Baxter International Aktie

All right. Welcome back. Good afternoon, everyone. I am Larry Biegelsen, the medical device analyst at Wells Fargo. And it's my pleasure to host this fireside chat with the management team of Baxter. With us, we have Andrew Hider, President and CEO; and Kevin Moran, Vice President of Investor Relations. Andrew and Kevin, thanks so much for being here.

Appreciate you having us.

So Andrew, let's start with a big picture question. You've been at Baxter for almost a year now. And the stock has done well. Oh, you wanted to. I apologize.

Kevin. Go ahead.

I'm just going to do the obligatory forward-looking statement.

Just a reminder.

Just a reminder, we will be making forward-looking statements here today. For more information please see our IR website or our SEC filings. Okay.

Sorry about that. So Andrew, talk about the key changes you've made, what's gone well and where do you still need to make progress?

Yes. And thank you. Actually, it's been a little over a year, and boy, the time has flown. If I do a step back, one of the areas and why I was excited about the opportunity of the job and Baxter specifically is really where the business came from and where we can go. And I'll tell you, I was able to do a bit of diligence before I said yes to understand our customers' perspective and the position Baxter has with our customers, and that's very positive. And so the time has flown. When we do a look back on the last year, we've decentralized the organization. So we've gone to independent P&Ls that are focused on how to drive impact for customers, aligned around innovation, around on-time delivery, around quality and around operational performance.

We've also launched GPS, which is our growth and performance system, really our continuous improvement program, that changing of culture to drive looking to make tomorrow better than today. Everybody gets obsessed with it. I always say if you can measure it, you can manage it, if you can manage it, you can improve it. And so we target areas that are going to drive impact and drive improvement on the business. And so we've started our journey and have outlined that first stage of our journey around stabilizing the business, around debt repayment because we know we've had a challenge on our leverage and that target and laser-focused approach to debt repayment comes from free cash flow, comes from buying down the bonds, all of the above and also our continuous improvement journey. So we've made progress. I'm pleased with where we're at. We have a lot more work to do, and we're excited about where we're going to take this, but it's about execution.

That's helpful. And congratulations on the hiring of a new CFO. A few weeks ago, John Rogers coming from Smith+Nephew. I think he starts in October. I think his experience, his relevant experience is obvious coming from another medtech company. But I'd love to hear from you why he was the right person. And then when do you think you'll be in a position to host an Investor Day?

Yes. So look, I can't be more excited to have John be a part of this next phase for Baxter. And I'll tell you, having spent time with him, he is the right person for where we're taking this organization. And just a couple of minor items on this. When we launched this search, it was a desirable position, and we had a lot of people in it. And the reason why we like John is he has a lot of experience and turnaround of big organizations. So we understand -- he understands the dynamics of how to get the business aligned with a critical few and drive impact.

And also the medtech piece was also an important portion for us around understanding the dynamics of our market, our space, so we can weave that into our ability to outperform. And so John checks a lot of those boxes and really aligns us where financial horsepower is going to be a critical element as we step into the capital allocation phase of our journey. And so excited to have him on board. October 1 is coming quick, and we can't be more excited to have John be part of the future.

How far away is your investor -- the first Investor Day in many years?

So while I won't comment on the timing, and we will have one at some point, it's more around execution. And one of the reasons why we pulled it for earlier this year was because we wanted to build that credibility around high say-do ratio, around aligning the business for execution in what we set out to accomplish. And so there will be a point in time when we get there, we'll certainly notify and walk through the path forward. But right now, it's about execution and delivering results for our shareholders.

Okay. Makes sense. So let's talk about 2026. You delivered a nice Q2, 5% operational growth. And you raised the guidance from flattish to 2% to 3%. How are you thinking about the second half of the year relative to the first?

So I'll start with this, and I want to put a caveat. No single quarter is going to define us. And I would say it was a decent quarter, and we're pleased with the progress we've made. And a lot of that stems around the tough decisions we made to get to where we are. So we're pleased with the progress. But we have a lot of work to do for the second half of the year. And so our teams, while we will certainly take the moment to celebrate, we quickly go to what do we need to do to finish the year strong and continue the momentum that we've started.

And from a math standpoint, I mean, the first half, we grew about 2%. And based on the updated guidance, we would expect second half to be at or above that. A couple of things I'd highlight there that kind of support it. One would be visibility within the HST segment, so specifically the CCS business and the order book. Recall, there was really strong orders last year and you think about that cycle of fulfillment, we have pretty good visibility there. And #2, I would say we expect the pump portfolio or infusion systems to grow in the second half of the year, year-over-year. And that reflects the strong demand for the Spectrum pump. And -- but I'd say, overall, the framework as we think about the full year has been consistent all year with stronger performance in the back half.

That's helpful. The margin guidance implies a pretty big step-up in the second half when you adjust for the tariff benefit in the second quarter. Please help us bridge the first half to '26 to second half margin ramp and confidence in that.

Sure. So this is another area where we've been very consistent all year, some first half headwinds, some mechanical impacts and then better performance, specifically in margin in the second half of the year. There's really 3 main components. And #1 is higher volumes. And this is consistent with typical seasonality of this business and importantly, getting the operational leverage from those higher volumes to impact margin.

Number two would be benefits from some cost actions that were taken earlier in the year. Recall, we rightsized our manufacturing and support footprint around the IV Solutions business. You've already started to see some of those benefits flow through. If you look at SG&A as a percent of sales in Q2, you already saw that improve sequentially from Q1 to Q2, and we'd expect that to continue.

And finally, this is probably going to be the most visible piece between Q2 and Q3 sequentially, cycling through higher cost inventory. This inventory was produced at the end of last year before we rightsized the IV Solutions support footprint. And so think about a 4- to 5-month kind of cap and roll, we have now sold through that inventory. And so it was a $50 million impact, at least a $50 million impact in Q2. You should see that improvement Q2 to Q3. But the easiest way to think about it is normalized Q2 for the tariff refund that we saw, and it's the consistent same 3 drivers we've talked about all year for margin expansion.

That's helpful. And Andrew, on the Q2 call, you said the health care environment in the U.S. was stable, but you're monitoring it closely. The question is, have you seen any changes since the Q2 call from a procedure and capital equipment standpoint?

So I referenced it on the call that we haven't seen a change in buying behavior. And I'll just say a couple of items. As a CEO, part of my standard work is to visit customers on a frequent basis. And we have very candid conversations around not only what Baxter does well, but also where we can improve and what they're faced with in their current market dynamics. And so net-net, we're not seeing a big change in their buying behavior. And we've seen strength pretty much across our business. We announced it on Q2. And we look at this as an area that we're going to stay close to, but we haven't seen a massive change in their buying behavior.

That's helpful. So let's transition to the business. Within MPT, you have some businesses doing well, like compounding and advanced surgery and some doing less well like infusion systems and injectables. I guess talk about the sustainability of compounding and advanced surgery and how long it takes to turn around infusion systems and injectables. And I think you already, Kevin, talked about infusion systems growing.

Yes. And so I'll just walk through a couple of items. First, look, we're pleased with the performance on Advanced Surgery. And this is a product set that I've actually seen firsthand how this impacts of patients when they're in a time of need. It's a great product. Customers value it. They utilize its capabilities. So we're pleased with the performance, and we want to continue to enable our customers to utilize this when needed. And so overall, look, we like the growth profile to date. We see continued opportunity. We're going to continue to drive this area.

When we look at our compounding business, a couple of things about this business. First, it's been a strong start to the year. That's largely driven by ANZ, New Zealand as well as Western Europe. And we're pleased with that progress. This business's top-line performance is strong. Free cash flow is strong. Certainly, we need to continue to drive on margin expansion. But overall, we would look at this as a higher growth than base business in Baxter, but it's one that I would say it's been a strong growth year-to-date.

As far as the flip side, and we've talked a little bit about IV Solutions, so I won't get into that specifically. But on the injectables and where we are with our anesthesia, we've had some challenges from a supply chain perspective from a contract manufacturer, and we are staying very focused on how to drive that as far as supply capability. We've largely improved our own internal challenge. So we've gotten that to be a strength, still driving it, still staying very focused on it. And we've also deployed some of our own employees at the contract manufacturer to help them overcome some of the obstacles. We see a light at the end of the tunnel, but we're staying very focused on really the metrics that we see on getting the product to market. And we've seen some relief, but we want to keep this going. We want to keep this as an area that we can drive into.

The light at the end of the tunnel, so maybe '27 is better.

We would expect this to be '27 is better.

And any update on Novum IQ and the field corrections you talked about on the Q2 call?

A couple of items. First, we like our total pump portfolio. And Kevin talked a little bit about Spectrum. But to give you an insight, we're continuing to innovate on Spectrum LVP. We launched IQX, which allows our Spectrum portfolio to talk to our Novum syringe. So Spectrum LVP, Novum syringe now talk together, positive for our customers. We've also launched PeerVue in that, which allows our customers to truly drive impact on their process. Both are very good for our situation. As far as Novum LVP, we're seeing nice progress in the testing and results. That said, we need to continue to align around the agencies of the FDA as well as the Canadian agency to make sure we align to ensure the product is ready for the relaunch. And so no update. I would just say we're making steady progress. We're pleased with our progress, but we want to make sure we get everything right on that relaunch.

Okay. IV Solutions, I guess the question is, has it turned the corner?

This is one when I first joined, we had taken the prior hurricane as kind of our test on what's going to happen in this market. And fast forward, by the end of Q3, early Q4, probably early Q4, we realized or started to realize quickly that maybe there's a nuance here. And so we did a lot of assessment. I'll get to the punchline. The new baseline is where we are today. And so the new norm is the current market situation. And so I would say we've now lapped that, and now it's where we can build from. And so it was a good Q2. Remember, the baseline was a little low. So while we certainly are pleased with the progress, it's about how we continue to drive this business moving forward, and we've now lapped. So we would expect this business to be back to what its norm on growth rates would be.

And norm is low single digits.

Low single digits.

And price, there was a time when people were excited about some of these new GPO contracts for Baxter. Are there still opportunities there?

So there are. And we are -- as we go into any resetting, we look at that as an area that we would target, and it certainly is something that's on our radar right now.

And just to build on that. So price has actually been a headwind in 2026. So recall in 2025, when we had 2 of the 3 GPOs go into effect, we saw over 100 basis points of benefit. So it has been a headwind in '26. The next GPO is effective in 2028. And so a little premature to talk about potential economics but still a little ways out.

So when you say headwind, you mean negative year-over-year or less of a benefit than that 100 basis points?

Less of a benefit.

Less of a benefit.

So not negative.

Not negative.

Got it. That's helpful. HST, so you're launching several new products. You talked about it earlier at CCS this year. How should we think about the impact to HST growth in the second half and into 2027 from CCS?

So I would say -- I would just say we've been clear all year. We expect our growth to be back half weighted. This is due to the order book, again, strong orders at the end of last year, also reflects kind of continued traction from new product launches. So both Dynamo in CCS as well as in the Front Line Care business, the Connex 360. I'd say no change.

That's helpful. So -- but Front Line Care, so just one follow-up on Front Line Care. It's been -- was soft in the first half of the year. So it sounds like you expect that to improve. Is that fair based on what you said?

Yes. So Front Line Care grew, I think, 2% on a full-year basis last year. It was down in Q1, but it was up 2% again in Q2. We expect the entire HST segment to grow low single digits. And so I think between CCS and Front Line Care, you should think about them both growing in that same range.

Okay. That's helpful. Andrew, just curious on the portfolio. How are you feeling about the portfolio at Baxter? And I'm asking in the context of Front Line Care, it's mostly like the old Welch Allyn business, which is a lot of physician office products. We think of Baxter more as a hospital product company. Why does the Front Line Care business fit in the portfolio just -- and maybe zoom out on the whole portfolio.

Yes. And so I'll walk through a couple of items on this. First, if you look at what our customers are faced with today and what they're faced with over the, call it, the months and years to come, they're looking at alternative sites of care. They're looking at different ways to approach the patient to have a high level of care for that patient and understand the data. And I'll tell you, given our breadth right now, Welch Allyn actually positions us very well for whether you're in the doctor's office to alternative sites for surgery to in the hospital. And it allows us that continuity.

The second item is, as you look at Baxter and you do a step back on our broader portfolio, we have patient monitoring. We've got the beds platform, which is a smart bed allows us to collect data off that bed. We do nurse call. We do other areas around that aspect with CCS. We do the pump portfolio, which also has data collection. It allows us to help to understand that workflow to drive greater impact. Now I would say this, we're not there. But we're moving closer and closer to that mark to really collect the insight to have tangible impact for our customers. And I'll just say, as our customers move to a challenged space where whether it's nursing staff or the ability to support for patient care, we want that flexibility. We want the ability to draw data to drive greater impact to support patient care over whether it's in a doctor's office setting to an alternative site to in the hospital and really maximize that capability for our customer set. And it allows us to have an even greater impact on that.

So I mean, I've asked you the question a few times on earnings calls. And now I guess what I'm hearing you say is you're happy with the portfolio at Baxter today.

Yes. So I would say, look, we're always going to assess portfolio. And if you look at our portfolio today, we have stuff in the invest and grow. And one of the exciting products that we have is our ambulatory cardiac monitoring platform with Bardy. That is a very exciting area, which we also have white space to be able to build out capability, and you're going to see us laser-focused on that. We like that area. We've got advanced surgery that also fits in there. We also have the Sustain and Sustain is -- think of things like the IV Solutions. We have a strong position in the market. We have high value with customers. We're a trusted brand. We want to continue to maximize that capability.

But then we also have some Fix. And I'll tell you, over my tenure, we're going to be looking at our portfolio to make sure it aligns with high value creation. And so while I would say, look, we're pleased with where we sit today, that's going to change, that's going to evolve, that's going to grow, that's going to also look at things and say, maybe it's not a fit over a long period of time. And so you're going to see us go through those cycles. And I would say it's more pruning than anything. We've gone through a lot of stages to get to where we are today, and we are going to maximize that performance as we sit to where we are.

One big picture question. You've made a lot of progress. Anything been harder than you expected?

Yes. So when you look at the business, I would say, look, I've been so impressed with Baxter's team alignment to continuous improvement. I would say we launched GPS a month into my tenure, a month into my tenure. And I was just in our facility in Pluvigner, and that's Pluvigner, France. I've been -- I was in our facility in Saalfeld, Germany last week. And to see the team's excitement about continuous improvement and not just operational, but how we're turning this into technology, utilizing AI to become stronger, faster, better for patient care, for customer care and aligning that to impact to bringing this to life. And I've just -- I've been so impressed with that capability and that strength. And I would say some of the things that I've been frustrated, one of them, and I'll be upfront, the leverage.

