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Baxter International Inc (NYSE:BAX)
Q2 2021 Earnings Call
Jul 29, 2021, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the Baxter International Second Quarter 2021 in Conference Call. [Operator Instructions]

I would now like to turn the call over to Ms. Clare Trachtman, Vice President of Investor Relations at Baxter International. Ms. Trachtman, you may begin.

Clare Trachtman -- Vice President of Investor Relations

Good morning, and welcome to our second quarter 2021 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 second quarter 2021 financial results and full year 2021 financial Outlook. With that, let me start our prepared remarks by reminding everyone that this presentation, including comments regarding our financial outlook for the third quarter and full year 2021, new product development, 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 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?

Jose E. Almeida -- Chairman, President and Chief Executive Officer

Thank you, Clare. Good morning, everyone, and thank you for joining us. I will begin with a review of Baxter's second quarter results, and also share a few words about our upcoming investor conference. Jay will then provide a deeper dive on our financial performance and outlook. And we will wrap up with Q-and-A. Baxter delivered second quarter sales growth of 14% as reported, 9% on a constant currency basis and 8% operationally. Growth was driven primarily by the ongoing global recovery from the COVID-19 pandemic, resulting in favorable performance comparisons for a number of our businesses versus the prior year, as the pandemic affect the patient treatment dynamics and demand mix in the prior year. On the bottom line, second quarter adjusted earnings per share were $0.80, up 25% year-over-year and exceeding our original guidance. All three of our geographic segments contributed to the positive quarterly performance. The Americas and EMEA achieved high single-digit growth and APAC achieved a low double-digit growth, all at constant currency rates. While we are clearly experiencing recovery from the pandemic across all three of our geographies, the situation on the ground varies considerably by market. As always, we salute the healthcare workers, who continue to face enormous challenges every day on the front lines of care. I also want to express my personal gratitude to all the Baxter employees, who tirelessly support these clinicians and caregivers while helping to ensure we address the needs of patients across our vast life-sustaining portfolio.

Turning to our performance by business, five of our seven product categories achieved growth on a constant currency basis. Performance was led by BioPharma Solutions and Advanced Surgery, which delivered 49% and 48% constant currency growth, respectively. Growth in BPS was filled by contracts to assist in the manufacture of COVID-19 vaccines. Advanced Surgery growth reflects a favorable comparison to the prior year spurred by improving surgical volumes as pandemic recovery advances globally. As you saw in this morning's press release, we are building on our momentum in Advanced Surgery with the acquisition of PerClot Polysaccharide Hemostatic System. PerClot marks our entry into the global hemostatic powder segment, which will allow us to serve surgeons and their patients with an even broader range of options to control into operative bleeding across active and passive solutions. Our Medication Delivery business grew 12% at constant currency rates, also benefiting from a favorable comparison driven by improving rates of admissions at hospitals as compared to the prior year.

Looking ahead, Medication Delivery is continuing to position for the U.S. launch of our NOVUM IQ infusion platform including those IQ safety software in our IQ enterprise digital connectivity suite. Following up on our recent FDA resubmission, we are now in the process of responding to an additional information request from the agency. We continue to expect to launch NOVUM IQ in the U.S. before the end of the year. Our Clinical Nutrition category advanced single digits at constant currency rates, reflecting ongoing strength in the U.S. Pharmaceuticals also grew at single digits constant currency. Adjusting for the recent Caelyx and Doxil acquisition, Pharmaceuticals was flat year-over-year. Although we expect competitive pressures to continue in this marketplace, we remain focused on launching molecules with differentiated presentations and/or complex formulations. We have several projected launches of new generic injectables in the coming years that will help to fuel growth in this business and mitigate some of the competitive pressures we are experiencing. Performance in Renal Care was comparable to the prior year at constant rates with growth in the U.S., offset by a decline across international markets.

On a global basis, the market continues to be dampened by the impact of the pandemic, which has contributed to a higher mortality rate for patients with kidney disease combined with a slowing of new patient diagnosis. As we said last quarter, we expect the recovery of this market to continue, returning to its pre-COVID dynamics over the next one to two years. In this quarter, we saw returned positive year-over-year PD patient growth globally including mid-single-digit PD patient growth in the U.S. The pandemic has highlighted the vital importance of the home dialysis therapy option. And as a leader in recognized innovator in this space, it has never been more urgent to support education, awareness and access. Our global safer at home campaign, which has been underway for more than a year, is dedicated to helping clinicians, patients and other stakeholders learn more about the benefits of home care, particularly amid pandemic conditions. Lastly, performance in Acute Therapies declined mid-single digits at constant currency rates year-over-year. This decline was expected given the extremely challenging comparison following last year's historic surge in demand for continuous renal replacement therapy in light of the pandemic. We remain excited by the prospects for the advanced treatment options in the CRRT market. In fact, Q2 marked the launch of PrisMax to the latest version of our nex-gen platform for CRRT and organ support with embedded TrueView digital health technology.

