From the Baxter webcast Questioner:
Let's talk about kidney care for a second. Can you maybe help us think through the decision tree and key considerations around spin versus sale? Because as I look at them, they appear to be sort of diametrically opposed outcomes from a strategic and financial outcome for the companies. Maybe just talk through what are the things that are going to go into your decision making process and how should we kind of think about those considerations?
Baxter:
So I'd say a couple of things – number one - strategically - the separation itself is certainly an important aspect of this, and we can go into that a little more later if you'd like. In terms of the idea that actually allows for capital allocation in both businesses - for Baxter, for strategic focus, for simplicity etc. For the separation itself that rationale, I think, is fairly consistent. The difference, I would say, between the two, I mean number one, obviously, there's a valuation aspect of this, in terms of what that might look like in in public markets, what it might look like in a sale transaction. Obviously from a sales transaction standpoint, let's assume valuations are at relatively equal values. You do get more cash up front, there's an ability to deliver more quickly to put ourselves in a position from a balance sheet standpoint, where we're able to move to a capital allocation of further investment as opposed to more, debt pay down focus. There's also valuation certainties around a sale that is different than in the public markets. So those are some of the things we're certainly contemplating. The most key point really is that we're going to do what’s best for our shareholders. And so whatever that decision is, whatever it comes to, you can be sure that's where we're going to go.
Questioner:
In terms of that assessment is that just a time value of money question? Because I appreciate the common valuation as being equal. It's hard to imagine a scenario where you're going to get the cash up front. That would be the same absolute dollar value as what you might be able to achieve in a spin. But, you know, a bird in the hand is worth two in the bush type of thing. Is it a time value of money, NPV question. How do you define the creation of shareholder value metric.
Baxter:
I think it is that, but then again I also go back to the point on certainty of valuation. Because obviously in a spin scenario we would have a retained stake. We wouldn't necessarily look at that in and of itself as a delevering event. I think what we've said is we'd look at putting debt on that new company and then somewhat of the same range that we would have today and others, we're not loading up that company with debt. And so I think the deleveraging would happen over time in a spin scenario, with some less certainty of valuation. And so I think those are some of the ways to think about it.
Questioner:
I appreciate wanting to put good parameters around the timing. But as you think about the opportunities in the kidney business, it looks like there's a lot of margin expansion potential here. I appreciate Q1 might have been overstated because of the Opelika dynamic, but at the same time if you exit some of these lower margin or potentially negative margin businesses in HD Acute and US PD and other higher margin businesses become a bigger percentage of the total, the value you can potentially accrue from a sale, could be higher if you if you saw that margin expansion. So why put the “this has got to be done by the end of the year” timeline out there sort of drawing that proverbial line in the sand. What does that accomplish?
Baxter:
First of all, we've committed to doing that. And, I think, from a timing standpoint, obviously, it's important for our balance sheet – number one, from the, ultimately, deleveraging standpoint, and again our ability to move forward. But I think just as a reminder, I said this a second ago, but just to elaborate on it a bit, the strategic rationale though, number one, kidney business , (yes Q1 was a bit of an anomaly I'll call it from a margin perspective), but even within our portfolio, that business is certainly the lowest margin business. It's the opportunity, but I think again about capital allocation for ourselves, it's capital intensive. when I think about our higher versus lower ROIC projects, the prioritization of that and again, I think the simplicity in putting our strategic focus and clarity, allowing for simplicity in the business, in a post spin world, most of our manufacturing businesses are very cleanly lined up with our business segments and I think there's an element to that that allows a lot of benefits out for us. And so I would look at it as much in the context of where it sits in our portfolio, what it allows us to do within the portfolio versus outside of it. And then of course for kidney that allows them to focus their investments as well in a way that can help drive their outcomes.
Questioner
One more on kidney care, then we'll move on to the balance sheet and back to the business. But how should we think about the underlying profitability of that business? I appreciate what you give from a disclosure perspective today, but you also have the spin related costs that are adjusted as non gap, and I think we all understand why. But it is those separation related costs - would those on a standalone basis actually be in the P&L? So we take the 200 million or so, whatever the number was last year, I think that's right, and that gets added back to OpEx for kidney care on a standalone basis?
