Good morning, ladies and gentlemen, and welcome to Baxter International's Fourth Quarter 2021 Earnings Conference Call. Your lines will remain in a listen-only mode until the question-and-answer segment of today's call. [Operator Instructions] As a reminder, this call is being recorded by Baxter and is copyrighted material. It cannot be recorded or rebroadcast without Baxter's permission. If you have any objections, please disconnect at this time. I would now like to turn the call over to Ms. Clare Trachtman, Vice President, Investor Relations at Baxter International. Ms. Trachtman, you may begin.

Good morning and welcome to our fourth quarter 2021 earnings conference call. Joining me today are Joe Almeida, Baxter's Chairman and Chief Executive Officer; Jay Saccaro, Baxter's Chief Financial Officer; and Giuseppe Accogli, Baxter's Chief Operating Officer. On the call this morning, we will be discussing Baxter's fourth quarter and full year 2021 financial results along with our financial outlook for 2022. With that, let me start our prepared remarks by reminding everyone that this presentation, including comments regarding our financial outlook for the first quarter and full year 2022, including the anticipated impact of COVID and inflationary pressures on this outlook, the recent acquisition of Hillrom, including anticipated cost synergies from future net leverage targets, new product developments or launches, business development and regulatory matters, contain forward-looking statements that involve risks and uncertainties. And of course, our actual results could differ materially from our current expectations. Please refer to today's press release and our SEC filings for more details concerning factors that could cause actual results to differ materially. In addition, on today's call, non-GAAP financial measures will be used to help investors understand Baxter's ongoing business performance. A reconciliation of the non-GAAP financial measures being discussed today to the comparable GAAP financial measures is included in our earnings release issued this morning and available on our website. As mentioned in our press release this morning, following Baxter's acquisition of Hillrom on December 13, 2021, Baxter's fourth quarter and full year 2021 financial results include Hillrom financial results for the last 19 days of the quarter ended December 31, 2021. Hillrom financial results for these periods are reported as the new operating segment in addition to Baxter's existing three geographic segments. On the call this morning, we will be discussing operational sales growth, which for the fourth quarter and full year 2021 adjusts for the impact of foreign exchange, the December 2021 acquisition of Hillrom and the February 2021 acquisition of the rights to Caelyx and Doxil for specified territories outside of the U.S. Later in the call, Jay will discuss our guidance for the first quarter and full year 2022. Operational sales growth for 2022 will exclude the impact of foreign exchange and the acquisition of Hillrom. Historical 2021 quarterly sales for Hillrom have been posted to the Investors section of our website. Now I'd like to turn the call over to Joe.

Thank you, Clare. Good morning, everyone, and thank you for joining today's call. As always, I hope that you and your loved ones are healthy and safe. We start this morning with some perspective on our performance last year and future trajectory. Jay will take a closer look at the financials and share our outlook for the first quarter and full year 2022 then we'll take your questions. As you all know, this is our first earnings call since acquiring Hillrom, the next inflection point in Baxter's multiyear transformation. The combination further extends our already diverse med tech portfolio and provides opportunities to broaden our reach, both geographically and across the care continuum. Importantly, it also unlocks exciting new possibilities for connected care innovation across our product lines with the potential to spark clinical insights, enhance patient outcomes and increase workflow efficiencies. In short, it holds the promise of greater value for all of our stakeholders from patients and clinicians to our employees and investors. The deal closed on December 13. So our Q4 and full year 2021 financials reflect 19 days of contribution from Hillrom. Looking at company-wide performance, Baxter delivered fourth quarter 2021 sales growth of 10% on a reported basis, 12% at constant currency and 4% at operational rates. Fourth quarter adjusted earnings per share were $1.04, up 30% year-over-year. Hillrom contributed $212 million in sales and $0.08 of adjusted earnings per share in the quarter. For full year 2021, sales growth was 10% on a reported basis, 7% on a constant currency basis and 5% on an operational basis. On the bottom line, adjusted earnings per share of $3.61 increased 17% year-over-year, which also reflects the contribution of Hillrom. Growth for both the quarter and year reflect the ongoing somewhat erratic impact of COVID-19, which negatively…