And we had thought when I came in last year that we were going to be under 3x. If you recall, my first earnings call, we took the year down, we took the quarter down, and we took the dividend down to $0.01 to send a signal that we are laser-focused on getting our leverage to under 3x because we've said it for years, and we didn't achieve it. And so that stabilize is real. That debt repayment is real because we want to deploy capital, capital allocation as a strategic enabler. And by having a higher debt load, it limits us. And we don't want to be limited because once you get through that, then you can start to look at where you might invest from an M&A perspective, a tuck-in M&A or technology builds the white space. And we know if you have to go through a clinical trial, it takes years to get there where we can bring stuff in and have the Baxter position to bring that to market at a faster pace. And so we've got to have a higher say-do ratio. We've got to deliver free cash flow so we can really drive down that, but we're on our journey.

That's helpful. Maybe sticking with capital allocation. So your goal is to get net debt to EBITDA down to 3x by the end of this year. Did you accomplish that with the recent $860 million tender offer last month?

It's a good offer. Actually, our team really did an excellent job in this. And we spent $600 million to take down $850 million. I mean, strong return. So really, really proud of the team's results there. And that comes from our ability to drive free cash flow. But if you look at that, it gets us in a position to be more confident and the ability to be at 3x or less by year-end. And then that allows us to start to lean into the capital allocation discussion for next year. Now we're not slowing down. And I'll tell you, having done this many, many times, it starts with cultivation.

The best deals we do are going to be cultivated deals. Cultivation takes time. And so we're training our presidents. We're enabling our presidents to start to cultivate. And so they've now built funnels in their core areas where it aligns with the strategic enablement for profitable growth. And they're starting that journey around how to truly look at cultivation as an enabler, how to build your funnel around opportunistic areas where we see a strategic enabler and knowing it's going to take time. And so getting there allows us to start to think about things differently, capital allocation-wise.

And what is your philosophy around capital allocation? Are you -- some CEOs like to have an algorithm, this percent return to free -- to shareholders, et cetera. Some CEOs prefer to maintain some flexibility. What's your philosophy?

Okay. A couple of things. First, if you join my team, you get 2 books and 1 book is called the outsiders. And the reason you get that is I want you to know how I think about capital allocation. And you guys know this, but as a reminder, there's 5 points that we look at for capital allocation, and we're going to look at all 5. Internal investment is one we're going to continue to support, greatest return to shareholders. We're going to look at M&A, strategic M&A as an enabler and share buybacks when we see the opportunity.

And I would say we like the flexibility because one of the things when we talk about capital allocation, things will move, but we don't want to be beholden to something. And so we'll set the parameters, and John and I will be working through this to set the layout and structure. But again, things are dynamic and you might be cultivating an asset for years and then all of a sudden it becomes available, you want to be in a position to outpace your competition for adding that as high value for our business. And so the net-net is it's all aligned to long-term shareholder value creation, and we're going to keep driving that.

That's helpful. All right. So let's turn to '27. Everyone says, "Hey, we're not going to provide any updates. We're not going to provide any guidance, but everybody gets the question. You're not being picked on, and Kevin knows that. So I guess the first question on '27. On the Q1 call, I think you talked about modest sales growth and some EPS growth in '27 despite the TSA headwind. You didn't reiterate those comments on the Q2 call. So my question is, what changed?

Yes. So look, I mean, to be quite candid, we are focused on '26. And as we know, Q1 was a point, Q2 was a point. Q3 and Q4, we got a lot of work to do. And so while certainly we'll update on '27 when we get closer to that time period, we've got some results to deliver on. And we owe it to our shareholders, we owe it to our customers. We owe it to our employees on execution and delivering on those results. So while we're not saying something changed, we're just focused on getting through this year because '27 is through '26 and delivering strong results in the back half of '26.

That makes sense. Okay. I mean, I guess I was going to ask if you think organic growth could improve in -- be better in '27 versus '26, but I don't think you're going to fight on that.

I can repeat the same answer if you want me to.

Well, then just on the EPS. We know you've got a couple of headwinds. You've got, I think, the tariff refund this year. You've been transparent about that. That's about $0.11. You do have the TSAs going away. We're all trying to figure out kind of what that means. We came up with about $0.10 headwind for that. That's our own math. And then the recent debt refinancing may be a little bit of a tail -- good guy. So we're coming up with maybe about $0.15 headwind next year to EPS. I guess the question is maybe a, what are the pieces we should think about? And b, any of the reaction to our numbers. So the puts and takes and just whether you'll bless any of the numbers. The $0.11 you've been transparent, you've disclosed.

To start off, I think I have to repeat, we will provide more color at the right time. And I think part of that color is the context of the puts and the takes. I know there's a lot of focus on TSAs right now. And so what I will say around that is when TSAs roll off, we will have had 2 years to contemplate its impact. And so in 2026, we do have the midpoint of the guidance is $160 million of TSA income. You should assume a lower than corporate average margin on that. That's not $160 million of drop-through.

So it is a much smaller number. That will be a headwind next year. And then when you think about the cost, both COGS and SG&A, an element of that, the direct piece will go away as soon as we stop providing the activity. And so that comes out pretty quickly. There's also a piece that will take more effort. So think like shared IT costs and things like that. And so the punchline on TSAs is there will be a headwind next year. We have consistently talked about needing to take the stranded costs out as we exit the year and that we will provide kind of the overall puts and takes for 2027 in totality at the right time.

And the only other item I'll just add is we were very specific on the tariff to separate that. That was a onetime event. And we were very clear on what that meant because it's about execution on the business and really driving that through the end of '26 to get ready as we step into '27.

Okay. That's helpful. Well, we've got 5 minutes left here. And Kevin didn't think I would get through all my questions.

Impressive speed.

So well, you guys were efficient. I guess a question I got on injectables, and we didn't talk about it is, are there enough molecules out there, new molecules going generic that allow you to grow that business? And we haven't heard you talk much about that.

Yes. So when we look at our position, we like the space we're in. We like the area. We're focused on ensuring that we are strategically aligned with where the market is going, and our teams are doing a lot of work around this. We do have some areas that we're, I would say, resolving. And I talked a little bit about the focus on operational. I had highlighted a facility that was a challenge for us. We've now largely put that behind us. We have a contract manufacturer that we're on site and resolving. And we did have a little bit of challenge on our facility in India. I would say that facility got back online, back on track very quickly. We're actually -- the team did such a good job around minimizing that overall impact, having a supply of inventory and then being able to bring the product line back on track. So we feel that we're in a good position, but we're very focused on ensuring that we continue that alignment for a higher value product set for the markets.

And before, Andrew, I give you the opportunity to make closing remarks, what is it -- what are some of the things you're excited about, new products? You talked about a couple, but what are some of the other new products you're excited about?

So if I do a step back, a couple of items. First, innovation is going to be an enabler for our future. And we're excited about what that's going to deliver. And just to think through and talk through some items. First, we launched Connex 360 in our Front Line Care business. Customers are really positive feedback on that product set and what it enables. And we launched Dynamo, our new connected stretcher platform. And I'll tell you, it was an area that we needed a new product set. We -- I was able to sit through right before we launched it with a lot of the customers that were engaged with the thinking around making sure it met the needs of our customer. And they're on this form that allows us to gain tangible, actionable insight.

So when we launched, it's been a really strong feedback from our customers around we have built a product that they want to use. And so we're excited about that. But as we look forward, the ambulatory cardiac monitoring business, a lot of opportunity to continue to drive that business to be a part of supporting patient care outside of the hospital. When I think about our Advanced Surgery business, we're looking at new avenues, new white space that we can continue to add on as a potential. And then as we go down through even into our ITP business around capability, not only with the pharma platform, but then also how we bring new solutions to market. And the business is really aligned to ensuring that we listen to customers, build that capability into our process and ultimately innovate to drive new solution sets in the market. And I talked a little bit about the IQX and our PeerVue. It's these constant drives around building and listening to customers for response.

That's great. So Andrew, we've got 1.5 minutes left. Really appreciate you being here. First, Wells Fargo Healthcare Conference, I believe it is, hopefully, not your last. But I'll give you the last minute to give any closing remarks.

Well, first and foremost, thank you very much for hosting us. What a tremendous experience. And I'll just say, look, we have a lot of work to do. And I like to characterize -- I've been pleased with the progress -- but we're not yet happy with the results yet. And we've outlined our stabilized, delever, launch and continuous improvement as our first phase of that journey. And so we're making nice progress in that journey, but we've got a lot of work to do. And we're excited about the future and delivering and constantly building the future of Baxter. Thank you so much. Have a great day.

Thank you.

Good morning, ladies and gentlemen, and welcome to Baxter International's Second Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded by Baxter and is copyrighted material. It cannot be recorded or rebroadcast without Baxter's permission. If you have any objections, please disconnect at this time.

I would now like to turn the call over to Mr. Kevin Moran, Vice President, Investor Relations at Baxter International. Mr. Moran, you may begin.

Good morning, and welcome. Today, we'll discuss Baxter's second quarter results along with our updated financial outlook for the full year 2026. This morning, a press release was issued with our preliminary earnings results and updated outlook. The press release and investor presentation are available on the Investors section of the Baxter website.

Joining me today are Andrew Hider, President and Chief Executive Officer; and Anita Zielinski, Interim Chief Financial Officer, Chief Accounting Officer and Controller.

During the call, we will be making forward-looking statements, including comments regarding our updated financial outlook for the full year 2026 and the anticipated drivers of the third quarter and second half 2026 performance. The anticipated impact of various regulatory and operational matters including ones related to our infusion pump platform and ongoing supply chain challenges and commentary regarding the global macroeconomic environment, including tariff impacts and the broader inflationary pressures.

Forward-looking statements involve risks and uncertainties, which could cause our actual results to differ materially from our current expectations. Please refer to today's press release, the forward-looking statement slide at the beginning of our investor presentation and our SEC filings for more detail. In addition, please note that on today's call, all our comments will be on a non-GAAP basis unless they are specifically called out as GAAP. Non-GAAP financial measures are used to help investors understand Baxter's ongoing business performance. GAAP to non-GAAP reconciliations can be found in the schedules attached to our press release and our investor presentation.

On the call, we will reference organic growth, which excludes the impact of foreign exchange, MSA revenues from Vantive and the impacts associated with business acquisitions or divestitures. Unless otherwise noted, all financial results on today's call reflect continuing operations and exclude Baxter's former Kidney Care business, which is reported as discontinued operations.

Finally, Andrew, Anita and I will take questions following the prepared remarks, and we kindly ask that you limit yourself to one question and one brief follow-up so that we can give as many people in the queue and opportunity.

With that, I'd like to turn the call over to Andrew.

Thank you, Kevin, and good morning, everyone. I am encouraged by our second quarter financial results that came in ahead of expectations demonstrating continued steady progress on our strategic priorities and improved execution across the business. In the quarter, broad-based operating performance drove organic revenue growth of 5% and Additionally, results reflect a tariff refund that was not contemplated in our original guidance, and free cash flow generation was again positive, which reflects our focus on strengthening financial flexibility.

We are now in a stronger position to deliver on the financial goals we set at the start of the year. I am pleased with the progress we are making, but I'm far from satisfied. We are still early in our turnaround and have more work ahead of us. We are laser focused on executing in the second half of the year as well as driving improved performance and long-term shareholder value creation.

With that, let me provide some highlights of our performance in the quarter. Second quarter global sales totaled approximately $3 billion, representing an increase of 5% on both a reported and organic basis. We saw growth across the portfolio, led by advanced surgery and drug compounding. Every segment and division contributed with sales increasing in both the U.S. and internationally. Adjusted earnings for the quarter were $0.56 per diluted share versus $0.59 in the prior year period. As expected, this reflects the known mechanical headwinds that we have previously discussed and that Anita will cover in more detail. It also includes a tariff refund of $75 million that was not assumed in our previous guidance and contributed approximately $0.11 per diluted share. Importantly, absent this benefit, margins and earnings still exceeded our expectations due to the strength of the operating performance.

With respect to Novum IQ LVP, we have identified corrections to address the field actions and are in the early stages of verification testing. We continue to work closely with the regulatory authorities and support our current Novum LVP customers, who continue to operate with the available mitigations while also continuing to serve the market with our broader pump portfolio. Overall, we saw steady demand across our end markets during the quarter. Growth remains strong in advanced surgery, and we have a healthy order book in our care and Connectivity Solutions business. Of course, we continue to closely monitor the broader environment, including macroeconomic uncertainty and volatility in oil prices.

Looking ahead, we are raising our outlook for full year organic sales growth to reflect the strong Q2 performance and our confidence in the back half of the year. We are also increasing our outlook for adjusted EPS to reflect the tariff refund. We continue to expect margins to expand in the second half of the year, driven by higher volumes consistent with typical seasonality, benefits from our cost structure actions and the roll-through of higher cost inventory.

Shifting now to our turnaround efforts. We continue to show progress on our 3 strategic priorities. The first of those priorities is stabilizing the business, particularly in areas that require increased focus. For example, we continue to focus on improving supply reliability across portions of our pharmaceutical portfolio, recognizing that challenges remain including with certain products supplied by a contract manufacturer. Additionally, we had strong execution against customer demand in care and connectivity solutions. Overall, we are seeing encouraging progress and are focused on building greater consistency across the portfolio.

As part of our efforts to stabilize and improve performance, earlier this year, we brought together our Pharmaceuticals and Infusion Therapies and Technologies businesses under a single leader. Our new reporting structure reflects that change with the combined business now reported as Infusion Therapies and Platforms or ITP, within the Medical Products and Therapy segment. We believe the combination will support stronger coordination execution and innovation across businesses that share common customers, capabilities and workflows in the pharmacy space.

Moving on to our second strategic priority, which is strengthening the balance sheet. During the quarter, we again saw positive free cash flow generation, bringing our year-to-date total to $257 million. This is another positive step forward and reflects our continued focus on improving working capital and strengthening cash flow generation across the organization. There is still significant work ahead. The strides we have made in the first half give us increased confidence in our ability to achieve our net leverage target of approximately 3x by the end of the year. Achieving a stronger and more flexible balance sheet unlocks more optionality to drive shareholder value, including strategic tuck-in M&A that enhances our customer offerings and growth profile as well as the option to return capital through share repurchases.

Turning to our third priority, driving continuous improvement. Now in its third quarter since deployment, the Baxter Growth and Performance System or Baxter GPS has taken hold in the company culture and is becoming increasingly embedded in how each division operates. Through the first half of the year, we have completed over 400 continuous improvement events held across Baxter. We have nearly 200 in flight and another 400 planned in the pipeline. While no single event will define our future, small improvements over time should lead to big improvements.

