Baxter International Inc (BAX) — Q1 2023 Earnings Call Transcript

Good morning, and welcome to our first quarter 2023 earnings conference call. Joining me today are Joe Almeida, Baxter's Chairman and Chief Executive Officer; and Jay Saccaro, Baxter's Chief Financial Officer. On the call this morning, we will be discussing Baxter's first quarter 2023 financial results, along with our financial outlook for the second quarter and full year 2023. With that, let me start our prepared remarks by reminding everyone that this presentation, including comments regarding our financial outlook for the second quarter and full year 2023, new product development, the potential impact of our in-flight proposed strategic and pricing action, business development, regulatory matters, and the macroeconomic environment including commentary on anticipated customer capital spending contains forward-looking statements, that involve risks and uncertainties and of course, our actual results could differ materially from our current expectations. Please refer to today's press release and our SEC filings for more detail concerning factors that could cause actual results to differ materially. In addition, on today's call, non-GAAP financial measures will be used to help investors understand Baxter's ongoing business performance. A reconciliation of the non-GAAP financial measures being discussed today to the comparable GAAP financial measures is included in our earnings release issued this morning and available on our website. Now I'd like to turn the call over to Joe. Joe?

Thank you, Clare, and good morning, everyone. We appreciate you taking the time to join today's call. I will begin with an overview of our first quarter performance and trajectory. Jay will follow with a closer look at our financials as well as our outlook for Q2 and the remainder of 2023. After that, we will open up the lines for Q&A. First quarter sales declined 2% year-over-year on a reported basis and rose 2% at a constant currency, exceeding our original outlook, driven primarily by better-than-expected sales in Renal Care, Pharmaceuticals, and Front Line Care. On the bottom line, first quarter adjusted earnings per share of $0.59 also came in above our guidance range of $0.46 to $0.50 per share, again, driven primarily by operational performance in the quarter. Results in the quarter were impacted by the expected declines in two of our legacy Baxter businesses. Biopharma Solutions and Acute Therapies, reflecting the tough comparisons to the prior year period due to COVID. Looking at our legacy Hillrom businesses, strength in Front Line Care and Global Surgical Solutions was offset by a decline in Patient Support Systems or PSS performance. This reflects what we believe to be softness in certain hospital capital spending patterns in the current economic environment. Following what I will candidly describe as a difficult 2022, we begin 2023 with a solid quarter and on a strong footing for future momentum. From a macroeconomic perspective, while the high rates of inflation we absorbed last year continued to impact our performance, most notably in the first half of the year, we are beginning to see more stability in the overall market. We are also starting to see an improvement on the supply chain front, which includes the increased availability of electromechanical components, creating more predictability in our operations and a reduced need for premium cost spot purchasing. Specifically, in terms of the healthcare marketplace, admissions and procedural volumes continue to recover from pandemic lows, contributing to positive demand. We also continue to see steady improvement in PD patient growth in many markets following several quarters of this lower demand linked to pandemic-related mortality issues. In another crucial signal, healthcare staffing levels have stabilized or are rising in hospitals and other facilities following some concerning lows. With that said, we believe, based on conversations with our U.S. customers, the hospital capital spending has been deprioritized for certain product areas, which has impacted near-term performance of our PSS business. Our current expectation is that the situation starts to improve over the course of the year. We're nearing the launch of our next version of our market-leading ICU beds, Progressa Plus. Progressa Plus is the only through ICU bed with new features to help clinically staff address complications and provide the best care possible for patients. We are already seeing strong customer interest in the new solution and look forward to the anticipated launch this quarter. Lastly, regarding this topic, I will highlight that we are not currently seeing the softness in capital spending extend to our