Thanks, Joe, and good morning, everyone. As Joe mentioned, we're pleased with our fourth quarter results, particularly in light of ongoing pandemic and global supply chain disruptions that we experienced during the quarter. Fourth quarter 2021 global sales of $3.5 billion advanced 10% on a reported basis, 12% on a constant currency basis and 4% operationally. Sales came in at the high end of our guidance range, which is in line with the commentary we shared in early January and underscores the essential nature and durability of our portfolio. Sales growth this quarter reflects the benefits of revenues associated with the manufacturing of COVID vaccines, strength in Medication Delivery, Renal Care, OUS sales of Caelyx, Doxil, which totaled approximately $35 million in the quarter, and a contribution of $212 million from Hillrom. On the bottom line, adjusted earnings increased 30% to $1.04 per share. Results in the quarter reflected a contribution of $0.08 per share from Hillrom, inclusive of incremental interest expenses related to the transaction as well as unplanned foreign exchange losses totaling $0.04 and higher than expected freight costs of $0.05. As Joe mentioned, we incurred significant expedited freight costs late in the quarter as cases of COVID-19 surged. Now I'll walk through performance by our regional segments in key product categories. Starting with sales by operating segment. Sales in the Americas increased 5% on both the constant currency and operational basis. Sales in Europe, Middle East and Africa grew 5% on a constant currency basis and 1% operationally and sales in our APAC region advanced 6% on a constant currency basis and 5% on an operational basis. As Clare mentioned, Hillrom's financial results are reported as a new operating segment in addition to Baxter's existing three geographic segments. Moving on to performance by key product category. Note…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Robbie Marcus of JPMorgan, your question please.

Hello. Good morning, everyone.

Good morning, Robbie.

Good morning.

Maybe to start, if I use the low teens accretion you've talked about for Hillrom, it gets me to somewhere around 7% EPS growth for base Baxter, which is below the LRP. So maybe first start off with what's driving it? You touched on supply chain issues and inflation, but I think it'd be important to put a finer point on it. And then I'll just ask the second question upfront as well. The first quarter is coming in a good clip below where the sell side is sitting coming into today. What gives you the confidence that supply chain issues will resolve in the second quarter, and you could see that acceleration and the drivers for the big discrepancy? Thanks.

Sure. Robbie, there are a few impacts that we're seeing in 2022 relative to previous LRP expectations. The good news from my perspective is a lot of these issues are short term in nature, many of them related to the Omicron variant and some of the challenges that's created in our manufacturing facilities and supply chain. So, if you think about it, over the last six weeks, we've seen increases in our expectations around expedited freight. We've seen some increases in expectations related to supply chain labor costs, in part related to absenteeism in the plants. We've also seen a bit more inflation. And then finally, we've had a back-order situation that really is some of the highest levels of back orders, both on the Baxter side and the Hillrom side that we've ever seen. And so, from my standpoint, we have weathered a very challenging short-term environment, some of that featured in our Q4 results. But it clearly impacts our Q1 and as a result, the full expectations for 2022. And so, what's interesting is we are seeing improvements in absentee levels at our plants. We are also seeing supply chain situation improve as we speak. So, all of these things, we believe, are short term in nature, but they definitely impact the first quarter and then also the second quarter from a margin standpoint before we get back to a trajectory which is much more normal and much more in line with our expectations in the third and fourth quarter. I think as we take a step back, look, we acknowledge there is some disruption in the short term, but really, really like the durability of the business along with the pathway we have going forward over the course of this year and then the future years. So really that – and then as it relates to Q1, the issues are most pronounced and really centered on Q1. We won't resolve the back-order issues until at some point in Q2. Furthermore, we won't get out of an expedited freight situation for a few more months here. So that's really why Q1 is where it is, and then we start to see improvements as we move forward.

Great, thanks a lot.

Thank you.

We can take our next question.

Vijay Kumar of Evercore ISI is on the line with a question. Please state your question.