From an ESG perspective, earlier this month, we announced our 2030 corporate responsibility commitment, which will help to drive Baxter's environmental, social, governance efforts over the next decade and beyond. This work is integral to how we advance our mission to save and sustain lives and serve all of our stakeholders from patients and clinicians to our communities and investors. Our 2030 commitment is built around the three overarching objectives, empower our patients, protect our planet and champion our people and communities. Full details can be found in our 2020 corporate responsibility report now posted on baxter.com. Briefly looking ahead, we continue operating in an environment of some uncertainty. We fully anticipate broader trend of pandemic recovery to sustain, but geographic disparities and emerging variants could slow and undermine the pace. All storages like our healthcare peers and countless other companies, Baxter is subject to the impact of inflation in the rising cost of freight, fuel and other raw materials and commodities. We will continue to look for opportunities to offset the impact from these incremental expenses.

As I wrap up, I want to highlight that our 2021 investor conference will be held on Monday, September 20 in Deerfield, Illinois. At the conference, we plan to focus on our key strategic objectives to enhance growth and drive innovation. In addition, as a critical part of our ongoing business transformation, Jim Borzi, Senior Vice President and Chief Supply Chain Officer, will outline the next phase of our manufacturing supply chain journey, which is expected to enhance our operational effectiveness and drive margin improvement.

Now I'll pass it to Jay, who will share a closer look at our results and our outlook for the balance of the year.

James Saccaro -- Executive Vice President and Chief Financial Officer

Thanks, Joe, and good morning, everyone. As Joe mentioned, we're pleased with our strong second quarter performance. Second quarter 2021 global sales of $3.1 billion advanced 14% on a reported basis, 9% on a constant currency basis and 8% on an operational basis. Sales growth this quarter reflects the ongoing recovery in hospital and surgical volumes, along with the benefit from COVID vaccines. We estimate these factors contributed just over 450 basis points of sales growth in the quarter. OUS sales of Caelyx/Doxil totaled approximately $30 million in the quarter. On the bottom line, adjusted earnings increased 25% to $0.80 per share, exceeding our guidance range driven by disciplined operational execution, and a lower-than-expected tax rate. Now I'll walk through performance by our regional segments and key product categories. Starting with our three regional segments. Sales in the Americas increased 8% on both a constant currency and operational basis. Sales in Europe, Middle East and Africa grew 8% on a constant currency basis and 5% on an operational basis, and sales in our Asia Pac region advanced 10% on a constant currency basis and 9% operationally.

Moving on to performance by key product category. Note that for this quarter, constant currency growth is equal to operational sales growth for all global businesses, except for our Pharmaceuticals business, for which we will provide both constant currency and operational growth adjusted for the acquisition of rights in select territories outside the U.S. of the Caelyx and Doxil. Global sales for Renal care were $964 million, were flat on a constant currency basis. Performance in the quarter was driven by our PD business, where we observed both the sequential and year-over-year improvement in global patient volumes. This was partially offset by declining international sales of in-center HD dialyzers, reflecting the impact from the pandemic as well as competitive dynamics. We continue to monitor the impact of excess mortality among ESRD patients and delays in new patient diagnoses resulting from the pandemic. Our expectation remains that PD patient volumes will continue to ramp over the course of the year, although the pace may vary by market. In particular, we are monitoring COVID resurgences in Asia Pac and parts of the Europe. Sales in Medication Delivery of $697 million, increased 12% on a constant currency basis. Strong global growth in this business reflects the recovery in the pace of hospital admissions in many markets following the height of the pandemic last year. We estimate that in the second quarter, the rate of U.S. hospital admissions was down approximately 7% as compared to pre-COVID levels, a market improvement from the second quarter of 2020, which saw U.S. admissions down approximately 20%. Pharmaceutical sales of $546 million, advanced 5% on a constant currency basis and were flat to prior year on an operational basis. Performance in the quarter benefited from the recovery in surgical procedures and hospital admissions, demand for our international pharmacy compounding business and the contribution from OUS sales of Caelyx/Doxil. This growth was partially offset by declines in our U.S. generic injectables portfolio, which faced a headwind from prior year sales of select injectable drugs used to treat critical COVID-19 patients as well as increased competitive activity for certain molecules.

Moving to Clinical Nutrition. Total sales were $237 million, increasing 3% on a constant currency basis. Performance in the quarter was driven primarily by growth in the U.S., partially offset by lower international sales of vitamins resulting from supply constraints. Sales in Advanced Surgery were $256 million, increasing 48% on a constant currency basis. Within the quarter, we estimate surgical procedures were at or slightly above pre-COVID levels, contributing to strength in the quarter. Sales in our Acute Therapies business were $188 million, declining 4% on a constant currency basis, reflecting the challenging year-over-year comparison due to surge in product demand this time last year related to the COVID pandemic. As Joe mentioned, we anticipate that COVID-related demand for CRRT will moderate this year, but will improve over time through the launch of new products and increased awareness of this therapy. BioPharma Solutions sales in the quarter were $183 million, representing growth of 49% on a constant currency basis, reflecting incremental sales related to the manufacturing of COVID-19 vaccines.