other businesses, such as Infusion Systems or Front Line Care, where demand remains strong for the products. Alongside these trends, we are, of course, moving full speed ahead on the critical strategic initiatives I announced at the outset of the year, focused on enhancing our impact and long-term shareholder value. Our plan to spin off our Renal Care and Acute Therapies business into a stand-alone kidney care company is well underway. The stand-alone company will emerge as a leader in a growing market segment with 2022 sales of approximately $4.5 billion and more than 1 million patients across more than 70 countries. It will hold leading positions across its portfolio and have a well-established presence in homes, hospitals, and clinics worldwide. Perhaps most importantly, as a stand-alone entity, it will benefit from increased management focus and the pursuit of its unique investment priorities, better positioned to accelerate growth and innovation, emphasizing its distinct market drivers. We are finalizing our search process to identify the future CEO of our spin-off company and hope to share more information on this front shortly. We currently expect the spin-off Kidney Care to occur by July 2024 or earlier, and we'll continue to keep you informed of our progress. Last week marked the initial launch phase of the new operating model we previewed for you last quarter, realigning our current portfolio of 10 businesses into four vertically integrated global business segments. Each segment is being led by an experienced, passionate senior executive with a proven track record of success and a compelling vision for the future. Medical Products and Therapies, led by Group President, Heather Knight, comprises our current Medication Delivery, Advanced Surgery, and Clinical Nutrition portfolios. Healthcare Systems and Technologies, led by Group President, Reaz Rasul, includes our legacy Hillrom businesses, including Patient Support Systems, Global Surgical Solutions, and Front Line Care. Pharmaceuticals, led by Group President, Alok Sonig, includes our current Pharma portfolio as well as our BioPharma Solutions business. And finally, Kidney Care comprises our Renal Care and Acute Therapies businesses. Each of these segments has global profit and loss accountability, dedicated commercial operations, and fully aligned research and development, manufacturing, supply chain, and functional support teams. Note that our global manufacturing sites are being aligned to each business to help fuel greater transparency, foresight, and resilience across the supply chain. While we are in the early stage of this implementation, our teams are moving fast, eager to capitalize on the tighter alignment that can help fuel enhanced strategic clarity, agility, and innovation. Even as we advance organizational and efficiency efforts, we also know that high-impact innovation is a critical factor in delivering accelerated growth among recent innovation milestones. We're very pleased to share that we have resubmitted our leading-edge Novum IQ large-volume pump for FDA 510(k) clearance. The Novum IQ syringe pump is now in use in the United States. As a reminder, we have not included any U.S. sales for the Novum IQ LVP in our guidance. I'm also pleased to report that our newly launched Zosyn premix is experiencing solid uptake in the U.S. hospital pharma marketplace. Other recent launches include Baxter’s new patient warming system, which minimizes risks associated with forced air warming, reduces noise and waste in the operating room, and lessens the burden on clinician workflows. Floseal + Recothrom, the first and only active flowable hemostat with a recombinant thrombin, resulting in 1.5 times faster preparation ReadyConnect System for Baxter’s Centrella Smart+ Bed, which delivers reliable, cable-free connectivity between the hospital bed and most nurse call systems on the market. And finally, ExactaMix Pro, the next-generation automated nutrition compounder designed to enhance security and improve customer experience and offer stronger data reporting capabilities. Looking ahead, while macro-environmental factors show signs of improvement, we remain cautious and balanced about the pace of recovery. This is why our current transformational initiatives are so vital. Our goal is to redefine our operations for sustained success in a rapidly evolving environment while always remaining true to our life-sustaining mission and focus on medically essential healthcare. Our momentum today and tomorrow is fueled entirely by our employees. I thank them for their dedication and resilience, which are vital to the transformation journey we are taking together. Now I will pass it on to Jay for a closer look at our performance and outlook.