Good morning, Joe and Jay. Thanks for taking my question. Maybe one on the revenue guidance here. Perhaps we're up, Jay, I'm not sure if I'm doing the math right. The implied Hillrom revenues, it seems to be perhaps down year-on-year because if I look at your operational growth for stand-alone Baxter and then look at the implied Hillrom, are there any – can you just one, remind us, has any assumptions change on these two businesses where Hillrom was five plus, Baxter, clearly, you guided to four plus. Are there any COVID headwinds, tailwinds we need to be aware of when I'm doing this year-on-year math?

Sure. Good question, Vijay. The Hillrom business, our expectation is mid-single digit constant currency growth. As I said earlier in my prepared remarks, Baxter is approximately 4% operational growth with the real [indiscernible] it's not a demand-related item, it really is related to back orders in the first and second quarter. And as I said, we hope to resolve those throughout the year. So, the Baxter side, we're talking about approximately four. Hillrom is mid-single-digit constant currency. And then the reported growth, I think, that there's some rounding going on, on both the Baxter side and the overall reported revenue growth side that leads you to the numbers that you're looking at. But as we look at it, we see Hillrom in the mid-single digits.

And then my follow-up, yes, sorry. Are there any COVID headwinds? And I think one of your – when the deal was announced, a lot of questions around the strategic rationale. And now one of your peers just did a connected care or communications deal. So maybe elaborate, perhaps for Joe, on this strategic rationale, connected care. How big of a deal is this, Joe, as you look at the next three to five years?

Vijay good morning. We are working on those opportunities, and we'll have more on that when we speak to the – to our investors at our Investor Day. But let me give you three different examples. The first one is a short-term opportunity that we have is our home peritoneal dialysis and [indiscernible] remote monitoring. Bringing them together is a very short-term opportunity that we have, will give us insight into fluid overload and also the workflow of current PD patients and allows us to do Bluetooth-enabled vitals and analytics integrated with a share source, reducing then the potential burden for patients and more proactive and accurate management of patients. This is a very short term. The [indiscernible] alarm systems, midterm one to two years, bringing together delivery of digitalization of alarms from the Baxter infusion pumps, CRT devices. Starling is our monitoring platform to both. Bringing that together improves the workflow in med search, for instance, ICU, pharmacy and other parts of the hospital. Just some benefits would be fatigue reduction transition from reaction to proactive. So, you can see things ahead of time, creates a much better environment for the nursing staff who will be focused on what actually matters versus alarm overload. So, we think that is a good opportunity to bring to get both the platforms and both these are very important part of the platform that Hillrom has. And then on a long term, we're going to closed-loop fluid management system, which is how do you actually monitor from a series of inputs, including hourly urine output, to the infusion pumps output, and alarms and types of drugs, bringing our monitoring together and all the information that comes out of the smart beds. How do we create an environment that reduces significant load to the clinician and alarms to the clinician when problems are really arising and preventing, eventually preventing some of the bad outcomes to happen? Those are just three examples of things that we are working on, and there is much more that we had a significant amount of workshops that one is specific with a significant amount of ideas. So, I'm very excited about that.

And maybe – hi Vijay, this is Giuseppe. Maybe I would add a couple of other or probably another angle to that, that is the site of care. There is a lot that we can do having two million connected devices or connectable devices in the field of the two companies together. So, there is a lot that we can do in the acute environment, but there is a lot that we can do in the home care environment. Joe touched based on the Voalte and Care Communication, think about the PD patients now at home with hypertension. We can monitor them in a better way and we can communicate to them, we can add more critical vital signs collection together with the cycle. And we can involve with both families, we can involve the family in the treatment of the patient, which is very important.

That's helpful.

Vijay, just to close out on your question, we have roughly year-over-year $50 million worth of headwind in our DPS business related to vaccines. And then as we look at admissions and procedures, we expect those to normalize throughout the year. But in the first quarter, they are down a bit low, perhaps low, mid-single-digit impacts in the first quarter of the year. So down approximately 4% as we see it today. Now from a COVID impact standpoint, I'm not speaking to the back-order situation and the situation that we've seen in the plant. I'm viewing that separately. It's more of a supply chain-related issue. But from a demand standpoint, those are the key items impacting sales in 2022.