Cross-functional teams are using Baxter GPS tools to identify execution risks earlier and implement mitigating actions sooner. Continuous improvement activity is supporting working capital, commercial, manufacturing and R&D priorities with early examples of improved efficiency and simplification across the business. We are also making focused investments in innovation to drive growth across the portfolio. We recently launched Peer View, a differentiated digital benchmarking application that enables hospitals to compare infusion data and drive infusion therapy best practices. This is strategically important for the ITP business because it enhances our digital road map for our infusion systems platform by including Purview in our IQX platform as a core digital capability, further differentiating our infusion offering versus competitors.

In Front Line Care, we recently launched a limited market release of BEST APX Acute Care. an airway clearance device featuring a smaller and lighter platform, updated interface and improved patient comfort. Early customer response has been positive with full market release planned towards the end of Q3. Additionally, adoption continues to build for the Connect 360 connected patient monitoring platform. with strong order growth throughout Q2 and a growing sales funnel.

In care and connectivity solutions, early momentum for Dynamo, our smart hospital stretcher continues with a strong commercial funnel and positive customer feedback. Additionally, we recently launched Dynamo in Canada, our first international expansion of the stretcher. And beyond product development, innovation is being advanced broadly across the company as we continue to prioritize using AI internally to work smarter, move faster and operate more efficiently.

I am encouraged by the early progress we have made and even more excited about the future of Baxter. My visits with stakeholders around the world, engagement with our team and conversations with our customers have validated the opportunity I saw when I decided to join the company. Baxter sits on a foundation of good businesses with leading positions and time trusted brands with clear opportunities for more rigorous execution to unlock our full potential and deliver consistent and sustainable earnings growth and long-term value for our shareholders.

I will now turn the call over to Anita to provide more detail on our second quarter results. including segment level performance as well as our 2026 guidance. Anita, over to you.

Thanks, Andrew, and good morning, everyone. I'm happy to be joining the call this morning to cover the details of Baxter's second quarter financial performance as well as commentary on our updated outlook for the remainder of 2026. Second quarter 2026 global sales totaled approximately $3 billion and increased 5% on both a reported and organic basis. On the bottom line, adjusted earnings were $0.56 per share, a decrease of 5%. This decline reflects 2 known and expected headwinds that we have talked about previously. First, the roll-through of higher cost inventory produced at the end of 2025; and second, an unfavorable comparison to the prior year period, which benefited from a change in estimate that resulted in a reclassification between SG&A and cost of sales. These 2 headwinds were partially offset by $0.11 per diluted share benefit related to an IEEPA tariff refund.

Now I'll walk through our results by reportable segment. Commentary regarding sales growth will be on an organic basis. As a reminder, beginning with our reporting this quarter, our Pharmaceuticals business has been consolidated into the former infusion therapies and technologies or ITT division within our Medical Products & Therapy segment. The combined division is now named infusion therapies and Platforms or ITP. In addition, certain sales previously reported within other, primarily related to products and services provided through manufacturing facilities aligned with ITT are now included within the division. Sales in our Medical Products & Therapy segment or MPT, were $2.1 billion and increased 5% in the quarter. Within MPT, sales of our new infusion therapies and platforms division totaled $1.7 billion, and increased 4%. Growth was driven by drug compounding and IV Solutions. This growth was partially offset by lower sales within infusion systems and injectables.

Within IV solutions, performance reflects growth of the new lower baseline of demand following clinical practice changes in the market. In Infusion Systems, results in the quarter reflect the net impact of lower sales due to the ongoing shipment and installation hold of the Novum IQ LVP, customer returns and transitions to spectrum. Importantly, demand for Spectrum IQ remains steady. Consistent with the first quarter, we did not see a material impact from Novum LVP related returns in the second quarter.

Performance in the quarter also reflects continued strong demand for our drug compounding services, which grew double digits. This strength was partially offset by lower injectable sales due to supply constraints and continued softness in certain premixed products. Sales in Advanced Surgery totaled $331 million and grew 12%. Results reflect continued strong demand and increased volumes from our global portfolio of hemostats and sealants, strong commercial execution across regions and steady procedure volumes.

MPT's adjusted operating margin totaled 19.3% for the quarter, decreasing 350 basis points. Results reflect higher manufacturing costs including lower absorption and the unfavorable impact from the Section 122 tariffs. Performance also reflects the unfavorable prior year cost timing comparison as well as a lower contribution from pricing. These were partially offset by the benefit related to the IEEPA tariff refund as well as increased sales volumes.

In our Healthcare Systems & Technologies segment, or HST, sales totaled $801 million and increased 4% in the quarter. Within HST, sales of our care and connectivity solutions or CCS division were $502 million and grew 5%. Within CCS, performance was driven by strong patient support systems volumes globally, including execution against the U.S. backlog and growth across international markets. To date, in the U.S., we have not observed any change in hospital capital spending and our order book continues to reflect solid demand. However, given broader macroeconomic uncertainty, we continue to closely monitor the environment.

Frontline Care sales were $299 million and grew 2%. Performance in the quarter reflects continued momentum from Connect 360 in the timing of large customer deals relative to the first quarter. Partially offsetting these benefits were planned global product exits in the portfolio. HST adjusted operating margin totaled 20.3% for the quarter, flat compared to the prior year period. Results benefited from the tariff refund as well as increased sales volumes. These benefits were offset by the previously discussed unfavorable year-over-year comparison related to cost timing.

Finally, other sales, which now solely represent MSA revenue from Vantive totaled $83 million. As a reminder, these sales are included in our reported growth, but they are not reflected in our organic growth.

Now moving through the rest of the second quarter P&L. Adjusted gross margins were 38.6%, a decrease of 210 basis points driven by the previously discussed headwinds and cost of goods sold. These impacts were partially offset by the tariff refund benefit. Adjusted SG&A totaled $648 million or 21.9% of sales, a decrease of 80 basis points. This reflects the benefits from previously implemented cost actions. Adjusted R&D spending totaled $125 million or 4.2% of sales. TSA income and other reimbursements totaled $52 million in the quarter, which came in favorable versus expectations. This favorability was offset by higher TSA-related expenses and therefore, did not have a material net impact to earnings. Altogether, these factors resulted in an adjusted operating margin of 14.2%, a decrease of 90 basis points.

The year-over-year change reflects the same underlying factors discussed earlier, including higher manufacturing costs and the unfavorable prior year comparison, partially offset by the benefit from the tariff refund. Net interest expense and other expense totaled $59 million in the quarter. The adjusted tax rate for the quarter was 19.9%, driven primarily by the mix of earnings across jurisdictions. In total, adjusted earnings were $0.56 per share for the quarter.

Before turning to our 2026 outlook, I want to comment on cash flow and liquidity. Second quarter free cash flow was $181 million, improving sequentially from the first quarter and reflecting continued progress in cash generation. This progress was driven by improved operational performance and focused execution across targeted areas of working capital. We remain focused on strengthening cash flow generation and improving the balance sheet. Reducing leverage remains our top near-term capital allocation priority, and we continue to target approximately 3x net leverage by year-end.

Now turning to our updated outlook for the full year 2026. For the full year, we now expect total sales growth to be 3% to 4% on a reported basis. This reflects current foreign exchange rates, which are expected to contribute approximately 100 basis points to top line growth for the year. In addition, reported sales are expected to include a headwind of approximately $25 million from MSA revenues from Vantive, representing approximately 30 basis points of impact on reported growth. Excluding the impact of foreign exchange and MSA revenues, we now expect organic sales growth of 2% to 3% for 2026. This reflects the stronger performance year-to-date and our expectation for continued growth in the second half.

As it relates to the segments, in MPT, we now expect full year organic sales to grow low single digits. This reflects stronger year-to-date performance, including in drug compounding. As a reminder, the year-over-year comparison in Infusion Systems improved in the second half as we lap the shipment and installation hold of Novum LVP. Our outlook continues to incorporate potential customer uncertainty surrounding the Novum ship and installation hold. In HST, we continue to expect full year organic sales to grow low single digits, supported by anticipated contributions from both the CCS and Front Line Care divisions.

Turning to our outlook for other P&L line items and key assumptions beginning with tariffs. We continue to expect approximately $40 million of impact, net of mitigating actions in the second half of the year. TSA income and other reimbursements is now expected to range between $155 million to $165 million. Higher TSA income is expected to be offset by higher TSA-related expenses, and therefore, not expected to have a material net impact to earnings. We continue to expect full year adjusted operating margin to range between 13% to 14%. We now expect our nonoperating expenses, which include net interest expense and other income and expense to total between $260 million to $280 million. We continue to anticipate our full year tax rate to range between 18.5% and 19.5%.

We continue to expect our diluted share count to average approximately 518 million shares for the year. Given the tariff refund in the quarter, we are raising our full year adjusted earnings from $1.85 to $2.05 per diluted share to $1.95 to $2.15 per share. While we are not providing quarterly guidance, I will offer some additional color on how we expect performance to progress over the remainder of the year.

Overall, we are reiterating the framework we have consistently laid out for 2026. We known mechanical headwinds in the first half, followed by expected improvement in the second half. The drivers of this improvement remained consistent with what we laid out last quarter. First, we continue to expect higher volumes and the associated operating leverage in the second half of the year relative to the first half. This is consistent with our historic seasonality and aligns with our updated outlook for sales.

Second, we continue to expect to see the benefits from the cost structure actions taken earlier this year. As I noted in the quarter, we have already begun to realize these. And third, as previously referenced, the higher cost inventory produced at the end of 2025 has now rolled through our P&L. With respect to free cash flow, our performance to the first half represents meaningful progress and supports our expectation for improved free cash flow generation in 2026 relative to 2025.

In closing, I'm also encouraged by both our second quarter results as well as the continued traction we are seeing across the organization from Baxter GPS.

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

[Operator Instructions] I would like to remind participants that this call is being recorded, and a digital replay will be available on the Baxter International website for 60 days at www.baxter.com.

Your first question from the line of Robert Marcus of JPMorgan.

Congrats on the nice 2Q. I'll ask both my questions upfront here. Clearly, a better-than-expected result on the top and bottom line in second quarter. I'd love if you could speak to some of the drivers of the acceleration on the top line and the confidence in the guidance raise. Same question on the bottom line, but it does appear like there were a number of onetime items in 2Q and you did raise the EPS guide less than the 2Q beat implying perhaps softer second half underlying EPS. And then on 2027, given the onetime items, do you still feel confident you'll be able to grow EPS next year?

Yes. Look, if I do a step back, I'll walk through though in pieces. First, we're pleased with the quarter. This demonstrates continued steady progress on our strategic priorities and improved execution across the business. Now, even more importantly is we saw broad-based operational performance improvement, and all segments and divisions were growing. A couple of call-outs. In MPT, we saw strength driven by double-digit growth in drug compounding. We also saw continued strong performance in our Advanced Surgery business. And also, while the baseline was lower, we saw strong performance in our IV Solutions organization.

In HST, CCS benefited from strong patient support systems demand. And within our FLC business, our Connect 360 product line continues to resonate well with customers, and we see improved performance on our funnel and our ability to execute. Now as a reminder, and I did walk through this -- or we did walk through this in our prepared remarks, there was a tariff refund that was not contemplated initially. It's about $0.11. Absent this, we continue to be focused on how we're going to strengthen the organization and continue to perform. As we look at '27, the path to '27 is through execution in '26 and especially the second half of 2016. While certainly, pleased with the quarter, it's one quarter. Our team is focused on driving the business and continuing to execute through the remainder of the year.

Now as we know, the nonreoccurring tariff benefit won't flow through next year. And we're going to give you additional color on '27 at the appropriate time. But right now, we're focused on executing in '26.

Travis Steed of Bank of America is on the line with a question. Travis, please state your question.

Congrats. I guess Q2 was a pretty high CD ratio, so nice to see. Maybe I would start with the Q2. I'm curious how big the drug compounding was -- how much of that was that 20% plus? Is that something that drove more of the upside this quarter, just given the mix on gross margin was a little bit light. So if there's anything you could say on drug compounding this quarter and how much that was of the beat?

Travis, this is Kevin. We did call out drug compounding as a good chunk of the beat in the quarter. And when you think about our raise for the second half of the year, it kind of reflects what we saw in the second quarter. It grew double digits. And you're absolutely right that inherently does have lower margin, and so that does impact our mix.

I do want to add on this a little bit. While, we're certainly pleased with the double-digit growth. Additionally, this business has favorable cash conversion, and there is some improvement on where we're focused on driving margin in a better place. So overall, again, pleased with this. We have some work to do to get this more in line with the overall Baxter performance.

Makes sense. And then I do want to push a little bit more on the guide to earnings at $0.19 this quarter. Tax -- the tariff refund $0.11 TSA, $0.04, lower just 2% to 3%, only raising by 10%. Is this just being conservative on the second half? And then curious how you're thinking about the TSA income dynamic and the headwind for next year. Is that something you can offset or have to lap?

Travis, let me start real quick just on the TSA and then I'll turn it back to get to Andrew on kind of the overall confidence in the second half. So we did see higher TSA income in the quarter than we were expecting, but importantly, we also saw higher TSA related expenses. So when we think about it at a net level at the operating income, it was not a material impact. And it's the same story for the full year. So yes, expecting higher TSA income, but you should think about it as not a big change when we're thinking about dropping through to the bottom line.

Yes. And not much more to add here, except look, we're pleased with the performance in the quarter, but a lot of work remains and our team is very focused on this, and it's just one quarter. So to your point, said ratio, we are very focused on executing for the second half of the year. getting ready for '27 and aligning the organization around how we performed and at its core is how we align GPS in action and that becoming our driver across the organization.

Larry Biegelsen of Wells Fargo is on the line with a question. Larry, your question, please?

On the progress here Andrew. maybe a little bit more of an update on Nova IQ. You talked about it early in the validation process. What are the kind of the next steps here Andrew, and if you don't get Novum back in the market, how durable is Spectrum IQ is a workhorse pumper?

Yes. Larry. And a couple of items here. Punchline is we're making progress. Now we continue to closely work with regulatory authorities, and we support our current Novum LVP customers, and they're working with the mitigating actions that are in place. As we do a step back, we like our total pump portfolio. We have Novum syringe. We have spectrum LVP and they're on the IQX platform. And as I mentioned in my prepared remarks, we've even launched Purview that enables these to -- it's really bring higher value for our customers. So overall, we're pleased with our total offering. We're pleased with the value proposition it brings to customers. And we're continuing to drive to when it's ready launched LVP. That said, our Novum LVP. That said, we're very focused on bringing that value to customers today and continuing to expand our value proposition.

That's helpful. Andrew, obviously, compounding was strong. You talked about that earlier. Talk about injectables and anesthesia, what the plan is to turn that around. When we had visibility on that, it was -- those were declining, I believe.