Thanks, Joe, and good morning, everyone. As Joe mentioned, we're pleased with our first quarter results, which came in ahead of our previous guidance range. First quarter 2023 global sales of $3.6 billion declined 2% on a reported basis and increased 2% on a constant currency basis. This compared favorably to our guidance, which called for constant currency sales to decline approximately 1%. As mentioned earlier, sales performance in the quarter benefited from better-than-expected sales in Renal Care and Pharmaceuticals as well as Front Line Care, which have reflected improvement in the availability of electromechanical components. On the bottom line, adjusted earnings decreased 37% to $0.59 per share, reflecting the increased cost we've recognized due to the significant inflationary impacts on materials, labor, and freight, along with certain supply chain constraints. Adjusted EPS for the quarter also came in ahead of our expectations of $0.46 to $0.50 per share, driven by improved operational performance and a benefit from lower-than-expected interest expense. Now I'll walk through performance by our regional segments and key product categories. Starting with sales by operating segment. Sales in the Americas declined 1% compared to the prior year on a constant currency basis. Sales in Europe, the Middle East, and Africa grew 9% on a constant currency basis, reflecting broad-based recovery in hospital admissions and surgical procedures across the region, and sales in our APAC region increased 3% constant currency. APAC sales reflected strength across the region, offset by a decline in China due to the impact from various government-based procurement initiatives being implemented in that market. Moving on to performance by key product category. Global sales for Renal Care were $892 million, increasing 4% on a constant currency basis. Performance in the quarter was driven by mid-single-digit growth globally in our PD business, partially offset by lower U.S. in-center HD sales following the exit of a distribution agreement at the end of last year. Results in the quarter also reflected the negative impact from ongoing government-based procurement initiatives in China. Sales in Medication Delivery of $687 million were flat year-over-year at constant currency rates. Strong international growth in solutions was offset by lower infusion system sales. As mentioned, we've resubmitted our Novum IQ large-volume pump for FDA 510(k) clearance. In the meantime, we continue to promote our Spectrum IQ LVP, which has been impacted by supply constraints for electromechanical components. Our teams have been and will continue to work diligently to secure additional parts to meet customer demand for the Spectrum IQ large-volume pump. Pharmaceutical sales of $523 million increased 5% on a constant currency basis. Performance in the quarter reflected increased demand for our drug compounding portfolio internationally as well as double-digit growth in our U.S. injectables portfolio. This helped to offset lower sales internationally for injectables. Moving to Clinical Nutrition. Total sales were $224 million, increasing 3% on a constant currency basis. Performance in the quarter was driven by demand for our nutrition compounding services. Sales in Advanced Surgery were $246 million, advancing 11% on a constant currency basis. Growth in the quarter reflects an improvement of elective procedures globally. Surgical volume recovery was strong across all regions. Sales in our Acute Therapies business were $180 million, declining 1% on a constant currency basis and reflecting a difficult comparison to the prior year, where we had experienced elevated demand for CRRT given the rise in COVID cases. BioPharma Solutions in the quarter were $139 million, decreasing 9% on a constant currency basis. This decline was in line with expectations due to lower COVID vaccine-related revenues of approximately $35 million compared to the prior year period last year. Sales in our Patient Support Systems business were $348 million, decreasing 8% on a constant currency basis. As Joe mentioned earlier, we believe performance in this business has been impacted by a slowdown in capital spending with respect to certain product categories. In addition, this business is experiencing lower rental revenues as compared to the prior year period. For the year, we expect growth will continue to be dampened by these factors, but we expect our order rate to improve over the course of the year. In addition, our backlog remains elevated and to date, we have not had any material cancellations. We're excited to launch Progressa Plus this quarter and expect it to positively contribute to future performance. Front Line Care sales in the quarter were $302 million, increasing 4% on a constant currency basis. This reflects demand for our intelligent diagnostics portfolio. We saw a slight improvement in supply availability of electromechanical components during the quarter, which enabled us to address a portion of the backlog associated with the Front Line Care business. While we're pleased to see improvement in our supply constraints, the business continues to have an elevated backlog level, which we hope to continue to work down over the course of the year as anticipated demand remains strong for this business. Global Surgical Solutions sales in the quarter were $81 million, increasing 8% on a constant currency basis. Performance in the quarter was driven by increased international placements in the quarter. Moving through the rest of the P&L. Our adjusted gross margin of 41.2% decreased 380 basis points over the prior year, reflecting cost of goods sold, primarily driven by the factors we've discussed around material and labor inflation, freight and supply chain constraints. Adjusted SG&A of $845 million represents 23.2% of sales, an increase of 10 basis points versus the prior year period, reflecting higher annual employee-based compensation accruals. Adjusted R&D spending in the quarter of $157 million represented $4.3 million as a percent of sales, an increase of 30 basis points versus the prior year as we increased our investments in innovation, particularly around advancing our connected care technologies. These factors resulted in an adjusted operating margin in the quarter of 13.8%, a decrease of 420 basis points versus the prior year. Net interest expense totaled $117 million in the quarter, an increase of $32 million versus the prior year, driven by the impact of increased interest rates on variable rate debt. Other non-operating income totaled $1 million in the quarter compared to $16 million of income in the prior year period. Results in the quarter reflect a benefit from the amortization of pension benefits as well as an equity gain, which were offset by foreign exchange losses. The adjusted tax rate in the quarter was 23% compared to 20.8% in the prior year period. This increase was driven primarily by a change in stock-based compensation impacts. And as previously mentioned, adjusted earnings of $0.59 per share declined 37% versus the prior year period. Earnings in the quarter reflected the increased cost of raw materials, freight, and labor as well as the impact of higher interest rates on variable rate debt and foreign exchange headwinds. Let me conclude my comments by discussing our outlook for the second quarter and full year 2023, including some key assumptions underpinning the guidance. As mentioned, we're pleased with the solid start to the year. After the challenging macroeconomic environment we experienced in '22, the challenges of which we continue to address. Our business fundamentals are solid and we're seeing positive trends externally. We're cautiously optimistic and continue to work to position ourselves to see improved performance in the years ahead, and we remain steadfastly focused on execution. Taking into account first quarter results, I'll now walk through our guidance and expectations. For full year 2023, we expect global sales growth of 1% to 2% on a reported basis and approximately 1% growth on a constant currency basis. We now expect full year adjusted operating margin to be between 15.5% and 16%. Interest expense is now expected to total approximately $500 million. We continue to anticipate an adjusted tax rate of approximately 22% and a diluted average share count of 508 million shares. Based on these dynamics, we expect 2023 adjusted earnings, excluding special items of $2.85 to $3 per diluted share. Specific to the second quarter of 2023, we expect global sales growth of approximately 1% to 2% on a reported basis, 2% to 3% on a constant currency basis. And we expect adjusted earnings, excluding special items of $0.59 to $0.61 per diluted share. With that, we can now open the call up to Q&A.