Moving through the rest of the P-and-L. Our adjusted gross margin of 42.6% increased by 100 basis points over the prior year, reflecting operational improvements in manufacturing and a favorable product mix as the impact from COVID receives. Adjusted SG-and-A of $649 million increased 12% on a reported basis, reflecting the impact from foreign exchange, the improvement in sales and resulting increase in commissions and increased promotional spend in support of new product launches. Adjusted R-and-D spending in the quarter of $139 million increased 18% on a reported basis driven by the impact of foreign exchange and investments in our new product pipeline. Both adjusted SG-and-A and R-and-D spending reflect a somewhat more normalized level of spend, as certain expense categories were depressed last year as a result of the pandemic, particularly those related to employee bonus accruals. Adjusted operating margin in the quarter was 17.2%, an increase of 120 basis points versus the prior year. Net interest expense totaled $34 million in the quarter, and other nonoperating income contributed $2 million in the quarter. The adjusted tax rate in the quarter was 17.8%, an increase over the prior year driven by lower stock-based compensation award deductions as compared to the prior year period. The tax rate was favorable to our expectations driven by a favorable change in earnings mix.

And as previously mentioned, adjusted earnings of $0.80 per diluted share exceeded our guidance of $0.72 to $0.75 per share. Within the second quarter, we repurchased approximately $300 million or 3.7 million shares of common stock. Year-to-date, we have repurchased $600 million or 7.3 million shares of common stock, which has been partially offset by option-related dilution. On a net basis, our outstanding share count has declined by approximately five million shares through the second quarter. In addition, during the second quarter, we announced a 14% increase in the company's quarterly cash dividend rate. The strength of our financial position has fueled our ability to increase our quarterly dividend rate on an annual basis for the sixth consecutive year. We continue to follow a strategic approach to capital allocation that is balance between inorganic and organic initiatives with the objective of accelerating growth and expanding margins, driving innovation and returning value to our shareholders. With respect to cash flow in the first half of 2021, we've generated $854 million of operating cash flow and $525 million in free cash flow.

Let me conclude my comments by discussing our outlook for the third quarter and full year 2021. For full year 2021, we expect global sales growth of approximately 8% on a reported basis, 5% to 6% on a constant currency basis and 4% to 5% on an operational basis. This assumes a benefit of approximately 100 basis points to both reported and constant currency revenue growth for the acquisition of Caelyx/Doxil as well as approximately 250 basis points of positive top line impact from foreign exchange on reported growth. Our expectation remains that on a full year basis, hospital admission rates will stay below pre-COVID levels with rates improving throughout the year, and exiting down low single digits. Based on surgical procedure data in the U.S. to date, we now expect surgical procedures will continue to be a 100% of pre-COVID levels for the remainder of the year. Moving down the P-and-L. We continue to expect adjusted operating margin to expand between 40 to 60 basis points. For the year, we expect an adjusted tax rate of approximately 17.5% and a full year diluted average share count of approximately 510 million shares. Based on these factors, we now expect 2021 adjusted earnings, excluding special items of $3.49 to $3.55 per diluted share. Specific to the third quarter of 2021, we expect global sales growth of approximately 9% on a reported basis, approximately 7% on a constant currency basis and approximately 6% on an operational basis. And we expect adjusted earnings, excluding special items of $0.93 to $0.95 per diluted share.

With that, we can now open the call up for Q-and-A.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And our first question comes from the line of Bob Hopkins with Bank of America Securities.

Bob Hopkins -- Bank of America Securities -- Analyst

Thank you and good morning. Can you hear me, OK?

Jose E. Almeida -- Chairman, President and Chief Executive Officer

Yes. We can, Bob. Good morning.

Bob Hopkins -- Bank of America Securities -- Analyst

Great. Good morning. So I just have two questions, and I'll just state them upfront in the interest of time. So I guess, first for -- maybe for Jay. Just wondering if you could flesh out the Renal performance in the quarter, a little bit more what happened internationally? And how quickly you think Renal could get back to better growth rates? So that's question number one. And then a follow-up on question number two is more strategic for Joe. And Joe, I realize you won't talk about market speculation, but I do think it would be helpful for investors to hear maybe a little bit of an update on your thoughts on M-and-A generally and maybe talk about what the circumstances would have to be for you to pursue a larger deal? How important it is that M-and-A improves the company's growth rate, things of that nature? I just think an update there would be much appreciated. So those are my two questions. Thank you very much.

James Saccaro -- Executive Vice President and Chief Financial Officer

Great. I'll address the Renal question first from a Q2 performance standpoint and then turn it over to Joe for the second question. Overall, as you mentioned, the U.S. had a solid performance in Renal growing 4%. We ended up -- TD was a little bit in excess of that 5% with the HD business slightly below that. And then internationally, you're right, we had a decline in the quarter, which we do not expect to continue. There were a couple of drivers of that. One is we've talked historically about patient census challenges, and that being a headwind that we're facing and contending with this year, which is kind of disrupted the normal orderly cadence of patient growth that we see internationally. And that was pronounced in the second quarter. Our PD business actually slightly declined, so 1% decline in the quarter. We do expect that to return starting in the third quarter and the fourth quarter. And frankly, we've seen, in certain markets, delays in procedures of establishing new PD patients, like, for example, in Japan, along with this patient census issue. All of these things came together to impact the growth rate in the quarter. Like I say, in the second half of the year, we do expect to see an acceleration and feel solid about that. And then in the HD business, we did have some pricing competition on dialyzers. We see that from time-to-time. So the HD business declined in mid-single digits, and we will expect that to normalize in the second half of the year. So while -- the Renal business has been a fairly consistent performer for us internationally. And if you look at that over a series of multiple quarters, I think you can expect -- or you can gain some confidence in the second half of the year, we'll grow that business internationally, roughly 3%. And I'll turn it over to Joe to address the other question.