Absolutely. Look, this business, look, it remained pressured due to ongoing supply constraints and continued softness in premix. Now, we are taking very specific actions to improve some supply conditions, select products, and there's an area, and I've talked about this in the past, and we're staying very focused on a contract manufacturer, and that does remain constrained. We are working extremely close to them on how to improve operational efficiency, how to align around product and continued high level of quality within the solution set. As a -- just to outline our full year guidance does have this built in. So we are in our stages around how do we execute and continue to perform in this space. We have taken that into account our full year.

Vijay Kumar of Evercore is on the line with a question.

Andrew, congrats on a nice print here. Maybe just on the performance within the second quarter, Andrew, some questions around whether any onetimers, was there any restocking benefit from is fluid. I know the markets went through a rebasing effort, if you will. And also, any quarter-end phenomenon, talk about phasing in the quarter, anything that stands out to you?

Yes. So let me take those in 2 areas. First, in IV Solutions, look, we didn't see a massive restocking. So I'd say it's not material in our overall IV business. That said, this is the new norm, and we've talked about how this is the baseline and how our product set and our alignment with customers. We bring a high value here. And so we're -- we feel good about our market position. We don't rest on this. We're always focused on how to improve for our customers and align this business to execute. We have a high value creation. We have the ability to help our customers as they utilize the solution set, but we are at the new norm within the business.

And the second piece of your question throughout the quarter. Look, all I can say is we saw broad-based strength across the business. And certainly, when we look -- and I called out a few of the areas that we saw some additional increase throughout the quarter, we're pleased across the board. That said, we've got a lot of work to do to finish the year strong, and our teams are very focused on rolling our sleeves up continuing to execute and utilizing our GPS as our guide for them.

That's helpful, Andrew. And then maybe one more product-related question, if you will, on Connected Care. There's been some concerns around maybe cautiousness by hospitals on utilization and maybe that's spills over into their CapEx outlook. So can you talk about your order book within Connected Care that business did well. Any signs of slowdown that we're seeing from a customer CapEx spending standpoint?

Yes. So a couple of items here. And I'll walk through what our teams are executing to. I'll walk through my current engagement with customers and how we view this space. But demand remains stable. And this is really supported by U.S. strong capital order book and funnel visibility across PSS and our GSS business. And so we've continued to see our ability to support our customers as they're investing for the future. That said, we are staying very close to this market, and we want to ensure that we are aligned with their needs. I will also additionally add that I have met and part of my standard work as a CEO is to meet with customers on an ongoing basis. And what we're hearing from them is a few items.

First, their continued focus on how they're investing to improve their workflow, improve their process alignment to our business. Number two, I've been able to see real-time firsthand how our new stretcher is resonating with our customers and the excitement that they have around this Dynamo platform and what it's going to mean to them as far as the ability to utilize this in their network. Early days, but certainly pleased with the progress. All that to be said, we are not immune. We continue to stay very focused on this. to ensure we've got alignment for our business.

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

I'm going to ask the drug compounding question a little differently. Just looking at the organic revenue guidance raise of 200 to 300 basis points, and implied EPS in the back half of the year is a little lighter than the Street despite some good guys like interest. What is the margin contribution of the guidance raise that you put in the guidance?

Peter, this is Kevin. So just to kind of reiterate a couple of points, drug compounding a good chunk of the performance in Q2, and when we think about overall first half performance, organic sales grew about 2%. Our new full year sales outlook of 2% to 3% means we expect sales to be at that growth rate or higher. So continued momentum. When we think about the EPS guidance raise, I think the easiest way to think about it is, that reflects the tariff refund that we received in the quarter. That was $0.11. That was onetime in nature, that was not previously included in our EPS guidance. And that is what the new EPS guidance reflects is the inclusion of that refund in Q2.

Okay. So I'll just, I guess, a little differently, you're raising EPS by the tariff, you're increasing revenue in the back half of the year on continuation but there's no EPS flow-through on that despite, I think, $0.03 coming from better interest rates. I guess, can you give me like the good guys and bad guys on margins in the back half of the year versus previous guidance? And things like oil and shipping costs or we keep with that in there as well.

Yes. So I think the punchline is from an operating margin standpoint, we've been pretty clear about first half headwinds followed by expected improvement in the second half. The new item this quarter is the tariff refund, which is nonrecurring in Q2. And so if you're thinking about kind of modeling on a sequential basis for the balance of the year, you normalize for the tariff benefit in Q2. And then you think about the drivers for sequential improvement that we've talked about, higher volumes in the second half, benefits from the cost structure actions. And we've already seen that start to manifest in our Q2 results. and then rolling through the higher cost inventory produced at the end of 2025, which importantly, we saw that recognized in the first half of the year. .

And so that item specifically, is going to be a Q2 to Q3 sequential improvement. And so I think, again, as kind of an overall the framework we've laid out is consistent. Obviously, the first half of the year from a top line has come in a bit stronger than we expected. But we are still very confident on the full year guidance and reiterated kind of the same underlying operating performance that we had before.

And just to add additional minor color around the supply question. Look, it's something we continue to closely monitor. And like everyone else, we've seen some pressure here. but it has been manageable, and it's within our guidance. So to be very clear, it's within our guidance. And so overall, I would say we're taking a very proactive approach on where we might have challenges and then we take mitigating actions and align around what actions are going to get us back in line.

On oil prices, I've talked to that quite a bit with the Vantive spin. It's obviously lesser of an impact on our business. Therefore, we're continuing to monitor it. That said, we've been able to offset.

Patrick Wood of UBS is on the line with a question.

Beautiful. I'll ask them both upfront. I guess first one, if you could unpack a little bit more on the advanced surgery side, the hemostats and sealants growth. I mean I stayed a lot stronger for a lot longer than at least we had anticipated. So that's one. And then the second one, just -- I know you're not guiding on '27, but as we contemplate '27 and the TSA income that comes out, -- is that still EPS neutral in that year? Or is this something that we should at least be conceiving could be a factor to put into our models for next year?

Yes. So to walk through advances, look, pleased with the progress here. Strong performance for the team, strong alignment with customers and having traveled with this team and having been seeing firsthand with our customers where our product set, our enablement and how our customers really look to us to help in the patient in having high patient care really aligns with our mission and save and sustain lives at Baxter is very important to us, and this business is front and center on that. So strong performance, strong growth. The team continues to align around strong demand and increased volumes for our global portfolio. and execution and staying very close to our customers through this.

As far as '27, look, the only thing you're going to add on this, and of course, there's a lot of moving parts. We're laser-focused based on finishing '26 strong. We have aligned around the actions we have to take as an organization and being very focused on what those align to for getting us ready as we finish the year and get ready for '27, and we will provide more color on '27 as the year comes closer, that includes TSA, that includes a continued view on markets and ensuring that we've got a clear focus on how we want to execute to finish the year out.

Joanne Wuensch of Citi is on the line with a question.

Really nice revenue results. I have 2 quick ones. The first 1 has to do with just the overall hospital environment and procedures. There's a pretty active debate out there on how much changes to the ACA is impacting procedures and with your presence in the hospital I suspect you have a frontline seat. And then the second one is I just want to make sure I understand the moving parts in gross margin impact of tariffs on the second quarter specifically? And then how should we think about full year gross margins and that strength for recovery.

All right. So I'll take the first part of that. And look, if I just do a step back overall, we're not seeing any changes with behavior from our customers and the overall environment. And we're seeing very close to this. And we're not immune. That said, we have not seen a change in behavior and/or view on our product set. But we are staying very close around this. And as a reminder, I visit customers often, we align around understanding what their needs are. And we're launching new products to expand that and to truly support their focus on patient care and also workplace optimization and Baxter has a strong ability to support that.

And then as far as gross margins for the full year, we haven't provided explicit guidance at the gross margin level. But when you think about some of the items we've talked about and some of the moving pieces, mostly focused on operating margin, they're obviously relevant to gross margin. So obviously, the tariff refund in Q2 was a positive rolling through the higher cost inventory. That was the largest headwind this quarter. And as we've noted, importantly, we've now cycled through that. And so if you're looking at Q2 is kind of your starting point after normalizing for the tariff refund, you should expect sequential improvement for the balance of the year. .

Rick Wise of Stifel is on the line with a question. Please state your question.

Andrew, 2 questions. My first is on Frontline Care, up 2% in the quarter. Anita, you highlighted planned product exits. My question is what -- can you quantify the specific 2Q impact on growth? What would it have been ex that? Or maybe it wasn't large enough to really quantify. But when do we get past that? And maybe a bigger question is, how do we think about frontline care growth going forward? Or what are you aspiring to? Is this a mid-single-digit grower? Is there something in the innovation pipeline that's going to change the trajectory? And then I have a follow-up.

Rick, this is Kevin. Maybe let me start here just talking about kind of the Q2 and then I'll turn it back to Andrew for kind of a broader innovation discussion. So as it relates to Q2, Connect 360 did contribute to the growth year-over-year of Front Line Care. Obviously, in the context of total Baxter, it's less of a contributor. But for Front Line Care, it was impactful in the quarter. Andrew, maybe a little more on the second part of this question on innovation more broadly.

Yes. And the piece on planned exits, I would say they're not material, but we do monitor these, and I'll just say a couple of items on this business and overall. We are focused on really alignment to where we have value creation for customers. And part of that is going to be strong portfolio management. And look, I'm a market's first person. And so we want to understand where we have value for customers, alignment with that value is and ensure that we're not only launching products to meet that and expand that. We sustain our solution set that's going to keep our customers in a good place.

And so think about this as base hits, that constant drive to always get better, be better and being front and relevant in front of our customer base. And overall, long term, within this business, look, we've seen improvement. It's early days. And I would say the leadership team is really laser-focused on how to execute and the right value creation for customers and that ultimately then what that means for the business growth.

Yes. And Andrew, this is more for you and sort of a big picture question. Obviously, these are your words, you said earlier, you've made continuous positive progress. it's impressive. It's good to see the quarter. And I know you're pleased with the progress. I suspect my sense of you is I got your satisfied. But my question is, where do you think on better or faster, bigger than you, what's the biggest better, faster thing that's happened that you're pleased about. But where are you -- I don't want to say disappointed or frustrated, but where would you have wished it could go faster? And maybe talk to us about how you personally are evolving your focus to make the fastest stuff go faster and make the stuff that's maybe been a little slower than you would have wanted to go turn around better? .

You bet, Rick. Let me just walk through a couple of items. And I've been very pleased with how GPS has taken shape across the organization. And Look, having done this before and I've been a part of many organizations that are land, this the team at Baxter's really embraced this. And if I were to coinaphrase, boring and consistency, brilliant execution we want to be consistent, and we want to continue to ether. And so the nuance that I want you to think through is, and I referenced this, we have done, and think about this, year-to-date. We have done over continuous improvement events. We have almost 200 in flight, and we have another 400 planned in the pipeline. And when we think through that, that is the driver for on is if you look at the flywheel of our GPS system, it starts with strategy. It starts with understanding the markets, understanding the position, understanding the products, and then it aligns to what are the breakthroughs that we want to drive within each business, within each segment, then it goes to how we're going to measure KPIs, and we look at annual, we look at quarter, we look at monthly. We look at daily where possible. And then it's on our teams, actually, and I travel a lot, and I get to see firsthand how the teams have embraced this concept, this drive, their passion for making tomorrow better than today.

And I can do a reference point after reference where we can give examples of the examples. But to me, that's how we think about the future. There is no one innovation that we'll define our future. There's no one continuous improvement event that will [indiscernible]. It's the accumulation and combination of all of them that puts us in that execution cadence. That said, it starts with leaders. And even this week, we have a leadership team here that's going through their view on how to get better every day, how to build capable teams that drive and that passion around making tomorrow better than today. And so we're early in our journey.

Now you nailed it in the question, which is am I ever satisfied? No. I'm that constant drive to always get better, but I am pleased with our progress. That said, one quarter is one quarter. It's that drive to finish the year strong, get ready for '27, launch new exciting products that are base hits and build the team's momentum around how we continue to perform, continue to drive. Thank you for the question.

Matt Taylor of Jefferies is on the line with a question.

First, I wanted to ask a follow-up on the operating environment because there are several places in the release and the materials where you talked about stable demand for patient support for your product. It really seems like you're saying nothing is changing with CapEx spending. So could you be specific, are you seeing any impact from ACA or HIC subsidies and/or Medicaid? And do you expect any impact from that? If you could help to frame that risk at all, that would be great.

Yes. So a couple of items here. Look, we are not immune. We stay very focused on this, and it's a part of -- look, we assess customer base. We go through all the external documentation. And what I can tell you is net-net, we've not seen a massive change in behavior and buying behavior, and -- but we're staying very close around it. And I walked through a little bit of that earlier around funnel around outlook. So again, we're seeing strong demand for our product set. That said, we're staying very, very close to this to ensure we've got alignment with customers on their buying behaviors and their needs. So overall, no update on our expectation. That said, it's something we are continuing to monitor and continuing to assess.

Got it. Could I ask one follow-up on '27? I know you're not going to be specific, but previously, you had talked about the confidence in at least being able to grow the top line and earnings in '27. Can we still assume that's the case? Or maybe you have more confidence in that now that you've produced good results here in Q2? .

A couple of things. And I'll just walk through it. Look, we are pleased with our progress. No one quarter is going to define us. Now we're pleased with the progress in Q2. That said, as I talked to the team, look, we've got a lot of areas we want to target and drive in the second half of the year. And Certainly, we don't want that to get ahead of ourselves. And so as we look at '27 to get there, it goes through '26, and so we'll give update and color at the appropriate time. But right now, we are laser focused on executing for the remainder of the year.

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

Andrew, I note it's -- Baxter has some comp variability as we're trying to assess each business unit and the go forward, as Matt's question addressed about 2027, but I was hoping to just get an update on your team's view on the weighted average market growth rate of the portfolio in various business units, many different product lines. But historically, we've thought of the way the average market growth rate Baxter's portfolio around 3% to 4%. I mean, does that hold true when comps stabilize and as you look forward? And where do you see Baxter's portfolio, which business units are prime to gain share as you reach that steady state maybe in 2027 and beyond?

You bet. And look, if I just do a step back, look, we view this as a low single-digit area. And that's overall. Now -- and we then piece this apart we go into different areas of the business. We've obviously seen and continue to see strong areas, and I'll just call it a couple. We've seen strong performance in our Advanced Surgery business. compounding has obviously been a strong grower. That said, all of our businesses are focused on executing and bringing value and innovation to our customers and alignment to that cadence around that. And -- what gets me excited as we continue our execution journey is how -- and I know we didn't talk about this, but how we're looking at leverage. And we talked in our prepared remarks around getting to approximately 3x by year-end, obviously, gaining confidence in that gaining ability and what that means for future and how we think about capital allocation with our alignment to internal investment as well as potential tuck-in M&A as well as well as other opportunities that are going to really be part of the future narrative. That said, it's about execution. It's about how we line. It's about GPS being at the core of everything we do and our people to align to that future. Thank you.