Hey, guys. Congratulations on a good start here. Maybe my first question is for Joe and Jay. You mentioned that utilization trends are improving and supply chain constraints are easing. When I looked at your Q1 performance and your Q2 guidance, the annual forecast suggests 0% growth in the second half on a constant currency basis. Can you walk us through whether this reflects conservatism, if there are any timing elements involved, or what assumptions are made for the second half?

Yeah, Vijay. Thanks for the question and the comments. So far so good in terms of sales performance in the first quarter of the year. And to your point, I think importantly, we've seen a fairly cooperative environment both on the top line and also very importantly, from a general macro context. Those were some really important underpinnings of the guidance that we originally shared. We needed to see that and we did. So really, really good start to the year. As it relates to sales cadence first half versus second half, really there are a couple of specific drivers that lead to slightly slower growth in the second half. And it's really not unplanned or it's consistent with our expectations. Essentially, our renal business has nearly $100 million of one-time headwinds, i.e., through specific payments that occurred exiting of distribution agreements last year or exiting lower margin arrangements. And so all of those things take renal from positive growth in the first half to negative growth in the second half. So very discrete item there. We expect that to sort of normalize and see growth more consistent with patients going into the future. And then, as we look at our Pharmaceuticals business, we really had outstanding performance in the first quarter. We'll expect to see some continued growth there, but we do see a little bit of a deceleration, most notably compounding in the second half of the year. So that has an impact on the overall sales cadence. I think the most important thing from my perspective was the steady macroenvironment and utilization and patient trends. So we saw that in the first quarter. We're happy to carry that forward.