Thanks guys.

Thank you.

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

Hey good morning guys. Thanks for taking my questions. The first one is actually a bridge. Can you help us sort of bridge the midpoint of the 1Q guidance of $0.81 versus last year's $0.76? What's the contribution from Hillrom within the first quarter guidance? I was trying to understand the cost and backlog pressures on sort of core Baxter. And can you quantify the backlog you're assuming in the first quarter and 3Q?

Sure. From an EPS standpoint, there is definitely a good contribution from Hillrom as we look at it year-over-year. And if you think about 2021 Q1 actual $0.76. But really between some price impact, some inflationary impacts and freight, we're talking about roughly $0.15 of negative impact. And what we would normally expect to see on the Baxter side is really substantial organic volume growth to offset that. We see some of that, but it's not sufficient enough to really carry the day in terms of driving the normalized levels of earnings growth and power that we expect from the business. So, we're not seeing that organic volume pick up in part because of the supply chain situation, which, as I said, should normalize throughout the year. And then Hillrom is north of $0.10 in terms of contribution in the quarter, which is something that is – it's a great add. The business is impacted is well thought by some of these supply chain issues. And so Hillrom's growth accelerate throughout the year as well.

Great. And then a follow-up question. You talked about passing on some of the inflationary costs to customers in some geographies. Can you expand on which product lines and geographies you can pass through those costs? And as I think about sort of global revenues, any ballpark or sort of what percentage of those can be passed through and sort of what pricing you can get on that?

Pito, this is something that we comment very little. Our pricing is a strategy that the company has. We have pricing built into our contracts. What we're looking at here is an exceptional amount of extra cost the company has to carry on the expedited freight, the ability to get components in the door, inflation and labor as well as the components that are coming in. So we will selectively decide where we're putting those costs – those price increases. They will come in different forms, but we're not going to specifically speak about geography. We know that we have put them in our plan, and we'll be executing on to them.

Great. Thanks so much.

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

Good morning. Thanks for taking the question guys. Just first on NOVUM IQ, Joe, I heard your comments upfront about expecting approval this year in the U.S., I believe. I think at J.P. Morgan earlier this year you talked about some cybersecurity issues that you were, I think, re-filing on or submitting additional information on. Could you please update us on the timing, a little bit more detail on the timing there on NOVUM IQ and your confidence in approval this year, and I had one follow-up?

Larry, good morning. We want to file this last set of documentations, which the FDA will have 31 days to provide a response to us, okay? So this is not the beginning of the application. This is the end. So to that end, we want to make sure we have some new set of eyes. We looked at the whole application, it looks really good. But there were areas that we think we could do better. Cybersecurity is one of them that we want to be always top decile when it comes to that. So we went back and made some adjustments and improvements, and that took time. So we will be filing with the FDA hopefully soon. And we're expecting that to be 31 days after that, we'll have the answer on our large volume parenteral LVP pump. And they are following that, we're going to apply the same 31 days at the end of it for the syringe pump and related software that will be our enterprise software as well as software controls, the pumps, the way they work with the networks. So that's pretty straightforward. We are doing the best we can to get the best chance to get this product. I don't speak on behalf of the FDA, I never do. I don't have any control on the internal process. One thing that we can control is the quality of the application that we have. And to that end, we want to make sure that we increase our probability to be high as possible before it goes in for those 31 days.

Thanks for that, Joe. And one other thing you talked about in your prepared remarks was about evaluating the portfolio and potentially exiting or divesting, I think, non-core businesses. How long will that process take? And when do you think we'll hear more about it? Thanks for taking the questions.