Jose E. Almeida -- Chairman, President and Chief Executive Officer

Thank you, Jay. Let me give you, how I think about M-and-A, to answer your question, Bob. First is size being a secondary conversation. First is you strategically fit for the company. We look at the areas of growth for the future. You look what is going to make a difference in the healthcare in five to 10 years, where this Baxter is going. It's now where the puck is where the puck is going. Sometimes we get it attached to growth rates and things of where things are. We've got to look where things are going. And Baxter is doing a lot in connected health, and we need to make sure that we have the ability to deploy capital in that area as well as adjacencies. Going into areas of no correlation to Baxter to create [Indecipherable] presenting much more challenging environment for the company in terms of M-and-A. Not impossible to do it, but it's something that is more difficult. Second is how do we see returns. The returns are always the same. We look at internal rate of returns to be above our cost of capital, about a few hundred basis points as well as we look at ROIC very similarly on a five-year base posted deal. We look also the ability for the company to generate cash flow and our ability to bring the company integrated into Baxter, which I feel confident that we, through our digital transformation, have a much better ability of bringing companies in than a few years ago. And the third and last one is that not every deal is created the same, and we examine multiple opportunities at all times. So the company has a significant amount of cash. And it doesn't go against deals. It goes back to the shareholders in form of -- in terms of buybacks, as we have done. As you saw, we just did some buyback this quarter. And for the year, we are around $600 million. So this is how I think about M-and-A.

Bob Hopkins -- Bank of America Securities -- Analyst

That's great. Thank you very much.

James Saccaro -- Executive Vice President and Chief Financial Officer

Thanks, Bob.

Operator

Robbie Marcus of JPMorgan is on the line with a question. Please state your question.

Robbie Marcus -- JPMorgan -- Analyst

Great. Thanks. Appreciate it. Jay, maybe I could start with you. I wanted to touch on guidance. You guys had a really nice EPS beat in the quarter. You have admissions trending toward pre-COVID levels over the back part of the year. Maybe you could just walk us through the updated guidance and how you ended up, where you did, especially on EPS?

James Saccaro -- Executive Vice President and Chief Financial Officer

Sure. You're right, Robbie. Thus far, we're seeing a fairly stable admissions environment relative to our expectations. Underlying our guidance, we're expecting roughly 98% of admissions in the United States in the fourth quarter of the year. We watch that, of course, very carefully, and I've talked about the risk and the sensitivity around that in the past, and we're particularly watching given the delta variant, but feel solid that we've got our hands around this at this point. And so then as we translate that to the rest of the P-and-L, let me talk first about a full year basis and then maybe make some comments on the second half. On a full year basis, we are seeing some challenges in the Pharmaceuticals business related to competition and pricing. And so on a full year basis, probably $0.06 of a headwind from pharma offset by $0.06 of a benefit from our BioPharma Solutions business, which is performing better than our expectations. So those items kind of -- sort of counteract each other. And then we have roughly $0.08 or so on a full year basis of global supply chain costs that we're contending with. And so essentially, we're seeing things like freight and premium freight cost, that's roughly $0.03. We actually have a fairly substantial manufacturing facility in Colombia. We've had a couple of cents of impact from Colombia unrest and ensuring we're getting product to our patients and product out of the country in an expeditious manner. And then, of course, through some purchase price variations, which there is some inflation in that rounding out the $0.08. But offsetting that, we have -- we're committed to really using resources efficiently as a company. And so we're able to counteract the vast majority of that. So roughly $0.07 of benefit from measures that we have in place that are enhanced versus our expectations, really looking at all of the spending categories and challenging ourselves to make sure that we're using resources as efficiently as possible.

Of course, when we do those exercises, we don't touch things like quality or critical R-and-D programs, but we really do look hard at the cost base to ensure we're being efficient and offsetting where possible. So that's really the story on a full year basis. But if you think about it -- and then there's financial assumptions that kind of wash out, we had some benefit in the first half from a number of assumptions, and then we have some headwinds in the second half. But if you look at it exclusively from a second half standpoint, I'll say that FX is actually $0.03 of impact. So that is really one of the big drivers of the second half performance. We've seen dollar strengthening. And so that has an impact on our translation back of our overseas business. That's roughly $0.03. BPS and Pharma, again, kind of wash out in the second half. And then we have a couple of cents of supply chain expenses. But I think really the most notable impact to the second half is this foreign exchange impact that we're contending with right now.

Robbie Marcus -- JPMorgan -- Analyst

Great. And Jay, I don't know if you want to take this, or Joe. I think it is worthwhile spending a little more time on the $0.06 pharma headwind. What's driving that? What drugs? What makes you feel better, you could overcome it in the second half? And just any detail there would be great. Thanks.