That's helpful. And perhaps one follow-up on Hillrom. I think the prior guidance was 4% constant currency. Did that change at all? And perhaps Joe, if you can comment on, Hillrom was a 2% decline, mostly driven by PSS. I think most of your peers, they're talking about easing supply chains, electronic components, backlog getting converted. Like, why is Baxter confident that this is not share loss? I think you made some comments on backlog and orders. So maybe if you could size it for us.

Vijay, good morning. I want to start by saying that we're very pleased with the performance of most of the businesses under Hillrom and our integration of the business into Baxter. We've had a very strong Front Line Care quarter, and this performance has improved due to better product supply. We're expecting low to mid-single digit growth, around 3% to 4%. Suppliers are improving their delivery, which has positively impacted Front Line Care. Not only is Front Line Care performing better, but our backlog is also increasing more than we anticipated, creating positive momentum. We've seen a decrease in sales for PSS in the first quarter, with rentals down by 20% from the peak during COVID when rental activity was high in 2021 and early 2022. There has also been a notable delay in capital spending. However, we are very excited about the launch of Progressa Plus, an upgrade to our Centrella Bed, set to be released this quarter. This is significant since we haven't introduced a new platform like Progressa Plus in nearly a decade. We are leading in the ICU market and are looking to expand not just within Baxter accounts, but also into new competitive accounts. It’s worth mentioning that the capital spending delays have been specific to this area, as we haven’t observed such issues in other Baxter categories. As I noted, Front Line Care is showing robust growth. Additionally, our infusion therapies and pumps businesses have displayed remarkable growth and strong forecasts for the rest of the year. This trend of delays is particularly evident in the beds category. Nevertheless, with our upcoming product launches, we are optimistic that the situation will improve in the second half of 2023.

Fantastic. Thanks, guys.

Thanks, Vijay.

Hey. Good morning. Thanks for taking my questions. The first one is similar to Vijay's question. But relative to your guidance that you've updated today, sort of what has been the biggest source of upside and downside in the first quarter as it relates to both revenues and inflationary pressures?

Sure. I think there were a few areas where we saw solid performance in the first quarter. Our Pharma business, we added a new leader to this area last year. That team is really doing an excellent job with respect to new products and accelerating commercialization of some of these products. So we had a really nice performance in the first quarter. Now some of that did benefit from a buoyant procedure and admissions backdrop. But overall, really happy on the pharma side. From a renal standpoint, I think this is an important one. Renal benefited from solid pricing and mix, along with outside of certain markets in Asia, we saw some decent patient growth. So I think the Renal story, notwithstanding my comments earlier around second half comparable issues, the renal story has started strong this year and we expect that to continue. And then finally, our Advanced Surgery, another area. We've got a great leader in this business, and that team as well, benefiting from procedures clearly, but at the same time, solid execution across the board leads to some favorability there. So those were some of the bright spots that we saw. As it relates to challenges, I think Joe explained clearly, we were a little bit soft in PSS, but we remained very optimistic. I spent some time looking at our Progressa Plus, our new product there. It's really an exciting new development. So we'll see how that goes. That launch is happening, and it's something that I think the market will welcome. So those are a few comments on favorability and unfavorability for Q1. And then Pito, your question about supply chain and what I would say there. Obviously, after the challenges that we experienced from a general macro backdrop last year, I was really happy to see, generally speaking, a cooperative environment. And when I say generally speaking, on the one hand, commodities are going in the right direction. We're seeing indices support the forecast that we put forth. Some of our suppliers are still looking to sort of increase prices to Baxter. And we constantly work through those situations very carefully. But I would say, generally speaking, we have a fairly stable backdrop from a supply chain standpoint.