Larry, we – when we started transformation on Baxter, we had three very specific areas of improvement. I would say four, not three, four. First is to bring the company into profitability state, put us with – close to our peers and transform the company's ability to generate free cash flow. The second was most importantly, the culture of the company bringing the right talent to get the culture going. The third was innovation, and we just spoke about it getting a bump with the FDA that was unthinkable when I first got here because we did not have any internal programs or any devices within the company other than few that we acquired through Gambro. And the fourth piece was the one that we haven't touched much. We did some tuck-in acquisitions. And then we thought about how do we transform the portfolio, the company changed the CAGR, the direction, the innovation, go where the puck is going. That was the acquisition of Hillrom brings that part into Baxter. Conversely, we do have a couple of areas that we don't believe are the right businesses for Baxter to own. And to that end, we are in the middle of analysis and we should have more in that area either by May or a little later than that in how we're going to adjust our portfolio. What we want to do is always look at the portfolio in a way that can increase the CAGR of the markets we serve, increase the profitability of the company and remove businesses that have been sometimes legacy businesses. They are sitting here with probably not a right capital allocation and bring that to people who can bring that capital allocation to them, freeing up the cash flow for Baxter to invest in what really we want to invest, which is in our connected care, digital health and then to double down on parts of Hillrom, they're doing so well.

Thank you.

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

Hi. Good morning, thanks for taking the questions. I wanted to just ask, it sounds like from your commentary, Joe, Jay cleared that there are potential revenue synergies with this combination. I was wondering if there are any sales synergies baked into 2022 guidance and then just [Technical Difficulty] communicate fully the level of sales revenue synergies. And then the follow-up is just any change to the outlook in terms of the potential for the combined business to accelerate organic revenue growth as we move through 2022 and some of the challenges that are present throughout the med-device industry and into 2023 and beyond? Thanks for taking the questions.

Sure. As far as revenue synergies go, we have included none in our numbers for 2022. So there's no revenue synergies. Now having said that, we're incredibly excited, and Joe highlighted some of the work, and I'll let Giuseppe talk in a second about some of the progress that we're making because we're really excited about the opportunity for revenue synergies long-term. And I think as we learn more about the Hillrom business, and then we also see how the Baxter business has weathered a very volatile environment, I think we're very confident about our long-term ability to drive growth across this combined platform. So Giuseppe, why don't you talk about some of the revenue synergy ideas and some of the excitement we're generating there?

Sure, Jay. So the teams both the regional teams and the GBU teams work diligently on understanding which are the themes and the drivers of sales synergies, and we see a few of them very clearly. The first one, geo expansion and channel optimization, it is clear that Baxter presence outside of the U.S. is much stronger than legacy Europe presence, and that will end up to good sales synergies there. But there are also synergies in connected care, analytics and services. There are synergies in strengthening our position in alternate care and synergies in strengthening our position at home as well. Don't forget that before the Hillrom acquisition, home for Baxter was mainly [indiscernible]. Now we have new therapies like respiratory, like monitoring, cardiology monitoring, which [indiscernible] of course. That are very, very interesting to us. So we have a more comprehensive offer as well at all. So just to recap, geographic expansion, connected care, alternate care and home are the main drivers of synergies.

We will have the opportunity to share more about this at the upcoming Investor Day, including some quantification of revenue potential and some refreshment of the financial long-term outlook for the combined company.

Great. Thank you.

Matt Miksic of Credit Suisse is on the line with the question. Please state your question.

Hi. Thanks so much for taking the question. I just have one follow-up on this – the topic of synergies if I could and then on supply chain and staffing. So appreciate the color on the revenue synergies you were just describing. Can you maybe talk a little bit about what you've seen so far in terms of the cost side, logistics and operations, integration that have begun? And both on the positive side and any risks you're building into your outlook in terms of dissynergies as you bring these organizations together here in the near term?

So on the cost side, we previously shared $250 million in expectations by year three as part of really focusing on certain G&A areas and procurement opportunities and so on. And what I will tell you is we are very comfortable with that number and as we learn more, we're getting increasingly comfortable. So there have been no negative surprises as we think about the cost synergy opportunity. So this one has been very much according to plan. I think we've been really pleased with the talent that we've seen at Hillrom, the processes. So there's a lot of great opportunity there and thoughts that we can leverage. But as far as the cost synergy goes, its right in line with where we hoped it would be, if not trending even more positive.