Jose E. Almeida -- Chairman, President and Chief Executive Officer

Robbie, when we think about pharma, what's the value proposition of our pharma business is complex formulations and delivery in novel ways, premixes and waste that have not been yet launched or a combination of both. So we are in process of delivering our portfolio. The conditions of the market have deteriorated in terms of pricing headwinds as well as COVID, with the patients that have not gone to a hospital, and the budget of the pharmacies, right? So when we look at this whole thing, where do we stand today? We still see the headwinds that, that business has. Don't confuse the whole category that we have, which is -- has two very separate businesses. One is our anesthesia business, which are gases. Instead of gases -- and that has declined consistently over the last 24 months because the type of delivery systems the anesthesiologists are using across the globe for gas from our Pharmaceutical business. So I tell you that we just had three products conditionally approved. We're going to be launching three in the next six to nine months.

We are excited about the portfolio and follows the same recipe of difficult to formulate, and novel ways of delivering. So if you think about that, it is still a good business, has very, very, very strong and healthy profitability. So what we need to do is to make sure that our innovation will -- does not stop, and we continue to bring products organically and sometimes inorganically to the portfolio to be able to augment the growth of this business and keep ahead of the competition. Baxter has put together a very good group of R-and-D scientists in the United States as well as India. And together, they are working 24 hours a day in tandem to be able to deliver on that. I'm still fan up that portfolio, understanding the headwinds that, that portfolio can have every so often, as some drugs will go out in contribution based on competition, but then we're able to launch new products. Remember, there are 22 new product launches this year, probably around half of them are Pharmaceutical products. So we do not see a long-term issue for this business, but more so a -- every so often issue that you have -- when you have competition coming into your market that has just happened in the last 12 months.

Robbie Marcus -- JPMorgan -- Analyst

Appreciate it. Thank you.

James Saccaro -- Executive Vice President and Chief Financial Officer

Thanks, Robbie.

Operator

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

Pito Chickering -- Deutsche Bank -- Analyst

Hi, good morning. Thanks for taking my questions. Two on Renal. The first one is the U.S. grew sequentially about $1 million. Can you walk us through sequential PD growth versus non-PD? And how much the January excess mortality from COVID impacted that sequential growth?

Jose E. Almeida -- Chairman, President and Chief Executive Officer

So, Pito, I will start, and Jay will pick up from there. Our sequential growth has improved from Q1 to Q2 in the overall U.S. market from 3.3% to about 4% in Q2 and going there to peak about 6% in Q4 for a pretty good performance on a post-2020 year, which is -- which was really hit hard in terms of new patients and the death of patients on COVID. I would say that the PD market is still very much a good market to be in. It has grown above the overall renal dialysis business across the globe. Particularly in the U.S., we're still very optimistic on the vector of the growth that despite all that happened in 2020, we're able to have growth this year and expect to return to a high single-digit patient growth to double-digit patient growth, probably toward the end of '22 going into 2023.

Clare Trachtman -- Vice President of Investor Relations

Yes. And Pito, just to add to that, basically, by the end of the year, we would expect the dialysis population in the U.S. to grow just under 1%. So it is starting to recover after being down more than 2%. Again, this is the treated dialysis population in 2020. So it will return to grow up this year and then continue to grow even faster in 2022 and beyond.

Pito Chickering -- Deutsche Bank -- Analyst

Okay. Great. And then a follow-up question on the renal OUS. How much of the impact that you guys saw in this quarter was from excess mortality from COVID? Like you mentioned to Bob that you expect this to normalize in the back half of the year. I just want to understand how much is purely temporary like the procedures in Japan for PD versus more permanent in nature?

James Saccaro -- Executive Vice President and Chief Financial Officer

Yes. So what I would say is it is really a mix of those two items, and we don't differentiate -- we don't split that out for a number of different reasons, but understand those drivers internally. The 1% decline, we're going to expect to see in the second half of the year 4% growth, as we start to see procedures normalize and then we start to lap the headwind of the very unfortunate patient mortality situation. So again, if you look at -- as I commented earlier, if you look at the international business on a rolling 12-month basis in PD and renal internationally, it's a solid grower for us. We expect that story to continue moving forward.

Pito Chickering -- Deutsche Bank -- Analyst

Alright. Thanks so much.

James Saccaro -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

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

Vijay Kumar -- Evercore ISI -- Analyst

Hi, guys. Thanks for taking my question. Maybe my first one, a high-level big picture question for Joe. Joe, when you think about the business at pre-pandemic versus post-pandemic, at a very high level, has anything changed fundamentally for the business, right? Whether when you look at your end markets, margin structure -- and -- but fundamental -- I mean, there are obviously some temporal issues here, but these all seem to be workable, solvable, temporal in nature, but fundamentally, has anything change when you think about the pre- and post-pandemic universe?

Jose E. Almeida -- Chairman, President and Chief Executive Officer

Vijay, I think that there is changes in how patients are being treated and how hospitals are seeing the influx of patients. I -- when you think about 2019, you saw -- and you see how we are looking at for the rest of the year, we see this year as a recovery year where the admissions toward the end of the year, they exit into 2022, will be probably 100% -- 98% to 100% of going back to the admission flow rates that we've had before. So if you think about the major dynamics of the market, I would say there is a move from the acute care to the less acute care. And what is the impact for Baxter? If you think about Baxter as a healthcare supply company, with products that are must have, independents that are setting. We follow the patient with our products in many places. If you go to a less acute site, you will need a pump no matter what, you still need fluids, you need medicines, injectables, you still need things that are needed to treat that patient. To the home side, we have that advantage and have spoken about the PD advantage that is a positive for the company, not only by the rule in the U.S. with a kidney dialysis and transplant changes that were done during President Trump's tenure, but also the place to be, if you have sick patients that don't want to go to acute sites or dialysis clinics. So that is a positive. When we look at what I see is temporary, the inflation that we are seeing in the disruption in supply chain, I think not only Baxter is working hard to offset that, but also I don't believe those are fundamental changes that will alter the -- completely the going-forward dynamic of our logistic costs as well as raw material costs. We will face headwinds in this area.