Okay. And then specifically, can you refresh us on what assumptions you made in your updated guidance around transportation costs for 2023? What percent of those costs are over the ground? And what do you assume in diesel costs for the rest of the year? Just wondering, with diesel serving in the low 4s at the pumps now, how should we think about the tailwinds from lower diesel costs rolling through the P&L?

I don't want to go into a detailed operational review. We typically do not disclose the breakdown between ground and air freight costs. However, I can share that in our forecasts, we strive to incorporate the latest indices and insights from reliable sources regarding future trends. This applies not only to diesel and logistics costs but also to materials like resins, packaging, and corrugate. We have significantly enhanced our forecasting capabilities in this area, particularly as a lesson learned from last year. Our supply chain finance team has put in considerable effort to improve this process. Overall, we assess current index levels and trustworthy forecasts going forward, directly linking our performance to them. One factor contributing to an increase in margins for the second half of this year is the costs we are currently facing, which include freight and logistics as well as other categories.

Great. Thanks so much.

Thank you, Pito.

Hey. Thanks, everybody. Jay, I'd love to dig a little bit deeper in that second half margin ramp that you just mentioned. I know you had the $300 million in cost savings, the macro cost. Can you help just give some confidence in the back half margin ramp?

I think it's interesting. The first quarter performance really contributed positively, and importantly, some of our assumptions were confirmed, giving us confidence as we head into the second half of the year. However, there is a significant increase expected from the first half to the second half. There are three main drivers for the expected improvement in operating margin. First, sales typically increase in the second half, and we expect more than $400 million, nearing $500 million, in additional sales in the second half compared to the first half. This pattern has been consistent over the past few years, which positively affects margins and also results in a significant EPS benefit, with about $0.30 or more of EPS coming from those additional sales. Second, regarding the integrated supply chain, the costs we're facing now are based on the elevated prices we experienced in the third and fourth quarters of last year. Recently, as those indices have decreased, we see an opportunity for supply chain improvements that could yield about $0.15 of margin improvement from the first half to the second half. This improvement is driven not just by favorable indices but also by our value improvement programs, which focus on efficiency in our plants. Finally, we have previously discussed some cost-saving measures that will have a greater impact in the second half than in the first. We have largely completed these initiatives, and the benefits will be realized more in the third and fourth quarters, contributing around $0.15 to the margin improvement. So, the transition from point A to point B in significant margin improvement really hinges on these three specific factors.

That's very helpful. Thank you, Jay. I have a follow-up question regarding Novum IQ. When it gets approved, should we anticipate it generating around $100 million in full year revenue and $200 million in margins? Are these figures above or below the corporate average? Additionally, I’m curious about your thoughts on the potential for gaining market share and how you plan to position yourselves against competitors. How do you view the opportunity for gaining market share in this context?

We were not going to comment on the approval of the pump because it's not dependent upon us; it's with the FDA at the moment. We are optimistic about the performance of the pump when it gets approved. But we're not commenting on anything that the FDA is doing. I would say to you that there's an opportunity. There's a significant amount of pumps on recall at the moment, including brand new pumps, which just launched, I recall, Class 1 the other day. So we are currently capitalizing on that with our Sigma Spectrum. We upward forecast significantly on Sigma Spectrum. We are now more optimistic about the components. We are also doing some redesign of components to make sure there's more durability. And when Novum gets to the market, it's going to be for us to make the decision how to phase that in. Customers come to me want to stay with the current model of Sigma Spectrum because they have a fleet of it, and we have significant opportunities to gain market share once Novum is approved. So we're very excited about the platform that we have in front of us, and we're going to be putting more money in research and development assets to develop other categories of pumps within Baxter. So I will tell you that we're not giving you what's the forecast for Novum once approved. As soon as we get news about Novum from the FDA, we'll let you know what that means in terms of numbers. But at the moment, I tell you the demand for pumps is high, primarily because Sigma Spectrum is a good pump that is performing extremely well and facing competitors who have consent decree and recalls in many different categories.