There are no further questions at this time. I will now turn the call back to Andrew for closing remarks.

Thanks, operator. We are encouraged by the progress we're making and remain focused on the work ahead. Our turnaround is gaining traction. Execution is improving. We're building momentum across the business. We believe this positions Baxter to deliver more consistent performance, sustainable growth and long-term value for shareholders. Thank you for your time. Appreciate the interest. Stay safe, and goodbye for now. .

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

Good morning, everyone. Very pleased to welcome the management team from Baxter, Andrew Hider, President and Chief Executive Officer; and Kevin Moran, Head of Investor Relations. Kevin, I know you wanted to make some obligatory comments. So I'll turn it to you, and then we'll jump in.

Thank you and I appreciate you having us here today. Just a reminder, we will be making forward-looking statements that are subject to risks and uncertainties. For more information, please check out our website or our SEC filings. Thank you. Back to you, David.

Well, hopefully, that means we will get something good out of you because this is webcast, and you are offering the forward-looking statement disclosure. So I guess you can say whatever you want and change your mind tomorrow.

I can...

Well, maybe we could just jump in. And Andrew, you've been in the CEO seat coming up on 9 months, I think. Maybe just give us some of your reflections in the role, what have you been excited about? What's been disappointing to you as you thought about your expectations coming into the role? And where do you go from here?

Yes. So good morning, everyone. Look, first off, that's a 3-part question. So I'll try to get all 3 parts correct. But if you do a step back I took this job with the excitement around the potential with Baxter. And I'll tell you that, that was vetted and I've known this business for decades. And I was able to do a bit of diligence before even entertaining the offer around where Baxter sits with health care providers. I will just say it's a strong brand position and it's a strong trust position with our customers.

And so when I came on it was around how do we get Baxter back on track for execution. I'd like to say, say-do ratio. I'm a pretty simple guy. When it comes to execution, it's, do you say what you're going to do and do you deliver what you say. And the other piece is we've had a real focus around how to enable that execution with also the rich history that comes with Baxter. And I'd like to say we're almost 100 years old. Yet we've got the refreshed view of how we think about the future. And with 100 years comes a lot of complexity in how to minimize that.

The last piece of this equation around what I was faced with is our view or where we sit with capital allocation and leverage. And so I'm going to fast forward to -- we launched our 3-point plan around stabilizing the business, around delevering the balance sheet and around driving continuous improvement. And to know me, you know that I'm not a light believer in this. I'm a huge believer, I've been part of GE for 6 years, Danaher for 10, ran a private company, then I took over ATS Corp. for almost 9 years. it works. If you can focus on it, so if you can identify the key metrics, and you can enable the key metrics, you can improve the key metrics. And so we started our journey.

And the proof points along the way, we launched Baxter GPS within, I would say, within 6 weeks of me being on board, that's growth and performance system. We've gone to a decentralized model. So as a CEO, I don't like secret decoder ring. I want to know if we're winning and losing in 3 seconds, and we have 8 value creators, not 7, not 10, 8, revenue, margin, free cash flow, ROIC, top 4 financial, 2 are wrapped around customer, on-time delivery and quality. Because when I talk to our customers, and I do frequently as a CEO, they tell me if you deliver me my product on time, higher level of quality, I want to buy more of it and people, hire from within to our internal fill rate and turnover, track, retain, development.

And so we've gone decentralized. We've launched our Baxter GPS. We very quickly took the dividend away. And the reason we did was we had stated in 2025 would be under 3x, quickly realized that, that's not going to be the case, and we took the critical decision around how do we make sure that, that is a top priority because Capital allocation is aligned with long-term shareholder value creation. And so we will take action to drive impact. And we now have aligned the business around continuous improvement.

So fast forward now where do we sit today? And I'm almost 10 months on the job. I visited, I don't know, probably 60-plus percent of our locations. I visited many of our customers. And what I can tell you, it's starting to take shape. In Q1, we did over 200 continuous improvement events, over 200. And I'll tell you proof point is when I go on site, and I see the leaders driving the behavior around red or green, not pink, purple or yellow, red or green. So we know where we're winning and we know where we need to focus and then driving Kaizen to get back on track, really that constant drive to always get better. And I'm seeing more and more proof points.

We've stated the target this year around our leverage and being approximately 3x by the year-end because that enables us to then utilize other avenues for capital allocation. And if you join my leadership team, you get 2 books. One is The Outsiders. The reason why you get that book is I want you to know how we think about capital allocation and how we think about operating the business. The other one is Extreme Ownership, no excuses leadership.

So now the path forward, what you're going to see is our drive to always get better. And it stems with the path to a high say-do ratio and getting our leveraging endpoint where we can invest at a higher level internally and start the discussion externally. But it's rooted through execution. And so we're making progress. I would say I was pleased with Q1, not happy. But we're making progress in the direction. And it's about that constant drive to always get better. And I'm just going to say one other item before I turn it over, and I know I'm a little bit long-winded, but it's for a reason. I was recently at 1 of our facilities. Where I was walking around with a senior supervisor and the gentleman was about at his retirement, and he was walking through with me and he's thanking me for bringing GPS. And if you don't know this, continuous improvement is everyone, not Andrew Hider, it's everyone within the organization. But the reason why he was thanking me, he said, Andrew, I have been telling my supervisor for the last 10 years. If we just focus on this improvement, we can make a much greater impact on the output.

And he said, "I'm about to retire, and I finally had a shot to drive that continuous improvement to make the impact and to see the outcome. " They said, you gave us an environment where if we fail, we just went back to what we did before, but we could improve that, and we did. And now we can turn it over for the next person to have a better experience on their operation. And it's that mindset that drive on the culture aspect that is going to propel us forward. And so continuous improvement never stops, and we're just started in that journey.

So you gave me a long answer, and I asked a long question, but the -- maybe dive into some of the details here. Sort of about stabilizing the business. You're talking about flat growth or approximately flat growth this year. What has stabilized the business mean? And can you -- when do you get the company growing again?

Yes. So we recommitted for the year. And what we've said is the markets that we're in today are low single digits, and we would expect to start to see that. We're lapping a lot of areas this year. And we would start to see that as we go into next year. It's very early. So the path to '27, and I'm not going to give any more -- I'm not going to give any guidance on '27, is through '26 as we go in the latter half of the year, it's about executing and getting us ready to perform in '27.

And have some of the kind of end market headwinds that negatively impacted performance last year, where are we in the IV utilization cycle? Maybe we'll start with that one and then go to a couple of the others.

Yes. So this is one, and I would say this is a bit of a -- we had to drill and dive deep into the IV conservation discussion. And to give the short answer to a longer question, we originally thought because we've had experience with challenges like this in the past, that IV is going to just come back. And what I can tell you is through 3 avenues, our internal assessment an external source, so an external group and my own diligence with customers, this is the new norm. And we'll see that kind of flush out this year, so it will be more stable. And as we go into future years, we would expect this to be normal course operation, which is low single-digit growth. But we had to do a lot of assessment around this, and then we've rightsized the business because once we then identify that this is the new norm, we took the action on the organization to rightsize it for where it sits. And we've done all that work, and so we should start to see that get back in line. .

Okay. And so sort of at the new normal, meaning hospital behavior has changed. It's changed for good, but that change is now it's in the rearview mirror fully? Or you still need to go through this year to you think, to bottom out trend?

Well, obviously, we're going to lap some areas. So Q1 is a bit of a lap time. And I would say, latter half of the year is when we should start to see that come back. We took the action. So our inventory roll will start to take shape latter half of the year as well. And so again, as we exit the year, it should be on a more normal course as we look at that business specifically.

And then maybe sort of the other business that does stick out is the injectables and anesthesia franchise. What what's happening there put simplistically? And what's the path to turning it around? .

So a couple of items on that. First, when we looked at our Pharma business, it also has some of the same dynamics as the ITT business. So the fluid conservation also happened in that area. And so not only did we have to take the same actions around view of the business, we then looked at it and said, there's a lot of synergies with those 2 businesses, and we have combined them. So we've now put that -- because it's the same buying behavior, same logo, same area. So we've combined those businesses to drive a greater impact.

And so we've now restructured around how we're going to execute for the commercial portion of the business. That said, there's also a couple of internal dynamics. One, and I talked about this on the call, we had an operational site that was challenged. And it's been a challenge for a while, ups and downs on performance. Well, we put a team in to drive impact. And I'll say early signs, and I was there 2 weeks ago, we've seen nice turnaround.

Now 1 quarter, 1 month isn't a long-term view, but it's moving in the right direction. And not only that, they're seeing the strongest performance in a while. And so now it's about how they sustain that impact and continue to drive Kaizen after Kaizen. So we're pleased with the progress on our internal. We have had a challenge on an external and it's a contract manufacturer. We're working, we're on site I've held calls with them. And we are working on not only the direct course on this, but then what do we want to think about this long term to make sure it's not a challenge for the future. And I can't get into too much detail beyond that, but it is something that's an absolute key focus for us.

And on the injectable portfolio specifically, that's a interesting business. It's pretty good margin, very good margin. But it's also kind of a hamster wheel from a product launch perspective is that you have to have continuous product launches to stave off natural price decline in a generic market. And when you look at your primary competitor, Kabi, I feel like every day I'm reading about it like an FDA approval. So how do you get the engine going? I know a Ahmedabad isn't probably the answer given some of the quality issues there. Like how do you get that engine going.

A couple of things. First, it's now approval, so Ahmedabad, is a new option for us as we expand, which we're very pleased with that. It took us took us a long time to get there. And now we're pleased that we can put new product into that facility. The other piece is, it's around how we view our investment to launch. And just to give you some insight around how we think about innovation, enabling our future. If you look at the 5 points of capital allocation, internal investment generally is one of the higher returns for shareholders over a long period of time. So we have not shortened that area. We've kept our investment high there even while we're going through these other areas to drive our leverage down. This portion of our business with every other area they're doing quarterly business reviews with me to make sure they drive and launch new solutions. And I would say we lost our track a little bit. The team is very focused on how they're launching new products in this space and what that means. And so what I can tell you is laser-focused on execution and how we drive higher R&D and lower sustaining on our launch cadence.

And how about the anesthesia side of the business? I know that that's a franchise that faces some of its competition, some of it is the shift in modality of anesthesia. Where are we in that kind of transition in that franchise? And can that business get back to growth?

Yes. So inhaled anesthesia is a challenging market and challenging space. And we look at our -- look, we laid the business out in 3 categories. There's the invest and growth which we expect high return from that invest and grow, there's sustained and I would say, like our ITT business is in this sustained area around how do we sustain that share position? How do we drive free cash flow in that area? How do we have strong ROIC on our investment and then there's a bit around the fix. And I would say our inhaled anesthesia, we're in that fixed category. It's a challenged market, challenged space. We're doing the necessary areas of focus, but it does take time as far as how do we look at that longer term.

And I would say for right now, it's in the fixed category, and it's focused on how to out execute and outperform in the space, but we've got some work to do.

And then maybe I'll close on compounding before going to the HST business. Compounding has been sort of a consistent standout performer for you. We can talk about the P&L implications later. But what's driving the sustained growth in compounding? How much of that is volume versus price? And how do you think about where are you in capacity? And put another way, how do you keep growing this business?

Yes. So rough area, and I'm going to do rougher. So this market grows mid-single-digit-ish. And obviously, with our performance, we've been outpacing that, largely driven by Australia, New Zealand, U.K. And we have a unique position in this space. And I would say our team has been laser-focused on how do we bring the value for our customers, make it easy to do business with our business and we've been able to realize that within the growth and within the space. And so a lot of it's around execution, and we've seen that.

Now this business growth has been good. Free cash flow is good in this area. ROIC is generally good. Margin is the discussion and making sure that we're constantly looking at how do we drive this as profitable growth. And I'd say that's where you're going to see us focusing on more and more over time because the market is there. It's our ability and customers are leaning into Baxter providing a solution that helps them in their ability to provide care, but we need to also make sure it's margin. We're looking at the margin as we're looking at growth in the market in the space.

And is the margin of that business has been going up or down?

So I would say it's getting better, but it's not at the pace that we would expect.

Is it profitable?

Oh, yes.

If I said high single-digit operating margin, would I be wrong?

I would say it's profitable, and that's a great way to put it, and it's a higher growth area of our business.

All right. All right. I'll reach back into my memory bank. Maybe just going on HST. Obviously, business has seen a lot of volatility, but it's also kind of an interesting one because you've got a lot of other things masked in there like you have the Bardy franchise, for example, which is a high-growth area. You have some other pieces of the puzzle that are smaller in revenue, but much higher in growth. Like how do you think about sustaining? We all think about beds, right, fine. That's a big business. How do you think about just like the growth algorithm in that business and then being able to put enough dollars into the higher-growth areas to such that they can move the needle.

I love that you're calling out some of the areas, of course, that we do internally as well. And I would say similar to how we think about the broader Baxter, we put those businesses in the same view. There's going to be invest and grow, sustain and fix. And we actually announced this on the call last quarter is within our Front Line Care business, we did some SKU rationalization. And there were some SKUs that guess what, we weren't making money on. We had launched new product solutions that you should shift to, yet we were still offering the product. And so we're going through the cleanup phase on that. We're not in the business to lose money, and therefore, we want to make sure if we have option B as a better option for the patient, for the customer, and we should be shifting there, we're going to help our customers shift there.

The second piece of that is also shifting to investment around the growth and enablement of growth. And you talked about Bardy, I have been on site. It's a great product set. It's cardiac monitoring. We're excited about this product. There's optionality for how we're thinking about new product launches in this area. We have a strong product set with strong data for the customers, for the patients. We're excited about that space. And there's many more in that camp. Oh, by the way, also in our bed business and not to drive into this one as well, but we've just launched our new stretcher platform. And we did that in a very fast pace with Dynamo with a significant customer engagement. And I'll tell you, when you speak to customers around it, the demand has been very high. Because they had engagement in the design process to enable and meet what their needs are. And so look, there's excitement.

And then the last one, I'll just walk through and I would say we've got pieces of the puzzle and we're laying this out is the connected care piece. And simple numbers, right, the average hospital, 300 beds, every patient has many, many areas for data collection. We have a strong position and it's -- if you take the 6,000 [Technical Difficulty] in U.S., there's a significant opportunity for helping with workflow as customers are looking to maximize their patient care and minimize any challenge with the ability to support that. We're still working on connecting those dots and really enabling the data to impact to how we're going to monetize and how we're going to make sure our customers feel the impact as well as we see the revenue stream. And there is a strong potential around that.

So as I kind of put the top line outlook together, I want to talk a little bit about the P&L and capital allocation further. It sounds like saying end markets grow, call it low single digits, maybe that's 2% to 3% or something like that. This year is kind of a year of stabilization for the company, growth would be below that 2% to 3% level as you kind of work through some of the dynamics that I think have been very well telegraphed, but you see a path back to market growth next year. Okay.

