the quarter. So obviously, the headwinds from Helene, the talk was about 100 basis points in the quarter.

Heather Knight (COO)

Yeah. So, $110 million on the top line and $0.10 on the bottom line. Yeah.

Joel Grade (VP and CFO)

But obviously, the great news on that is that we actually overperformed in terms of the recovery time, in terms of offsetting some of that. So I don't know, maybe Heather, I'll give you over to you to talk a little bit about some of that.

Heather Knight (COO)

Sure. Hi, Vijay. Good morning. Nice to hear from you. So, we did better in Q4 with the swift recovery of our North Cove site, thanks to the great work of our team. So about $45 million better on IV solutions as a result of the swift recovery that we had out of that location. So, we did see strengths across our infusion therapies business and the infusion pump platform in particular in the fourth quarter. So, I'll say we're very happy with the launch of Novum IQ and where we are. The teams are doing a great job driving this new platform.

If you recall, Baxter placed a pretty big bet to internally develop a brand new-to-market and novel infusion pump platform, both with the hardware, software, and digital platform, and we're seeing it pay off, so our infusion business grew 50% last year in 2024, and we're expecting another great year this year in 2025, and it's not only important because we get the revenue from the hardware and software, but also because we get to pull through very consistent revenue over the life of that pump, so share capture, competitive gains are really important, and customer satisfaction right now is very high, both on the implementation of the pump as well as the EMR integration with the new platform, and this was developed in collaboration with our customers, so again, we're starting to see the benefit of that.

We took multiple points of market share last year in 2024, and we're expecting to see more of the same more competitive gains in 2025. And then we have some new complementary digital suites that are now launching that will be a great complement to this launch mid-year in 2024 that we released. So I'll tell you, I'm pretty excited about where we are in this new chapter, the new pace, momentum that we're building around the Novum platform. And IVs are stable. We've gone through the GPO re-sign and are in line with our expectations, if not slightly better than we expected. So we're expecting a great rebound in 2025 and certainly really appreciate our customer support during the recovery of Hurricane Helene. And hats off to the Baxter team for the fast recovery. But thanks for the question today.

Yeah. This is Brent.

Brent Shafer (Chair and Interim CEO)

[audio distortion]. Yeah. I'd just like to recognize Heather and her team and really all the folks who worked on North Cove recovery. It's hard to explain it in a financial setting, but the work to deal with a disaster situation, to work through that effectively, bring the plant back up, and really look after the community at the same time. It's just world-class response by the folks who are involved, and I personally want to thank them all, especially Heather. Thank you. Thank you. Very helpful answers.[crosstalk].

Operator (participant)

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

Travis Steed (Managing Director, Equity Research Analyst, and Medical Technology)

Hey, thanks. I'll follow up a question on the saline side, and obviously, great job on the fast recovery. I think it went better than most expected.

I was just thinking about how you think about the book of saline business, kind of before and after the hurricane. Did you see customers add a second source and how you're kind of thinking about the share of that? And then I had a follow-up question on free cash flow.

Heather Knight (COO)

Yeah. Thanks for the question, Travis, so as I mentioned to Vijay, I mean, our expectations are in line or even slightly better. I think because of the fast recovery that we had, quite honestly, out of North Cove, so we're not seeing as many customers take on a second source, particularly because, as we've mentioned, we're back to pre-hurricane levels at this point, so these new US GPO contracts, in particular, started on January 1st and February 1st.

So now that we've fully recovered, most customers are still committed to their remaining compliance and minimum committed volumes that they've given to Baxter. So, we're pleased with the response and our customers sticking with Baxter during this time. We know the fourth quarter wasn't easy for them, but we proved to them the resiliency that we have and the investments, quite honestly, that we've made over the last few years. And our global network and activating that during Helene certainly helped and relieved some of the pressure. So, we think that that's pretty unique to Baxter and the hundreds of millions that we've invested in our platform and IV solutions due to the critical nature that they play in healthcare.

So again, in line or slightly better and working closely with our customers to make sure that they can resume normal clinical practice as they've had and patients can get the critical solutions that they need.

Travis Steed (Managing Director, Equity Research Analyst, and Medical Technology)

Great. That's helpful. And then I did want to ask on this free cash flow generation. I know there's a lot of adjustments this quarter. How should we think about some of these adjustments going forward? When do you think you can kind of get back to kind of 80% free cash flow conversion? I don't think you gave a guidance for free cash flow next year. I'm curious how you're thinking about that. And then the Frontline Care write-down, any more color on that? I don't know if that's kind of a change in the growth expectations for that business long term.