Great. Thanks, Joe and congrats on a good quarter.

Thanks.

Thank you.

Great. Thanks for taking the questions. Maybe to start, I would love to get your thoughts on pricing. What it was in the quarter, and your ability to take price going forward, we see peers taking it in the capital components. And we hear some of your peers talk about it in some of the hospital supply areas. Would love to get your thoughts on the potential for Baxter moving forward?

I'm not going to provide specific figures for the first quarter, but pricing was an important factor. Throughout last year, we faced significant additional costs across our portfolio and nearly all of our product lines. There are times when we can't adjust prices in the short term, whether in a particular quarter or year, and in some cases, it may take a couple of years to make adjustments due to long-term agreements. It's crucial for our team to ensure we capture our fair share of the economic value we deliver to our customers. This year, we're being very deliberate about this. We saw positive pricing in the renal sector and expect positive pricing in hospital capital as well. In all our operational areas, we anticipate decent pricing, with the notable exception of Pharma, where pricing has been more stable, especially in the first quarter, although it remains competitive. From our perspective, this will be a key driver for us, not just this year but also in the years to come.

Great. Thanks. Maybe one more, we saw some news reports on a potential sale of the bioprocessing unit. Just the latest update on your thoughts on that business and how it will proceed. And if a sale does go through, is that repayment the primary use of cash? Thanks.

Robbie, good morning. We have experienced significant interest in this business. We still are exploring strategic alternatives, and we'll let you folks know as soon as we make the decision. If there is a sale, the proceeds will be exclusively and mostly directed to debt repayment. So it opens the opportunity for Baxter for future reinvestment and even stock share buybacks and other opportunities. But the first thing for that amount of cash, if that is the alternative we decide to go forward with, will be to repay debt.

Thanks for taking the questions.

Thank you.

Good morning, Joe. Hi, Jay. I have a couple of questions. Joe, could you walk us through your perspective on the status of the Hillrom integration? Is it completely integrated into Baxter now? Do you have the team in place, and is everything functioning well, with just the supply chain still needing to align? Also, could you provide some insight into the timeline for Hillrom to return to a more typical mid-single-digit growth rate? Thanks, Joe.

Good morning, Rick. We have made significant progress with the integration of Hillrom. We have retained some key talent while also incorporating a number of Baxter employees into Hillrom. Currently, Reaz Rasul leads Hillrom, overseeing its three divisions, which are managed by a combination of Baxter and former Hillrom staff. In terms of synergies, I previously noted that in the first year we achieved double the results we had anticipated, and we remain on track to fulfill our promises made during the acquisition. Aside from the supply chain challenges we faced last year, we are beginning to see the benefits of frontline care and our portfolio contributing positively with growth in both the U.S. and international markets. The availability of components is improving, and our backlog in Front Line Care is increasing along with our sales. We are really enthusiastic about that segment. Our PSS business in the U.S. encountered some challenges in the first quarter, with a 20% drop in rentals due to the impacts of COVID over the past two years. However, we expect that the launch of Progressa Plus and enhancements to Centrella will be strong catalysts in the second quarter, and we anticipate a rebound as capital purchases resume. We are hopeful to return that business to a more sustainable growth rate by 2023 and into 2024. We are also exploring ways to strengthen leadership across all aspects of this business. Outside the U.S., PSS is performing well, and the GSS business, while smaller, is also doing well both domestically and internationally. Overall, we are optimistic about Hillrom, as it opens up new growth opportunities and product launches for Baxter. We have a strong pipeline of upcoming launches, particularly in pumps, indicating significant potential ahead. We plan to manage the short-term restrictions on beds in the U.S., and as I mentioned, introducing these new products will serve as a great catalyst for future growth.

Great. Thanks for that. I have a follow-up question for either Jay or Joe. Electromechanical components are clearly essential to this ongoing turnaround process. Are you around 50% of the way back in terms of having what you need, or is it more like 10% or 90%? Are you optimistic that you largely have what you need as you approach the end of the second half? Can you help me think through that a bit? Thank you.