That's fair enough.

All right. Very helpful. Maybe we turn over to the P&L. One of the conversations I have with investors a lot, and it's sort of -- it's hard to reconcile sometimes if you even just look at like the gross margin. Gross margin is below where company total was before the separation with Vantive and we've all seen the Vantive P&L. So we know where that sat relative to total Baxter. So can you just help us think about where we are specifically on the gross margin? And where that -- can you get back to, call it, I don't know, 40% by the end of the year?

Maybe I'll take that one. I certainly acknowledge some of the headwinds we've had at the gross margin line. And I think the Vantive divestiture and the TSA arrangements have added a lot of noise to that with the activity in COGS and getting TSA income below gross margin. We're lapping some of that. And obviously, TSA are going to roll off going forward. And so hopefully, we'll have a much cleaner view of what's going on. We've been pretty transparent about some of the headwinds that we face. In Q1, we talked about the prior year comparison, the reclass from SG&A to COGS. We've talked about tariffs now for a couple of quarters, and we'll begin to lap that as we go into the second half of the year. .

And then finally, we've talked about higher manufacturing costs and including absorption. And again, we're going to cycle through a lot of that in the first half of the year. We gave an operating margin bridge this last quarter from first half to second half. Many of those drivers are relevant at the gross margin line. So if you just take big round numbers, we've reported 11% in Q1. We said similar earnings in Q2, so call it, 11% first half midpoint of our full year guidance, that's over 500 basis points of expansion first half to second half. About half of that is attributable to volume and getting the appropriate level of leverage with that. Said a different way, we are not expecting a Herculean ramp in volume think consistent historical levels of volume. Second, cycling through that higher cost inventory. Andrew talked about the cost actions we took to rightsize our support footprint. We expect to have that behind us as we go into the second half of the year.

And then finally, not gross margin, but the third piece to the operating model walk is realizing the benefits from those cost structure actions that we took earlier in the year. So I haven't provided explicit gross margin guidance for the year, but if you take our operating margin guidance and kind of work your way up, the back half is definitely in the ZIP code of the number you referenced.

Okay. And maybe just one of the -- I had a conversation with someone yesterday kind of walking through the accounting around manufacturing variances. It's sort of like you had to pay the bill twice in the first half of the year. So you have -- remind me i think it's $75 million of capitalized variances that hit the P&L in the first half of the year?

The difference between first half, second half.

Yes, the different.

Yes. So we had about $20 million in Q1. You would expect the difference in Q2. So call it north of $50 million. And then...

And then you have flat operating margin despite higher volume Q1 to Q2.

Correct. We didn't -- we said similar earnings in Q2. So if you assume incremental volumes on similar earnings, that would actually be slightly dilutive, but I would consider it similar to be appropriate.

So as we look at the back half of the year, is that a good picture of, I don't know, kind of like a normalized P&L jumping off point, meaning there's -- you have the higher manufacturing costs are in the base, the variance have been having cap -- have been recognized. Is that a good starting point like what the business looks like.

Without providing guidance for '27, I would say there's a significantly better view of underlying earnings power, and we have cycled through many of the headwinds that have plagued us in '26.

Yes, I won't be doing my job if I don't keep pushing. But you talked about the $0.14 of headwind on TSA next year. Can you grow earnings. Can you overcome that?

Yes. So we've said what we said the path to '27 is through '26. And I want to be very clear. We're not going to share it anymore. I mean we're confident. We reiterated '26 on the first call the year. Our path to getting there is through driving execution. And we got to earn that right. We've got to deliver for our shareholders and we get to show what the business can do. And so by doing that, puts us in a much better position as we go into future years. And I would say, we're laser-focused on that. The team is committed, and we're driving the right level of engagement and discussions in the organization.

And oh, by the way, we've also said we want to get to approximately 3x, which puts us in a unique position as we are to talk about capital allocation into next year. And that's going to give us the ability to look at different levers for the future. But the path to '27 is through '26 and its execution.

And just to build on that, with respect to TSAs. So we've sized what we expect TSA income to be in 2026, $130 million to $140 million. I would say, think about that in 2 buckets. There's a piece of that, that as soon as the activity stops, we can very quickly stop incurring the cost. So think about direct freight on product or a direct head count that supports it. So that can come out very quickly. The other portion relates to kind of more shared costs to think IT. That takes a little bit more time to pull out. But I would just leave you with we have known about TSAs expiring now, it will be over 2 years when we get there. And so this is not a surprise. We have taken actions. We've talked about the actions we took earlier in January to right size our cost support footprint and other actions. Part of this is chipping away at what we know is coming in '27.

Okay. Very helpful. Maybe I want to come on the capital allocation side. But before we touched on that, one of the things you talked about was the cost actions that the company has taken. The company has taken a lot of cost actions over many years and multiple kind of changes in reporting structure, vertical matrix, decentralized. How do you keep people engaged and make sure you have the right people to invest for growth and execute. You talked about the path to '27 is through '26. I mean how do you ensure -- for lack of a better word, keep things together, and drive that performance?

Yes. So culture is squishy. But you kind of know it when you see it. And I would say I travel a lot around seeing firsthand, how our leaders show up. And you get a sense of that, and I'm just going to point out last week, I was in Monterrey, I highlighted them because of they did a Kaizen event. It was an incredible Kaizen event. I actually -- with Baxter, I'm doing our GPS wins and it talks about different Kaizen events and the impact. And I use that as an example because here is a facility that the turnover was very high in the past. And when I say very high, it was like 30-plus percent they're going down to 10-ish percent in turnover. That is a massive improvement. It starts with leadership engagement. It starts with a high say-do ratio and driving from the front. They're not all green. And if they were all green, that would be a problem for somebody setting the bar high enough and I expect my leaders to stretch their business.

And so they were 70% green, they were 30% red. And it's okay to be red, but it's not okay to be red and not do something about it. And so here I am on site, and this team, they're red at 30% of their metrics. And oh, by the way, you know my critical 8. But the power is, not only have they're red, they're driving countermeasures. They're looking short term, they're looking long term. They're doing Kaizen event as they have their Kaizen event. They get back on track for their stretch targets. That is a team now when I leave I know they're moving in the right direction. The engagement is higher, the turnover is lower, and they're driving the right behaviors around their businesses.

And so when I think about the future of Baxter, and by the way, we're going to be a decentralized business. I view that as the winning strategy around how we execute because then GPS is part of who we are and how we operate. And the next question everyone is going to ask me is, "Oh, Andrew, is it done? Is that turnover? " No. Everyone says they want to do continuous improvement until they have to do continuous improvement. And so for a person like me, there are leaders that they step up every year, and they say, I want to set the bar even higher. And then those leaders that don't. But we know where we're going to gravitate to and is that constant drive to always get better. And so I'm going to look at our leadership team over time to always get better and set that tone at every site, every location, every business unit to outpace, outdrive and out impact. That's the future of where we're going at Baxter.

Excellent. And that's a good kind of segue to kind of the final thing I want to ask. You made a couple of references to capital allocation in 2027. I know some of that's mathematical around where your leverage ratio is. But what are you signaling, How do you want people to interpret those comments? You've referenced the dividend? What's next?

So a couple of items. Free cash flow is critical to this. Q1 -- And by the way, we all know free cash inventory management, all that. We're getting better. I would say we're not perfect yet. We need to constantly get better and drive this as an enabler. It's 1 of our 8 value creators. It's a focus. We look at every business, every site, every organization around this. Number two, once you get under 3, then we look at what's the value creation long term for shareholders. So there's 5 points. We all know them but let me just walk through them. There's internal investment. There's debt repayment, there's dividend, there's share buybacks and then there's M&A, 5. We now have had to limit many of those because we had to get under 3x. And if you know this, you know when I came on, we thought we'd do it in '25. We had to push that to '26 and that's why we took the critical action around the dividend. Once we open that up, then we're going to look at what is that value creation, long-term value creation for shareholders. And that's when we start to really deploy it both internally and externally.

And I would say we're starting to cultivate potential M&A. No, I'm not saying that's a conclusion. I'm just saying to be in the space, you want to cultivate and you want to start to build out your capability to understand because when you join the future of Baxter, it's like you're joining a train going to Chicago. And this is the last stop. But when you're on this, GPS is the North Star, and we're going to drive the critical elements of how we execute the business to outperform in the markets. And so we're starting to set that tone but it's early.

And what excites me about that is once you get that internally, you're investing in areas that you can drive, and it's more R&D versus sustainment. And by the way, we're doing quarterly business reviews around that. Every R&D leader has to go through that on how we think about that. And then future for tuck-ins, how we think about that strategic area of technology and capability with the Baxter brand and the Baxter penetration. So it brings value for our customers drives impact for their market and allows us to drive continuous improvement on the new potential.

I got one more in here in the 15 seconds we have. Would you be buying back stock now if you could? And where do share buybacks rank in that priority scheme?

We're at time, what I can tell you is we don't look at -- I don't think it's an or discussion, I think it's an and. You can do Internal investment, you can do M&A and you can do buybacks, and we're going to look at those as where we trade to make sure that we're constantly looking at the greatest value over time. Because one can be short term and one can be long term. And I don't think it's an or discussion. Thank you so much. I appreciate the time. It's great seeing everyone.

Thank you, everybody. Thank you, Andrew. Thank you, Kevin.

[Audio Gap] Presentation of the morning. So welcome up next, Baxter International. We are lucky to have Andrew Hider, President and CEO. It's our first time having a fireside chat. So thanks for coming. And then Kevin Moran, VP of Investor Relations. I think you wanted to start out with the legal stuff, Kevin?

Yes. Thanks, Travis. Just a reminder, we will be making forward-looking statements today. For more information, please consult our IR website or our SEC filings. Back to you.

Great. Thanks. Andrew, maybe starting out, like your initial time at Baxter, I think you talked about changing the culture to one that's more accountable. Maybe just kind of talk about kind of what kind of changes you've made so far and where you're at in the process?

Great. And good morning, everyone. Look, I came to Baxter with a belief around where we sit in the markets, the engagement with our customers and really the ability to get back in line with execution. And if I do a step back, that's only -- my view on the business has continued to evolve, but the thesis around where we sit with our customers, our progress on performance and then ultimately, where we're taking this has been in line.

And I would just say, early on in my journey, we started Baxter GPS and it's Growth and Performance System. And the reason we did was it's that alignment to the critical few metrics that we're going to hold at the highest level, and we call them value creators. And by the way, there are 8 of them. They never change. Every business, every site, every division has those 8: revenue, margin, free cash flow, ROIC, top 4 financial, on-time delivery and quality from a customer perspective, internal fill rate and turnover from an employee perspective.

And the reason why that's important is as we've gone to a more decentralized organization, I don't like secret decoder rings as a CEO. I want to go on site, and I want to know in 3 seconds, where do we need to focus and spend our time. And so to the culture question, we've moved the needle. Now we're early in that journey. And I want to be very clear on culture takes time, but I've been really encouraged by the engagement of the team around what that looks like, and proof points, Q1, we did 231 GPS events. 231. Now no single event is going to be a silver bullet. I'm here to tell you. It's a series of events that continue to change over time, but we've made progress.

Additionally, we've restructured the business to be very focused on our end markets, what we call decentralized management. And to be -- to think about it cleanly, it's -- we put the power in the P&L, in the business unit to drive effective change for our customers and ultimately, our shareholders.

And then the last piece is I'm a big say-do ratio person. What we say we got to do. So Q1, look, we're -- I'm pleased with the progress. We have a lot of work to do, but we've made progress. And I would say we, Baxter, need to continue to build that focus on execution and that alignment to high say-do ratio. So moving, a lot of work to get done between now and when I would say we're at our high point of execution, but it's moving in the right direction.

So you've broken down the turnaround in kind of multiple phases, Phase 1, holding people accountable. Maybe what's in Phase 2? And when does Phase 2 start? When you kind of move from Phase 1 to Phase 2?

Yes. And one of the -- when you look at a continuous improvement culture, one of the questions I get often is, do you have the team? And I would say everyone wants to do continuous improvement until you have to do it. And so that's going to evolve over time. But we've made significant progress. We've delayered the organization. We put the power in the business units, and we're starting to execute.

One of the next phases, and I've been very clear around this is getting our leverage under 3. And the reason why that's so critically important is it allows us to press the other areas of capital allocation. And if you join my team, you get two books, and one is The Outsiders. And the reason I want you to have that in your back pocket is that I want you to know how I think about investment, how we think about investment, how we look at operationalizing our business and how we expect execution. So when we achieve under 3x, it allows us to open up that ability to execute from a capital allocation for long-term shareholder value. That will be part of the narrative for the future.

The Q1 obviously beat. Is that part of the accountability already showing up in a better execution right away? Is it too early to say?

Look, we have a lot of work to do, right, first half, second half. And I walked through why we're confident in second half. Again, I'm pleased with the progress, more work to do throughout the year. But proof points, GPS events, training and engagement, we started the first week in January. We did a President's Kaizen event. There was 10 events, big impact events. I did it, my senior staff were involved in Kaizen events. The reason that matters for culture, it shows nobody is above continuous improvement. Everyone here has a stake in ownership around that.

But the other proof point that I would say we're pleased with the progress, not there, but pleased with the progress is our free cash flow. And so we've made progress there. We're going to continue to laser focus on how we drive free cash flow in the business. It's not where we want it to be, but we have seen improvement, more work to do.

As you've kind of evaluated the portfolio, is this the right mix of businesses for Baxter? How do you think about the quality of the different businesses? There's obviously the team and culture things, but there's also the businesses and the markets that you compete in.

Yes. And I'll answer this in a few ways. First, Baxter has gone through a lot of portfolio shift. And that's largely behind us. And I would say, sure, there's some TSA next year. But I would say large part with the Kidney Care business being spun out of Vantive, that's now behind us. And so when I talk about stabilizing, that's part of the equation for stabilizing.

Number two, we faced some headwinds in '25 that I would say we had to call. One of them was IV solutions. And when I talk about IV solutions, we initially had the perspective that it was going to come back in a shorter period of time. And I'm here to tell you, we made that call. It's -- we're not talking fluid conservation. It's the new norm. And we've now rightsized the business for that. And so we would expect that business in the future to get back to low single-digit growth.

And so what you're going to see in the future for Baxter is there's going to be three major categories that we're going to put our businesses in. There's going to be invest and grow, areas we know we can drive and continue to outpace the market. There's going to be sustain, which is how we look at those businesses for cash generation. We look at them on the investment to return at a higher level of expectation, but they're the fuelers. And then there's going to be fix and/or divest. And I would say you're going to find lower in that threshold, but we are going to look at businesses we need to fix and be laser-focused on it.