We have spoken about the cost of containers, are very expensive, fuel and everything else. We're offsetting that, as you could see this quarter, and we have done for the year, and we plan to continue to do it. The thing is how do you see that? Is that a fundamental change in the cost structure? We don't think so. We think that, that will eventually subside. But at the moment, we don't have that in our numbers. In our numbers what we have is us offsetting headwinds coming in from the cost point of view. Market-wise, as I said, they are changed a significant amount of telehealth, connecting the dots of information coming from ICUs. So the better off -- we will be better off, but continue to develop our digital health products as we're doing. If you think about our share source with the companion -- with the mobile companion that we just launched earlier this year, a true view in our CRT as well as half of the portfolio with the FDA today. Regarding our new pump, is not a mechanical/electrical pump, is actually software that is going with it that will be installed in the hospitals networks as gateway to be able to manage traffic and bring information back and forth. So that boat has shipped -- that boat has sailed. There's no way to not be in the connected market going forward.

Vijay Kumar -- Evercore ISI -- Analyst

That's extremely helpful, Joe. Jay, one quick one for you. You take a lot of pride in free cash flows. Obviously, the pandemic, there's been a lot of moving parts. Year-to-date, the free cash conversion is up 70%. I'm curious what are temporal items here? And should we think about Baxter -- when should we think about Baxter getting back to being a premium free cash conversion company?

James Saccaro -- Executive Vice President and Chief Financial Officer

Thanks for the question, Vijay. As you know, Joe and I are both really focused on driving free cash flow and driving free cash flow performance sustainably. And frankly, we've made a series of decisions over the last couple of years to suboptimize the base case, to protect against severe situations that could emerge. All of these things were absolutely the right thing to do, carrying extra inventory into the pandemic. As we sit here today, carrying select inventory of incremental product, as we look at a hurricane season, which could be a challenge. And so these things have -- we've had a little bit excess inventory relative to our normal expectations. As we move toward the end of the year, and as we've been able to improve the predictability of sales by product line in a post-pandemic world, we'll start to be able to optimize cash flow a little bit more carefully and closely. And so I think as we move to 2022 and '23, we'll start to see more normal years for cash flow. Obviously, 2020 was a huge anomaly. 2021 continues to be anomalous because of, again, just really being sensitive to having enough product available to support patients in a very challenging situation. But as I said, I think as we emerge in 2022 and '23, we'll be able to optimize the inventory a little bit better, continue our focus on accounts receivable. And then furthermore, on the days payable really work to optimize that, working closely with our suppliers. And then finally, from a capex standpoint, there are certain investments that we always make, and we'll continue to make those, especially those that support growth in businesses like our PD business. So we'll continue to look for those value-creating opportunities, and those exist. So we'll have more capex, and that will be a continued area for us of great investment. But I think 2022 starts to become a more normal year and then even more so in future beyond that.

Vijay Kumar -- Evercore ISI -- Analyst

That's helpful, Jay. Thank you, guys.

Operator

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

Lawrence Biegelsen -- Wells Fargo -- Analyst

Hi, good morning. Thanks for taking the question. One on BPS, one on NOVUM IQ. Obviously, Joe, BPS was really strong this quarter. I'd love to understand the contribution from the COVID vaccine. And how sustainable that is? How should we think about -- is that still a $50 million to $100 million annual opportunity? And Joe, you signed a contract last year with a partner on a non-COVID vaccine. So when could we start to see that contributing? Just trying to understand the outlook for BPS. And I had one follow-up.

Jose E. Almeida -- Chairman, President and Chief Executive Officer

The outlook has been improving because of the necessity for vaccines. So right now, we're looking at about a north of $100 million this year of contribution from BPS.

Clare Trachtman -- Vice President of Investor Relations

[Speech Overlap] Specific to the COVID vaccine.

Jose E. Almeida -- Chairman, President and Chief Executive Officer

Specifically with COVID vaccine. Now BPS as a business is larger than that, but just BPS vaccine -- north of $100 million.

Lawrence Biegelsen -- Wells Fargo -- Analyst

And it turns in a sustainability of that, I guess there's no way to comment on that at this point?

Jose E. Almeida -- Chairman, President and Chief Executive Officer

It's tough, Larry. We -- on one side, we hope that we don't ever need to produce another file of vaccines. So this disease goes away, and the world is back to normal. On the other hand, we're doing what we can to help the world get through this. So I would say that you're probably going to have some residual production in 2022. Because as you can see, it was overseas about a few weeks ago. And the scarcity of vaccine is remarkable. So there's still a lot of places in the world that don't have vaccines. And I think eventually, those vaccines will reach there. So we're not making a prediction in 2022, but we think there will be residual production in 2022 for vaccines.