Rick, the worst thing we can do is to feel good about something that just start turning around. So we're very excited about having availability; as I said before, the demand for our Sigma Spectrum infusion pump is very high. And we're very happy actually to have a significant amount of components that will allow us to increase the sales of that product and satisfy the backlog that we have. If we had more, we could sell more. We see alleviation of backlog of products that need to be shipped on Front Line Care already coming out. Our back order has reduced in half what we had about nine months ago, and a lot of that is related to semiconductors. With that said, we're not letting this go away. We got an opportunity to improve. So we have a significant amount of initiatives within the company for redesign of components to go on boards. Some are very critical; some are less critical. We have a transfer office established within Baxter, not only for microprocessors but also for other components. Things are not 100% normal right now. We still have a great deal of suppliers trying to get pricing out of Baxter. We're offsetting those. We're absolutely not accepting, but also offsetting with a significant amount of cost reductions. So as we navigate through 2023, it will be very important that the company does not lose its focus in finishing what we started in the semiconductor transformation in the supplier chain resilience. But we feel cautiously optimistic that we have turned the corner when it comes to supply of components into our business.

Appreciate the perspective, Joe. Thanks.

You're welcome.

Hi. Great. Thanks so much for taking the questions. So Joe or Jay, some of the themes that have obviously come in here for Q1 so far this earnings cycle, health care and med tech. And I guess providers as well as improving utilization volumes, strong admissions is going to be key to some of your products. I wonder if you could give us a sense of what strong uptick in these sort of elements meant to you in the quarter? And then what do they mean in terms of pull-through increased assumption of some of the products that you sell as well as the availability of staff to get some of the implementations of these systems done like in connected care or the rollout of the beds? Maybe just some additional color on that. And then I have one follow-up.

What we see is a reduction in the pressure hospitals experienced last year due to increased nursing availability. To provide some context, we had a few one-time events in our medication delivery segment, which we have been reporting on. If we look at medication delivery and exclude those one-time gains and losses from the first quarter of 2022 to 2023, our growth is approximately 6.2%. This growth aligns with what we're observing from publicly traded hospitals currently reporting their performance. In the medication delivery area, which includes infusion solutions and vitamins, this growth is significant considering it usually sees low-single digit growth. Therefore, we are witnessing a rebound toward normalcy. Our focus on optimizing hospital workflows is where we see our products starting to make an impact. Recently, we integrated our Sigma Spectrum for two-way communication in hospitals. Today, hospitals no longer ask only for pumps or monitors; they require integrated solutions to improve workflow. Baxter is investing heavily in research and development in frontline care to enhance our ability to launch products quickly and create effective solutions for hospitals. We are cautiously optimistic, seeing an increase in procedures, with higher emergency room admissions and more operating room activity. Our Advanced Surgery business reflects this growth robustly at almost 10%. This indicates a strong flow of procedures in the U.S., suggesting a promising outlook for 2023.

That's terrific. And then just if I could, a follow-up on a question that we get occasionally here on the spin. I know it's still early, and you're working through many of the details as you lead up to that event. But around the dividends, Jay, if you could talk a little bit about how you're thinking about managing that and what at this stage is your expectation or aspiration to sort of continue to pay the Baxter dividend for the entire entity as you kind of get through the spin transaction next year?

It's early days in terms of the capital structure and dividend policies for the two companies. We recognize the significance of dividends and at Baxter, we take them very seriously as a valuable way to return capital to shareholders. While this has been effective for us historically, it's too soon to comment on capital structure and related matters. We will provide updates as we approach the spin-off and discuss concepts like the dividend policy for Renal Co. However, it feels premature to address these topics right now since we are still in the initial stages of preparations for the spinoff.

Got it. Congrats on the quarter and thanks for the color.

Thank you.

This concludes the call.