And so I would say our portfolio is good. We're going to continue to listen to customers. We've done a lot of work around the markets we serve. We've done a lot of insight around where we play in the value chain for our customers. But at no moment, is that going to be kind of defining our future, meaning our portfolio will evolve, but we like our position today. And we have a lot of optionality for the future, but we need to execute on our plan.

Any sense for -- or color on which businesses kind of fall into those different categories?

Yes. And I'm careful on this. And I would say we're not outlining that externally right now, but just to give it a couple of examples. Advanced Surgery would be one we put in the invest and grow. There's a lot of options to drive that good, strong position. As a matter of fact, I'm meeting a couple of customers tomorrow as standard work as a CEO is I meet with customers and I'm on site at our facilities. And so really seeing it firsthand the impact that we have with that product set, the strong value we have with our customers, the technology and power we have in the product, allows us to put it in that category.

And then just to give you an example of what would be in the sustain, we want to sustain our position, our strong share position in our IV solutions and really drive that business and make sure that, that continues to remain very relevant because our customers rely on Baxter to provide a solution, high-value solution where we make it easy for them on their workflow. And so we've also outlined our Pharma business to be closer with our ITT business. So we now have it as combined because it's very similar selling process, high-value capability, high patient impact and makes it easier for the customer to run the workflow. And so you're going to start to see that evolve over time, and we're going to be very open around what that looks like.

You talked about pushing down P&L responsibility. How deep in the organization is that going? Is it changing incentives and bonus structures? Or how are you making those changes?

So a couple of things I'm going to walk through, and I'm just going to hit how we think about it from a cultural perspective, where it sits in the business. But I'd start with, if this team were to travel with me to the facility I'm going to tomorrow and Friday, what you would see is we start with the value creators. And as you walk through the facility, you're going to see how we measure that daily, weekly, quarterly, monthly and on an annual basis and the targets we set around how we drive it.

Now that's early in its journey, but the team is taking this head on around red or green. Not pink, purple or yellow; red or green. And if you're red, it's okay, but it's not okay not to do something about it. So when you're red, it means action. And what do you do to drive root cause, countermeasure and what's the target to get back on track? And why that matters to me as a leader? It's because then when I go on site, I understand are you taking the critical actions? Because remember, businesses are going to be faced with many different variables along the way. And are you training your leaders to drive action in that. And that's what we're looking at.

Number two, around our position and how we think through how we drive our businesses. And the leaders with P&L have that overall accountability. So they own the P&L, but they drive very deep in their business. And I would say our bonus structure was good. But where we missed, and I'll just say it cleanly, we were low percentage in how we held people accountable to objectives and then what that looks like on impact. And we have driven that at the top all the way down to full organization. And it's a much higher percentage. Close to 100% of our team is now -- objectives are aligned with the performance that we expect on the business, and the teams are accountable to those numbers and driving those numbers.

That went into place January 1?

Went into place Jan -- I would say, over Q1. As you recall, right, you go through strategy, you go through what we call goal deployment, which is our X Matrix around where you're going to stretch the business to drive and outpace and then AOP and then that trickles down into what we expect from if you're a supervisor to a manager to -- if you're in engineering, how are you launching products, expanding your ability with customers and driving that for value creation. And we're being very focused on what that looks like.

Where are we with the CFO search? And like what kind of attributes are you looking for?

Look, it's -- and I said it on the call, it's a desirable job. And I would say we're fortunate that we have a strong finance organization, and Anita Zielinski has stepped in as the interim and she's doing -- she's our Chief Accounting Officer. She is -- understands the nuts and bolts of the business. So comfortable on where we sit.

We're looking for an operationally focused CFO. And so when we think about the business, it's about how do we maximize our performance. And then longer term, what do we do with that cash? And that's the capital allocation piece. And getting somebody on that understands who Baxter is, knows where we sit and then also the ability to align the business around execution and performance is somebody we're looking for.

I want to touch on kind of the macro inflation and what you're seeing on the cost pressures that are coming in from the macro standpoint.

So -- and I'm not going to reiterate the call we had, but we reconfirmed our full year guidance on our Q1 call. Now what gave us the ability to do that? First, we talked -- I talked a little bit about the oil impact and how we view it today versus where we were in the past. And to give you clarity, when we had our Kidney Care business, it was a higher level of exposure. It's roughly half or less now. So it's less exposure on that from a standpoint of oil impact. And I even said on the call that if it stayed flat to where it is today, we view that we're able to manage that.

Number two, being proactive in how we really manage our supply base and how we drive our supply base to minimize any type of disruption on increasing costs, et cetera. And we have driven that from a proactive approach.

And then the last piece is just to lay it, we went through a cost structure change. And part of that was two items. First, we delayered the business, and we've outlined that, and that's part of the first half, second half equation. Number two, we took action on our IV solutions business. And we had carried a cost that was a burden cost and never easy, but we realigned it to the new norm of the business, and we expect that to flow through in our inventory in the second half of the year.

So comfortable where it sits today, but we are not immune. And I want to be very clear on that. It's about how do we take proactive approach, how do we drive our business, but we're not immune. And so we often look at how do we potentially offset something that could come down, and we're constantly looking at what are the areas that we might be challenged on and take action.

What are the areas to kind of watch out for? Is it mostly all resins and shipping costs? Or is there anything on computer chips or other areas that maybe we should be watching?

Yes. And I walked through a little bit around the chip aspect, and I would say it has not been a big impact on us today. We're being very close and intentional on that. Oil, we watch, and we do look at that from a resin perspective, but I did walk through what that looks like. And so I would say we continue to monitor the global impact and tariffs obviously being one of them that we monitor to make sure that we're positioning the business to continue to drive to what we signed up for.

What other maybe cost savings programs or offsets do you have in the business, if things do get worse, to offset some of it?

And I would say -- so we call it PPV, purchase price variance. we're being much more proactive on that. And I would say the team understands what that looks like. And oh, by the way, part of that is also hitting free cash flow because we expect also payment terms to be something we view with our supply base.

We're also looking at how do we look at levers within efficiency in the business, and we hold ourselves that -- we call them our improvement process internal, and we look at automation for that. We look at efficiencies on labor with that. We look at how we go to market on that. So all those areas.

And then there is some element of price that we look at as well. And I would say Baxter has gotten better. We're not perfect, but we've gotten better from where we were in the past. There is an element of if our costs go up, we have the ability to go back in the discussion. It takes time -- and as you're well aware, last year, we had about 100 basis points of price in our number from last year. And we are looking at that for the future because we offer a high value for our customers and that constant driver on value and value creation. And that's why innovation is also a key element in our future and base hit innovation where being in front of customer, listening and launching solutions that really enable them to do their process better and be more effective on care for patients.

And so we're very aligned with what that looks like. And a clear example of that is the Dynamo stretcher. Very proud of that launch. A lot of excitement around it. We've seen tremendous feedback from our customers in a positive way. It's a connected stretcher. And it's about that listening and launching solutions that offer higher value for our customer base.

On margins, first half to second half was a 500 basis point step up. I think a lot of people are looking at that and seeing like how is that possible. So can you just help us bridge that gap?

Maybe I'll let you start and then add in the high level.

Sure. So we tried to put out a fair amount of color on the call kind of helping people understand and process what those buckets were. So call it, 500 basis points from what we said about first half and kind of implied at the midpoint of our guidance. About half of that is simply an improvement in volumes and capturing an appropriate level of leverage associated with that. And that frankly has not been the case recently here. And so kind of getting back to that more normal leverage that we would expect.

The other two areas, one would be realizing the benefits from the cost structure actions that Andrew discussed. Those were mostly taken in January. Those are going to be realized, and we just have to see them flow through the P&L. And the third piece is cycling through the higher cost inventory or the absorption headwind that exists in the first half. It was around a $20 million impact in Q1. It's probably going to be closer to $50 million impact in Q2. But importantly, as we exit the first half, we think that will be behind us. Again, it's a very mechanical thing. We're just going to sell through the inventory that was produced at the end of last year before we took those cost actions.

These are the three biggest areas, obviously, not all encompassing. We've talked about inflation. I think importantly there, based on the cap and roll and where we sit today, that would only be a month or 2 impact for the full year. And so as we took a step back, looked at all the risks and opportunities for the year, felt comfortable that, that was a manageable risk in the context of everything in totality.

Yes. And look, I don't have much to add, Kevin laid that out appropriately. I mean if you look at it, right, 50% is -- and like you said, typical market for our business and it's just math. It's how it's going to roll through. And so yes, of course, we're going to continue to face areas that we're going to drive in the business. And there's a lot of wood to chop between first half and second half. But we do view that we are very comfortable with reiterating our guidance for the year and what that looks like and how we're executing towards it.

You've also kind of talked about 2027. You said grow -- ability to grow revenue and EPS both. You've been saying that for a few months. What's giving you the confidence to kind of say that a year in advance? What are some of the risks to that?

So a couple of items. First, I want to be very clear about something. Our path to '27 is through our ability to execute in '26. So I want to be crystal clear on it's how we execute throughout the year. And of course, there's a lot of dynamics between now and next year. And I'm not here to go through all what that could look like because we're going to be faced with different challenges throughout the year that we're going to take head on.

As we look at next year, our typical market growth is low single digits. We would expect it to be that in next year. And through that, as we look at how to drive the business, we would also look at in [indiscernible] our ability to expand our margin profile through that increase. And so I'm not here to talk about '27. I'm here to talk about our path there is through '26. And through that is launching new products, executing our plan, driving the business, and that puts us in a better position to execute '27, '28, '29.

When you look at like this year, obviously below your weighted average market growth rate, which assumes -- implies share loss, like if you look at where you're losing share, what's kind of giving you the confidence to get back to stabilized share in those businesses?

Yes. And I wouldn't agree with losing share. What I can say is we did have -- and I talked about fluid conservation. That is a real item in Q1, it was a bigger quarter last year, and that comp was a challenge for us. When we look at the year, getting back to a more, I would say -- we laid out to neutral or just above.

When we go through our businesses, it's how do we align them for driving expansion with customers. And we've largely now we have gone through and lapped some of the conservation that we've seen and/or ordering process around that, and we're setting up to a more normalized approach on Baxter. And I would say we're very comfortable in our share position. We're very comfortable with the market dynamics, and we're very comfortable with the value for our customers and then realizing that over a long period of time.

Just to build on that. So you touched upon the new market baseline in IV solutions that's impacting '26. But recall, there's also -- we're annualizing or lapping the lost Novum sales as well that were in the prior year. And we are also facing some pressures in the injectables business, and we've talked about some of the supply challenges there. So those are all three things that are impacting '26 that don't necessarily have to do with share.

When you first came in, I think you stopped giving quarterly guidance. I think you were like, hey, our visibility is not there to do that. You gave some color this past quarter on Q2. Is the visibility and your ability to set guidance getting better at this stage?

Yes. And look, I look at it as no single quarter is going to define our business, right? It's how we continue to execute year-over-year and that constant drive to always focus on the areas that need to improve. And I would say that was one of the areas around why we are very comfortable on looking at the full year guidance. And so when we think about the year, that's how we're going to lay it out.

Fair. And then I want to touch on free cash flow. It's kind of been an area that Baxter is probably needing to improve going forward. What's the kind of the levers? And how long is it going to take to start improving the cash generation here?

So again, in Q1, it was a nice area of improvement, a lot of work to do. There's three areas. There's collection from customers, there's payment to suppliers and how we manage our inventory. We have action plans around all three.

And I would say we're getting better. We're not where we need to be. And you're going to see us constantly drive around how do we get better on this process because free cash flow, as I mentioned earlier, is one of our value creators, and it's one of the areas we look at with a keen eye on we're going to hold ourselves accountable to getting better on this on an ongoing basis.

And you're even confident not to put buybacks on the long-term slide that kind of [ stood ] out to me. Is that still the plan longer term?

So once we get past and get under 3x, it opens up a whole area that we can look at from a capital allocation. And there's five points, right? There's debt repayment, there's buybacks, there's internal investment, there's M&A and then there's dividend. And I would say we talk about it because we're going to be looking at that for the future around the greatest return to shareholders, and it's over a long period of time.

So I would say we're signaling it because it will be consideration, of course, it's one of the five levers. But I'm not here to tell you that we're at a point at which we're going to put the percentages of what we're going to do with the free cash flow because we're going to look at that on an ongoing basis around that impact for the long term.

So M&A is still part of the strategy?

Today, we're focused on executing the business. Once we get to that level, M&A is going to be part of the consideration around what we look at, but I'm not here to tell you what that's going to look like.

Okay. I was asking kind of post 3x, obviously...

Yes, yes, yes. So -- and look, my view is having done this before, cultivation is king. I'm a huge believer, I call it ABC, always be cultivating. And how do we get out. And we're building those relationships now, but these take time. And I'm not going to be in a position where we feel like we need to jump to something. It's about strategic focus on where we're going to see expanded growth with our position today in the market and how do we drive that from an overall capital allocation perspective. And we're going to look at ROIC as a threshold.

And so when we start to get to that level, we want to have built that relationship. And the reason why we want to build that relationship is we want to have the ability to either have last look or have that relationship for when a customer decides they want to -- or when a company decides they want to do something different, they reach out to Baxter first. And so that type of thing takes time, and we're building that, but we're early in our journey there.

So your -- I guess, prior predecessors -- or not prior predecessors, but your prior companies you worked at were kind of leading companies in the space. Is that the goal? Like what does Baxter look like on the other end of this?

We want to be known as strong executors in the markets we serve. And what you're going to see over time is you're going to see us focus on not only expansion in the markets we participate in. So we want to outpace our competition in the markets we participate in. We're also going to look at how do we do systematic M&A around how do we drive our ability to really align to customer and shareholder value. And you're going to see us -- and with that, it's going to be some portfolio shift, but you're going to see us focusing on areas that are high-value return and how do we be strong stewards for our shareholders.

Anything that I didn't touch on, Kevin? You want to -- all right. Thanks for joining us.

Thank you very much. Appreciate it.

Good morning, ladies and gentlemen, and welcome to Baxter International's First Quarter 2026 Earnings Call. [Operator Instructions]

As a reminder, this call is being recorded by Baxter and is copyrighted material. It cannot be recorded or rebroadcast without Baxter's permission. If you have any objections, please disconnect at this time. .

I would now like to turn the call over to Mr. Kevin Moran, Vice President, Investor Relations at Baxter International. Mr. Moran, you may begin.

Good morning, and welcome. Today, we'll discuss Baxter's first quarter results along with our financial outlook for the full year 2026. This morning, a press release was issued with our preliminary earnings results and reiterated outlook. The press release and investor presentation are available on the Investors section of the Baxter website.