Clare Trachtman -- Vice President of Investor Relations

And we do have, some of our projects, to extend out through 2022 as well.

Lawrence Biegelsen -- Wells Fargo -- Analyst

Thank you for that. On NOVUM IQ, Joe. Obviously, it's a very important product for you. I'm wondering if you'll talk a little bit about the nature of the questions you received and the timing of the response and your confidence in the 2021 approval. Thanks for taking the questions.

Jose E. Almeida -- Chairman, President and Chief Executive Officer

Larry, I'll give you an update overall, but the nature of the question is a little too much. We're not going to get into it. But I would say, all the questions are answerable and all the questions are not out of this world in terms of complexity to put them on a piece of paper and get back to the FDA. I don't comment, all of you know on the call. And outside the call that I don't comment on behalf of the agency. The agency will do what the agency will do. What we can do is make sure that our engineers and scientists and the regulatory folks are focused on this. We have a lot of people focused on getting those answers to the FDA. We hope that they will be happy with the answers. And we can have the product launched this year as we're planning at the moment. I also want to just make sure that you all know, we're having pretty good demand for our spectrum pump -- our current pump, so it's not all or nothing. We do have really good demand for our pump, very large contracts coming about. So I just want to make sure that we feel very comfortable with where we are in terms of our technical responses to the FDA, we think we have it. We are very happy with the design of the bump and the future that holds because it's a very different platform that will hit the markets when approved and hopefully bring this industry at a different level of technology. But nevertheless, Baxter has three different groups of pumps, NOVUM IQ, Spectrum, Version nine as well as the pump that is yet to be approved by the FDA.

Lawrence Biegelsen -- Wells Fargo -- Analyst

Thank you, Joe.

Operator

Danielle Antalffy of SVB Leerink is on the line with a question. Please state your question.

Danielle Antalffy -- SVB Leerink -- Analyst

Hi, good morning, everyone. Thanks so much for taking the question. Just a follow-up to Vijay's question. Jay, this is for you on what's fundamentally changed. You did have pretty strong SG-and-A control this quarter. And just wondering, is that something that's sustainable going forward? And should we be thinking about that as a more meaningful lever going forward as we head into the Analyst Meeting? And I have one more higher-level follow-up.

James Saccaro -- Executive Vice President and Chief Financial Officer

Sure. I think the controls that we had in place, we were pleased that we were able to save a substantial amount in the second quarter, roughly $0.06 relative to our expectations on the opex line. And as we move to the full year, there's probably a couple more cents relative to our expectations. We'll always look to optimize spending for sure. And what we were pleased that we were able to drive an impact in the face of a challenging worldwide supply chain environment, in the second quarter. But there is part of the savings that we experienced this year that are related to a slower resumption of activity. And so as we look at the second quarter, we had sort of anticipated a very substantial increase in SG-and-A. You'll note that we did have a nice-sized increase in SG-and-A, but it was just not quite at the pace that we anticipated. So we'll expect that to resume. Here's what I would say about SG-and-A and other spending categories and cost of goods going forward. At the Investor Day, we'll talk about things like the work that Jim Borzi is doing to really optimize manufacturing and supply chain and really taking a cutting-edge approach in that arena. And then the other thing that I will tell you about is the digital transformation that we're undertaking, and that will have a nice impact in terms of really spending across the company. And I think that's something that will feature prominently. In the meantime, we were pleased to drive a short-term result, but I don't think all the changes that we're making are the ones that we'll be talking about with you when we get together in September.

Danielle Antalffy -- SVB Leerink -- Analyst

Understood. Thanks for that, Jay. And then, Joe, I guess the question is for you. And again, back to shifting fundamentals, you mentioned site of care, things like that. How are pricing conversations or contracting conversations different between the two sites of care, talking more ambulatory or outpatient versus hospital and inpatient? And is that something that we need to consider as we look over the long term for Baxter? Thanks so much.

Jose E. Almeida -- Chairman, President and Chief Executive Officer

Danielle, I will say that a lot of these sites are owned by large hospital systems. They are not just independent sites. The configuration of products in some of those sites are different than use in hospitals. So price points may differ for products used in non-acute or step down -- significant step down of facilities that are not part of a hospital campus. But that is not -- there's no two different conversations going on. We believe that our products are -- have price consistency across customers. And we negotiate every single contract with the intent to have as much penetration as we can within that integrated supply chain for the hospital. So if you think about negotiations are all about class of products, and quality availability of products and evidently, price is a big deal, no best price usually wins. So I don't see tremendous distinction.

Danielle Antalffy -- SVB Leerink -- Analyst

Okay. Thank you.

Jose E. Almeida -- Chairman, President and Chief Executive Officer

You're welcome.

Operator

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

Matt Miksic -- Credit Suisse -- Analyst

Hi. Thanks so much. I wanted to ask a follow-up for Jay on some of the environmental trends that you're seeing. And then I had one question for Joe as well, if I could. So on January remarks, you mentioned this sort of sustained high level of surgical volume performance you're expecting in the U.S. throughout the rest of the year. And I'm just wondering where -- what gives you that confidence or visibility that that's kind of where it will stay. And I mentioned one follow-up.