That's great. And then on supply chain, I know there's been a couple of questions, but you made a comment and I think some other companies presenting Q4 earnings and talking about outlook that made similar comments about this idea of improvements in the back half. And we've been talking about supply chain and input costs for over a year now, I think. And I guess the visibility of just putting a stake in the ground and saying, we do expect these things to improve, both in terms of staffing and inflationary cost and backlog and things like that. Can you maybe just give some sense as to your confidence in that visibility? It would be appreciated.

Matt, I will start. I want Jay to actually also supplement my answer. I see this in two different buckets. I see the short-term or the COVID impact, and then what is the long-lasting effect of having those inflationary costs. So the first is labor availability created by Omicron was significant, didn't take much, you could read the news and how it affects the country and the curve and acceleration of that infection, took a lot of people from our plants. They were either infected or had contact with people infected very much in number one priority of the company's patient safety and quality as well as employee safety. So we did not allow people to come to work, and we follow the guidelines with [indiscernible]. To that end, we end up with significant disruptions that caused all this air freight that we have to actually incur, which came actually towards the end of the fourth quarter as we will never let patients other products. As soon as we found that we start flying products despite, in fact, some of the products in value of ships that were going in because the rate and escalation of that. That problem of the labor availability and absenteeism is starting to subside; we have significant efforts in place and we start to see our plants filling up with people, and the situation will be resolved. Also, part and parcel to that was the fact that you have to attract employees to your plant. And there is an inflationary cost to the labor cost of the company and that is the one that we also are upping our salaries and making sure that we retain people. Those cost of inflation will go on for a long time. You don't reverse salary increases. What you…

Very helpful. Thanks.

You are welcome.

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

Good morning and thank you for taking the question. In your 2022 guidance, could you share with us what your COVID vaccine revenue is?

Sure. Joanne, it's about $100 million, a little north of $100 million is what COVID revenues this year.

Okay. And then also historically you've given us your thoughts on hospital census and returns to sort of – I'm not sure what we're calling normal anymore. But could you sort of give us a backdrop of how you thought about that and putting together the guidance?

Sure. We have – we're down roughly 4% on surgical procedures and admissions. And then we have that improving throughout the year to be perhaps slightly below towards the end of the year and on a full year basis relative to 2019 normalized levels. We're not banking on a significant new variants. So that's an important assumption that underlies our guidance. And we're not banking on that both from a revenue side and also from a supply chain disruption side. We don't have any line of sight that, that's going to be a phenomenon that we have to deal with. And we certainly hope we won't have to deal with that through the remainder of 2022. So really, the story is down 4%, a lot of that relates to Omicron and then it improves throughout the balance of the year.

Yes. And that's specific to surgical procedures, Joanne. So again, down kind of that mid-single digit, low- to mid-single digits in the first quarter and improving throughout the rest of the year. With respect to admission, we kind of have a plan versus kind of those pre-COVID levels down kind of in that low-single digits really throughout the course of this year.

Terrific. Thank you so much.

We will take one more question.

Matt Taylor of UBS is on the line with a question. Please state your question.

Hi. Thank you for taking the question. I just wanted to clarify on the NOVUM pump. It doesn't sound like you're baking any revenue for that in the guidance, just wanted to clarify that. And then previously, when you gave guidance in Q4 of 2020, I think, it was about a 1% contribution. Is that how you're still thinking about it once it gets launched? Or any other thoughts you could provide there?

So we've included guidance – we've included in our guidance revenues for NOVUM and really prominently in the second half of the year that reflects the successful launch of the product. As always, if that changes we're happy to adjust that moving forward. As far as specific volumes, I don't know that I would get into too much detail on specific amounts. But to the extent that the pump is deferred, we've been able to offset that either with sales of spectrum or other product sales. So it's definitely underlying in our guidance.

Thank you, Jay.

Thanks Matt.

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