Joel Grade (VP and CFO)

Yeah. Thanks, Travis.

So, on free cash flow, the way I would think about that is that we have talked about the fact that we want to have an 80% conversion of that free cash flow. And I expect that to be, generally speaking, what we'll do in the course of the year with one caveat to that. And that is in the first quarter, we're anticipating some negative impacts from, think about it this way. It's two things from a working capital perspective.

Number one is some of the expenses we incurred in Q4 related to Hurricane Helene are actually going to be paid in Q1. And then secondly, there's going to be some level of restock from an inventory perspective that's going to have a negative drag on cash. So, I would think about that number for this year as somewhere more like in the low 70s.

But that is mostly, again, impacted by the first quarter. And I anticipate a much more normal cash conversion in the second three quarters of the year and obviously going forward with hopefully continuing to improve that as we go forward. Regarding the write-down for Frontline Care, the way I would look at that, Travis, is we do a once-a-year review of our goodwill and other intangibles as it relates to those assets. And 2024 was obviously an impactful year from an FLC perspective. So I guess I'd characterize it more as an impact in 2024 on the model than I would any type of overarching concern about the growth prospects going forward.

Travis Steed (Managing Director, Equity Research Analyst, and Medical Technology)

All right. Great. Thanks, you. Thank you.

Operator (participant)

Your next question comes from the line of Lawrence Biegelsen with Wells Fargo. Please go ahead. Good morning. Thanks for taking the questions.

Lawrence Biegelsen (Senior Medical Device Equity Research Analyst)

Congrats on the nice finish to the year here. Brent, I was hoping to ask you two questions. First, David, earlier in the call, talked about the challenges Baxter's had in recent years. How do you think about the pros and cons of an external versus internal candidate for CEO, bringing in a fresh perspective versus someone who kind of already knows Baxter? I have one follow-up for you.

Brent Shafer (Chair and Interim CEO)

I mean, that's the big question, I guess. The board is very focused on that because there are pros and cons to either solution. Obviously, an internal candidate knows all the details of the business, how it runs, how it operates. An external one can bring a fresh perspective, but they have to ramp up quickly to try to catch that same level of knowledge, which takes a while, especially in a complex business.

So I can just tell you that it is a full board activity. The board is very focused on this. And though they would like to move as quickly as possible, the general sense is it's more important to get the right fit for the company at this point in time than it is to necessarily be quick. So, I hope that gives you a little flavor for it.

Lawrence Biegelsen (Senior Medical Device Equity Research Analyst)

That does. Thank you. And secondly, Brent, how did you evaluate the guidance as Interim CEO? And how do you think about the process for the Permanent CEO to reevaluate it? You know that, just to be candid, right, the investors typically think a new CEO will come in and want to put his or her stamp on the guidance, may want to change investment priorities and things like that. So how did you think about that?

Thanks for taking the question.

Brent Shafer (Chair and Interim CEO)

How do I think it coming in as an interim, you mean?

Lawrence Biegelsen (Senior Medical Device Equity Research Analyst)

Yeah. Well, yeah. I mean, is there a risk the new CEO comes in and says, "Hey, we need to invest more," and changes the guidance?

Brent Shafer (Chair and Interim CEO)

Yeah. Well, I think we've seen, at a board level, the three-year look at the business and where are the details and the drivers. And being on board now and in the business, I feel good. I feel like there are solid plans in place. Of course, when you have another person at the helm, and I'm an interim leader, so my focus is really on executing the plans that are in place. Another person may put a different filter on it, but the general situation around our markets and our offerings are known very well in the business.

So anyone coming in would be building on that. I guess that's all I can assume. It's kind of a hard question to answer because it depends.

Joel Grade (VP and CFO)

I think the one thing I would just give Brent the opportunity, and he's talked about it, I would just reiterate the fact that this is a great opportunity for someone to come in. And again, Brent has a perspective on that, and maybe you could share that as well. But I think as we talked about some of the key strategic initiatives that have been done over these last three years, again, there's really a couple of years. There's a really nice opportunity for someone to come in here and take a company that really, I think, is actually set up well for success. And so, I don't know if Brent has a comment. [crosstalk].

Brent Shafer (Chair and Interim CEO)

I come in a little bit about that. I mean, the organization, as you know, has been consumed with a lot of project work, very tough, detailed work, working through these separations, this spins. And there is a real energy in the organization to turn now to growth and innovation. And so, you can feel it. You really can. And that is a real opportunity here. There are good leaders ready to move it forward. And I think whoever comes into the role, that is the key piece to drive is that profitable growth from the base that's been done now because a lot of cleanups been done.