Baxter
Yeah, I guess the way I think about it is, the business itself within Baxter, (I know that's not what you're specifically asking about), this number is more of a high single, low double digit number. Then there's going to be on a standalone basis public company costs in the spin. There's going to be, obviously, other costs that today are absorbed as part of Baxter that would not be there. That's just the way I would think about this because there are going to be standalone costs that can be deducted.
Baxter2
And the only clarification I would make of the 200 million, some of that would be one time costs that would not be the recurring costs, that would be included as a standalone entity. So there are some recurring costs in there right now, but not all of that 200 million. So what we had said previously. Is that typically what we have seen with precedents is that standalone costs are about 1 to 2% of sales for spin costs and everything we've seen so far, kidney care advantage would be in that range.
Questioner
That’s very helpful. A little out of order here but you brought up the balance sheets. I want to touch on that because I think you paid the debt in May on the Euro bonds with the remaining proceeds from the BPS sale. You do have debt due in November. I think you also have debt due January of next year, so as you think about, I think it's like 1.8 billion of debt coming due that sits around a 1 1/2 percent interest rate, how should we think about managing that?
Baxter
First of all, the decision on the structure of the separation, that's going to impact the answer to this question. So, it won't be as definitive as you'd like it to be, but I guess what I would say to this is certainly the proceeds from the separation would be something that would be used to pay down debt and I think you know we've got a tranche due in November of this year. We also have a term loan in 2026 that's one of our higher end coupon debts, that I think that would be something we would also look to focus on as some of those proceeds are used. But I would just say the separation proceeds are certainly going to be a key part of what we're going to use and then obviously the remaining cash that we have from the BPS
Questioner:
Is there a good number we should think about as cash you would keep on the balance sheet to fund working capital...
Baxter
I think somewhere in the billion dollar range or maybe a little higher. I think that's reasonable.
Baxter2
I'm more aligned with you. I think our Treasurer would say higher, but I think about a billion and 1/2 we're good.
Questioner
If you think about the proceeds from a spin or sale that's one avenue to pay it down just from where we sit today, though if we assumed you had to refinance that, that would create a pretty significant interest headwind for 2025. If we said you're paying off one for 1 1/2 percent debt with, I don't know, five, 5 1/2%, wherever rates are now that would create a reason, some sort of incremental net interest expense headwind for next year.
Baxter
I would go back to my previous answer - we're still evaluating depending on how the structure of this happens. We may or may not end up in that place. But either way, we're evaluating what the different options are in terms of navigating that. I’m not ready to actually give specific clarity on that.
Questioner
OK, maybe we could toggle on to the business. You know, Q1 had a number of puts and takes in it. But as you looked at Q2, you're guiding to a modest deceleration in sales from the 3% in Q1 to 2 to 3% in Q2. Maybe help us think through the thought process there. If it seemed like HST should be improving markedly on a sequential basis, what are some of the puts and takes in the trajectory of guidance from Q1 to Q2.
Baxter
Generally speaking I'd say the overall business itself is pretty consistent between the two. The couple of things I would call out, as you said, we are anticipating some incremental improvement from HSD, certainly from Q1. We've talked about, somewhat, negative, yet improved incrementally from the first quarter. We also, when I think about the kidney business, we had a very strong acute business in the first quarter. That's something I think we're anticipating some softening of as we head into the second quarter as well as the in-center HD I think is also something that we're anticipating having, you know, lessening in Q2 versus Q1. And I think finally the compounding in pharma, we have a very strong first quarter from a compounding standpoint that we're anticipating some softness in or lessening of in the second quarter. Those are really primary puts and takes.
Baxter2
The one piece I would add to there, if we think about just the margin, because I take your point is we are going to incur some increased costs as we separate out kidney care from Baxter, from a manufacturing standpoint. Kidney care will be shifting to its own location. As a result, we're going to incur some increased cost logistics related as we do that and that's really one of the primary drivers, kind of a margin because we do expect gross margins to actually decline slightly in Q2 versus Q1.