James Saccaro -- Executive Vice President and Chief Financial Officer

Sure. Yes, in my prepared remarks, we commented that we're seeing roughly -- at historic levels of surgical procedures, roughly 100% of prior levels. We have some line of sight in the short term, but our crystal ball gets murky as we look toward year-end. That's very clear. And so I would say that one point of procedure volume in the U.S. is roughly $0.5 million of impact per month. And so that's something that we watch carefully. I think when we put together the sales guidance for the year, we have the ability to withstand a little bit of softness in surgical procedures and admissions, as it relates to Delta variant. But this is an uncertainty that we're contending with, not only on the surgical procedure side, but also on the admission side. And I've talked historically about a lot of the work that we've done in terms of forecasting and modeling. And I think we've done a really good job kind of relating our business to some of these fundamental drivers. But you're right, there are -- this is a valve of world that we're living in today. And we'll have to watch carefully as we move through the rest of the year if the virus changes course substantially. At this point, we don't have any reason to believe that will be the case and feel good about the numbers. I've sized the downside risk, it's not enormous. So I think we're in OK shape.

Matt Miksic -- Credit Suisse -- Analyst

That's great. And then just one follow-up for Joe. I think to Bob's question, you had mentioned that size was not so much of a consideration or determinant, but -- that I'd love to get your sense of -- I guess two things on the M-and-A environment. One is sort of asset pricing or the challenges that you face in making a med device or supply of acquisition in this environment. That's been a part of the conversation for Baxter for a number of years. And then also the balance that you see, the pluses and minuses of putting more capital work in a large deal, the risks associated with that and continuing with some of the tuck-in acquisitions that you've done before?

Jose E. Almeida -- Chairman, President and Chief Executive Officer

If you think about tuck-in acquisitions, they're always going to be there because it's a way for us to augment product lines and adjacencies. We just announced actually one today. And that is a good way. We don't have that kind of product. We need that kind of product to compete. So there's a really good thing where we saw in our Pharmaceutical business with Doxil and Caelyx. So it is needed. But then you think about where the future of healthcare is going, where the confluence of the forces coming about, how do we look at our portfolio going forward and what would be a good complement for the portfolio. So the size doesn't play a role, obviously, if it's something enormous and unachievable, we don't discuss that. But the size by itself will never be a determinant. As I said before, this is strategic -- strategy or strategic appeal. Second is the returns. The third would be our ability to integrate well. And if we don't find anything to deploy the cash, we deploy the cash back to the shareholders. So don't think about size ever been a determinant, think about strategic fit and future of healthcare.

Matt Miksic -- Credit Suisse -- Analyst

Got it. Thank you.

Operator

The last question comes from the line of Joanne Wuensch with Citi Group. Please state your question.

Joanne Wuensch -- Citigroup -- Analyst

Thank you for taking my question. Just a couple of pieces of clarification. What was the COVID vaccine benefit in the quarter on a dollar basis?

Clare Trachtman -- Vice President of Investor Relations

It was just over $40 million.

Joanne Wuensch -- Citigroup -- Analyst

I'm sorry, $30 million?

Clare Trachtman -- Vice President of Investor Relations

$40 million, 4-0. Just over $40 million.

Joanne Wuensch -- Citigroup -- Analyst

Excellent. And how much NOVUM IQ dollars incentive in the current guidance?

James Saccaro -- Executive Vice President and Chief Financial Officer

Yes. We have approximately a little north of $25 million in the fourth quarter.

Joanne Wuensch -- Citigroup -- Analyst

Thank you. And just to confirm, you're expecting hospital volumes to be at pre-COVID levels exiting the year?

James Saccaro -- Executive Vice President and Chief Financial Officer

No. At 98% in the fourth quarter. And so if we were to split it at the very end of the year, the run rate would be basically at the prior year level, so into Q1 of next year.

Joanne Wuensch -- Citigroup -- Analyst

Excellent. Thank you so much. I appreciate it and have a great day.

Jose E. Almeida -- Chairman, President and Chief Executive Officer

I just want to make sure that you all know that our -- we are not predictors of disease here, neither infection rates. So we do the best we can in putting our models in place. We base our numbers on that. We will all expect to, hopefully, the Delta variant will be contained in most places in the world, and we move on. But at the moment, the admissions in the U.S. of course were 98%, exiting the year hopefully in 2022 at 100%, things can change, as you can see by the infection rates, but the death is still much smaller than were before. So we do the best we can, when we give these numbers, is what we think is going to happen.

Clare Trachtman -- Vice President of Investor Relations

Thank you. That will conclude our call.

Operator

[Operator Closing Remarks]

Duration: 59 minutes

Call participants:

Clare Trachtman -- Vice President of Investor Relations

Jose E. Almeida -- Chairman, President and Chief Executive Officer

James Saccaro -- Executive Vice President and Chief Financial Officer

Bob Hopkins -- Bank of America Securities -- Analyst

Robbie Marcus -- JPMorgan -- Analyst

Pito Chickering -- Deutsche Bank -- Analyst

Vijay Kumar -- Evercore ISI -- Analyst

Lawrence Biegelsen -- Wells Fargo -- Analyst

Danielle Antalffy -- SVB Leerink -- Analyst

Matt Miksic -- Credit Suisse -- Analyst

Joanne Wuensch -- Citigroup -- Analyst

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