Lawrence Biegelsen (Senior Medical Device Equity Research Analyst)

All right. Very helpful. Thank you for taking the questions.

Operator (participant)

The next question comes from the line of Danielle Antalffy with UBS. Please go ahead.

Danielle Antalffy (Equity Research Analyst)

Hey, good morning, everyone. Thank you so much for taking the question.

And Heather, excited to work with you. Just a quick question. Actually, Larry's question is a good segue into Brent and Joel and Heather. Just as we look to 2025 and sort of some of the pipeline drivers specific to 2025 and maybe even 2026, I know you guys talked about like 10 product launches in pharma, for example. But any color you can give on sizing these and what we as analysts and investors can look forward to over the next 12 to 24 months? And that's all. Thanks so much.

Joel Grade (VP and CFO)

Sure. I'll start, and others can chime in as they like, so I guess we'll start with what I call a few of the kind of key drivers as we think about our guidance in 2025, the year ahead of us. Number one, we continue to have strong growth in MPT.

I think, obviously, as we mentioned a little bit earlier, the full year of the Novum IQ launches. Again, we're really excited about that. Our Advanced Surgery, we're anticipating continuing to build mid-single-digit growth there. And our Clinical Nutrition business, which actually kind of an interesting note, has started to penetrate into the ASC space. So we've seen some nice growth there and anticipate that continuing into the next year, as well as the impact of GPO pricing. That's a strong element in that business. We talked a little bit earlier about the recovery of HST and the continued momentum on the capital side of this particular PSS in the US, as well as the stabilization, excuse me, of FLC.

We talked about pharma as sort of the key of the innovations, the new product launches, and the mix improvement there of injectables relative to compounding, and I'd say even stabilization on the anesthesia side. I think the—so again, I think that's really on the top line. And then the drivers of the line that I talked about here, again, some of the GPO pricing, the new product launches, the mix, continued improvements in our ISC, our supply chain with our market improvement programs and volume leverage. And then over the course of the year, continued impact from driving out some of the stranded costs that we've talked about here. So, I think those are really the things to look forward to.

And then from a new product launch perspective, just in general, again, a renewed focus on that, an accelerated focus there that certainly has some impact in the ways I talked about in 2025, but also sets up for some impact beyond that.

Heather Knight (COO)

I'll chime in. Yeah. I'm looking forward to working with you too, this is Heather. So some things that I'm excited about, I mean, the pump platform, as I mentioned, is something that we will continue to build on. And we have additional launches to support Novum IQ and a gateway now that can work across our entire portfolio. So really excited about that and a connected ecosystem in the hospital, which is going to help clinical decision support and more personalized patient care. I mean, that's something that was the original thesis of the Hillrom acquisition.

We're starting to really see good pilots and momentum with our customers on that. HST is going to be introducing some new products. They've got launches coming out throughout 2025 and early 2026. We're still seeing great momentum on Progressive Plus and PSS, so that continues to pay good dividends in taking market share there. Pharma is hitting a really exciting cadence of new product launches, getting into more complex molecules, 10-12 launches a year that are really going to help buoy, and as Joel mentioned, the margins of that business. They're really focused on that and when they hit this innovation cycle that they're on right now. Those are some of the things that I'm personally excited about. He mentioned alternate site. We made investments two years ago in alternate site in the United States.

Brent Shafer (Chair and Interim CEO)

And we are starting to see dividends paid there in the nutrition portfolio and some small tuck-ins, licensing, and distribution deals that we did in MPT. And those are starting to bear fruit. So that momentum in the U.S. will continue. So those are just a few things that I'm personally excited about. So when I talk about a new rhythm, a new pace, and momentum that's building, we're definitely starting to see that across the portfolio. And those investments that we made bearing fruit now moving into 2025 and 2026. Thanks for the question.

Yeah. Thanks, Heather. This is Brent. I just add to that. I sort of referred to it, but really starting right now, we're putting the emphasis on accelerating time to market innovation development.

So that is an area of very strong focus right now, is how to speed up that whole innovation cycle and get product solutions to market faster. So that'll be ongoing work. But thanks for your question.

Thank you.

Heather Knight (COO)

Thank you.

Operator (participant)

Ladies and gentlemen, those are all the questions the time allows us to take. Therefore, that concludes today's question and answer session in today's conference call. We thank you for your participation. You may now disconnect.