Joining me today are Andrew Hider, President and Chief Executive Officer; and Anita Zielinski, Interim Chief Financial Officer, Chief Accounting Officer and Controller.

During the call, we will be making forward-looking statements, including comments regarding our reiterated financial outlook for the full year 2026 and the anticipated drivers of the second quarter and second half 2026 performance. The anticipated impact of various regulatory and operational matters, including ones related to our infusion pump platform and ongoing supply chain challenges and commentary regarding the global macroeconomic environment, including estimated impacts of tariffs and broader inflationary pressures.

Forward-looking statements involve risks and uncertainties, which could cause our actual results to differ materially from our current expectations. Please refer to today's press release, the forward-looking statement slide at the beginning of our investor presentation and our SEC filings for more detail.

In addition, please note that on today's call, all of our comments will be on a non-GAAP basis unless they are specifically called out as GAAP. Non-GAAP financial measures are used to help investors understand Baxter's ongoing business performance. GAAP to non-GAAP reconciliations can be found in the schedules attached in our press release and our investor presentation.

On the call, we will reference organic growth which excludes the impact of foreign exchange, MSA revenues from Vantive nd impacts associated with business acquisitions or divestitures. As a reminder, Continuing operations excludes Baxter's Kidney Care business, which is now reported as discontinued operations.

Finally, Andrew, Anita and I will take questions following the prepared remarks, and we kindly ask that you limit yourself to 1 question and 1 brief follow-up so that we can give as many people in the queue and opportunity.

With that, I'd like to turn the call over to Andrew.

Thank you, Kevin, and good morning, everyone, and welcome Anita, who is serving as Interim CFO until we appoint a permanent successor, she will continue her duties as Chief Accounting Officer and Controller. I have full confidence that Anita's stewardship, supported by the diligence of our finance team will help ensure continuity and a seamless transition while also supporting our turnaround, including efforts to strengthen our balance sheet. I'd also like to thank [ Joel ] for his contributions and partnership during his time with Baxter. We wish him all the best. We have launched a comprehensive search for a permanent successor, and I look forward to providing an update when appropriate. In the meantime, my focus remains on executing our turnaround, including stabilizing the business, strengthening the balance sheet and driving a culture of continuous improvement. The Baxter team is working hard and made progress on all 3 fronts in the quarter. I'll cover this in more detail in a few minutes. For the first quarter, financial results were in line with our overall expectations, and we are on track to deliver on our guidance for the full year. Although we are not satisfied with where our performance stands today, we have a road map in place to improve results and drive shareholder value. I have clear insights to the challenges facing our business. We believe we are taking the actions necessary to fulfill the company's potential. As I have come to learn through my immersive 9 months as CEO and deep engagement with customers, employees and our leaders. Baxter is a foundation of good businesses with leading positions and the potential to outgrow our markets, expand margins and increase cash flow. We are focused on delivering not only better but also more consistent and predictable performance.

With that, let me provide a high-level overview of our performance within the quarter. First quarter global sales from continuing operations totaled $2.7 billion, representing an increase of 3% year-over-year on a reported basis and a decline of 1% on an organic basis. Adjusted earnings from continuing operations for the quarter were $0.36 per diluted share versus $0.55 in the prior year period. As we stated in our last call, we expected the first quarter to be challenging, including difficult prior year comps. As a reminder, in the first quarter of 2025, we saw a onetime distributor build following Hurricane Helene, which benefited the MPT segment. Also in the prior year, operating margins realized a benefit due to the timing of certain functional costs being reclassified. In the quarter, we saw the expected headwinds from both tariffs and higher manufacturing costs, including absorption pressure operating margin. While we did not see a material impact from Novum LVP returns in the quarter, we believe it's prudent to continue to factor this possibility into our full year guidance. We remain focused on supporting our current Novum customers with their implementation of currently available mitigations. We continue to work diligently to finalize hardware and software corrections to resolve the active field actions. Once available, we will implement the corrections in coordination with regulatory authorities, including any necessary submissions.

Looking at the overall demand environment, we continue to believe we are in attractive end markets. Advanced Surgery, for example, had another great quarter, growing 10% and we are sustaining a strong order book in our care and Connectivity Solutions business. We continue to monitor the direct and broader macroeconomic effects of higher oil prices and conflict in the Middle East. Our Middle East exposure is less than 2% of total revenue. Importantly, our exposure to fuel today is less than half of what it was historically, given the divestiture of the kidney business. That said, this is obviously a fluid situation, which we are actively monitoring. In the event, the landscape changes, it will not be Baxter specific, and we are prepared to navigate any unforeseen dynamic with rigor and agility. To support our customers, we are continuing to advance innovation in targeted areas of the portfolio. This includes positive response from customers and strong order growth from Dynamo, a smart hospital stretcher designed to improve patient safety and care team efficiency. In the quarter, we also launched the IV Verified Line labeling system, an automated solution that supports safer medication administration and the XR spine surgical table, which is designed to support surgical teams across a range of spine procedures. We also have an active pipeline of differentiated solutions with integrated AI functionality, designed to accelerate future growth. We are already leveraging AI in our Connected Care Foundation, which unifies Baxter's unique data set provided by [ Internet of Things ] devices like beds, pumps and vitals to provide actionable data and analysis.

In addition, we are using AI in frontline care to develop products that strengthen clinical insights and operational efficiency. Overall, our performance in the first quarter was in line with how we expected the year to begin with a few puts and takes across the portfolio. Importantly, our results support the broader framework we laid out for 2026. And including known mechanical headwinds and a more challenging comparison to the prior year in the first half and improving performance in the second half. It is still early in our turnaround, but we are on the right track and showing progress on our 3 strategic priorities. The first of those priorities is stabilizing the business, specifically in areas that require increased focus. As an example, last quarter, we referenced back order challenges at 1 of our manufacturing facilities. That was impacting revenue and driving unfavorable mix within Pharma. During the quarter, we made significant progress in clearing back orders in addition to increasing throughput.

The second priority is strengthening the balance sheet. That includes improving free cash flow to support deleveraging. I'm encouraged with the positive free cash flow generation in the quarter, which reflects early success in our effort to improve working capital efficiency. While we still have more work to do, this is a solid step in the right direction and reinforces my comments that the actions we are taking will strengthen cash generation and our overall financial flexibility over time.

Our near-term capital deployment priority is debt pay down, and we continue to target net leverage of approximately 3x by the end of 2026. Once we reach our leverage goal, we will have a stronger balance sheet with more optionality to drive shareholder value, including strategic tuck-in M&A that enhances our customer offerings and growth profile as well as the option to return capital through share repurchases.

Turning to our third priority, driving continuous improvement. It has been almost 6 months since we rolled out the Baxter Growth and Performance System, or GPS, which is focused on simplifying processes, leveraging data and strengthening performance management. In the time since launch, we have delayered management teams and pushed down P&L responsibility directly to leaders of each of our operating businesses. We are setting rigorous KPI measures to drive accountability and continuing to embed the operating discipline into our culture to enable better execution, consistency and improve performance over time. We have also started to deploy AI tools to accelerate efficiency gains within internal quality workflows, such as the customer correspondence and AI-assisted corrective field action communications scheduled to be deployed later this year. Looking forward, we will thoughtfully embed AI directly into internal process improvements, frontline workflows and manufacturing at enterprise scale, with the goal of strengthening speed consistency, reliability while also maintaining rigorous governance and a focus on patient safety.

Baxter GPS is becoming part of how the company runs the business. We kicked off the year with 10 President [ Kaizen ] events. And we've now launched more than 230 continuous improvement events. We're building a stronger culture of continuous improvement through leader training and establishing a lean community of practice. Today much of our focus has been concentrated on cash flow, service reliability and speed to market. While we are still in the early stages of organization-wide adoption, we are seeing strong traction. Ultimately, the purpose of GPS is to enable a consistent approach across the enterprise to identify problems and opportunities earlier, the improved visibility, sulfide processes and drive accountability. This is not a short-term initiative. It is the new core of how we will operate going forward, and improve execution to deliver on Baxter's full potential.

I want to take a moment to thank our more than 37,000 Baxter colleagues around the world for their resilience and dedication to our mission. As the [ ore has been rowing ] in the same direction and speed, the power we will collectively generate will be hard to stop. We continue to believe that our long-term earnings power is meaningfully better than today's level. We are taking decisive steps in the early stages of our turnaround to get us there. We have streamlined the organization for greater accountability. We have launched Baxter GPS to drive continuous improvement and competitive advantage. We have heightened our focus on innovation to better meet our customers' needs, all to drive improved performance and long-term shareholder value creation.

I will now turn the call over to Anita to provide more detail on our first quarter results, including segment level performance as well as our 2026 guidance, which we are reiterating today. Anita, over to you.

Thanks, Andrew, and good morning, everyone. I'm happy to join the call this morning to cover the details of Baxter's first quarter financial performance as well as commentary in our outlook for the remainder of 2026. First quarter 2026, global sales from continuing operations totaled $2.7 billion and increased 3% on a reported basis and declined 1% on an organic basis. On the bottom line, adjusted earnings from continuing operations were $0.36 per share, a decrease of 35%. As expected and previously discussed, results reflect an unfavorable comparison to first quarter 2025, which benefited from a timing shift in expense recognition. This benefit in the prior year related to an updated estimate, which resulted in the reclassification of certain functional costs from SG&A to cost of sales. This was approximately a $50 million headwind in the quarter. Additionally, and as expected, we saw higher costs related to tariffs, which were not present in the prior year period and higher manufacturing costs, including lower absorption. .

Now I'll walk through our results by reportable segment. Commentary regarding sales growth will be on an organic basis. Sales in our Medical Products & Therapy segment or MPT, were $1.3 billion and declined 2% in the quarter. Within MPT, sales of our Infusion Therapies and Technologies or ITT division totaled $981 million and declined 5%. Performance in the quarter reflects lower infusion pump sales due to the previously discussed ship and installation hold of Novum LVP and an unfavorable comparison to the prior year due to a onetime distributor build with an IV Solutions following Hurricane Helene. Within IV Solutions, performance in the quarter was in line with our expectations. As previously shared, clinical practice changes in the market have created a new baseline in demand. In Infusion Systems, results in the quarter reflected the net impact of lower sales due to the ongoing shipment and installation hold of the Novum LVP, customer returns and transition to spectrum.

Sales in Advanced Surgery totaled $304 million and grew 10%. Results in the quarter reflected continued strong demand and increased volumes for our global portfolio of [ hemostats and sealants ], strong commercial execution across regions and steady procedure volumes. MPT's adjusted operating margin totaled 14.5% for the quarter. decreasing 480 basis points. This reflects the same drivers as total Baxter, including the unfavorable year-over-year comparison related to cost timing, tariffs, and higher manufacturing costs, including absorption.

In the Healthcare Systems & Technology segment or HST, sales in the quarter totaled $705 million decreasing 2% due to a decline in the Front Line Care division. Within HST, sales of our Care & Connectivity Solutions or CCS division were $435 million, flat compared to the prior year period. The Patient Support Systems, or PFS portfolio, which is the largest business within CCS, saw growth in the quarter and continues to see momentum, including a strong capital order book within the U.S. This was offset by our Care Communications portfolio, which is impacted by the timing of installations. To date, we have not observed a slowdown in U.S. hospital capital spending. However, given the broader macroeconomic uncertainty, we continue to closely monitor the situation. Front Line Care sales were $270 million and declined 4%. Performance in the quarter reflects the timing of government orders and large customer deals. It also includes planned global exits in the portfolio. HST adjusted operating margin totaled 9.4% for the quarter, decreasing 380 basis points. These results reflect an unfavorable year-over-year comparison related to previously discussed cost timing and higher costs related to tariffs.

Moving on to our Pharmaceutical segment. Sales in the quarter totaled $621 million, increasing 1%. Within Pharmaceuticals, sales of our Injectables and Anesthesia division were $301 million, a decline of 13%. Consistent with last quarter, the Injectables portfolio was negatively impacted by supply constraints and continued softness in certain [indiscernible] products. As Andrew referenced, during the quarter, we made significant progress in clearing back orders at 1 of our manufacturing facilities. Additionally, supply constraints associated with the disruption at a contract manufacturer contributed to the performance in the quarter. While we are working closely with the manufacturer to help improve supply of products, we do expect limited supply into 2027. Our Anesthesia portfolio also declined low double digits, reflecting continued softer demand for inhaled anesthesia products globally. Drug compounding grew 20% and continues to reflect strong demand for our services.

Pharmaceuticals adjusted operating margin totaled 7.4% for the quarter, decreasing 340 basis points. This reflects the previously discussed unfavorable year-over-year comparison related to cost timing, price erosion and an unfavorable product mix within Injectables, driven in part by supply constraints impacting select higher-margin products.

Finally, other sales, which represent sales not allocated to [indiscernible] and primarily includes sales of products and services provided directly through certain manufacturing facilities were $14 million in the quarter. MSA revenue from Vantive totaled $76 million. As a reminder, these sales are included in our reported growth, but they are not reflected in our organic growth.

Now moving to the rest of the P&L. First quarter adjusted gross margins from continuing operations were 36.8%, a decrease of 500 basis points driven by the previously discussed headwinds and cost of goods sold. First quarter adjusted SG&A from continuing operations totaled $614 million or 22.7% of sales, slightly lower than the prior year.

Adjusted R&D spending from continuing operations in the quarter totaled $124 million or 4.6% of sales. TSA income and other reimbursements totaled $42 million in the quarter, in line with our expectations. Altogether, these factors resulted in an adjusted operating margin of 11% on a continuing operations basis, a decrease of 390 basis points, reflecting the same underlying drivers discussed earlier in relation to earnings per share.

Net interest expense and other expense from continuing operations totaled $67 million in the quarter. The continuing operations adjusted tax rate for the quarter was 18.3%, driven primarily by mix of earnings across jurisdictions. In total, adjusted earnings from continuing operations were $0.36 per share for the quarter.

Before turning to our 2026 outlook, I want to comment on cash flow and liquidity. First quarter free cash flow was $76 million. This compares to negative $221 million in the first quarter of 2025. The performance in the quarter reflects improved cash flow generation, including progress across targeted areas of working capital as well as continued focus on execution. We remain focused on strengthening cash flow generation and maintaining discipline around working capital, which are foundational elements of our financial strategy. Improving the balance sheet continues to be a key priority, and we intend to deploy cash towards reducing leverage in line with our capital allocation framework.

Now turning to our outlook for the full year 2026, which we are reiterating. For the full year, we continue to expect total sales growth to be flat to 1% growth on a reported basis. This reflects current foreign exchange rates, which are expected to contribute approximately 100 basis points top line growth for the year. In addition, reported sales are expected to include a headwind of approximately $25 million from MSA revenues from Vantive, representing approximately 30 basis points of impact on reported growth. Excluding the impact of foreign currency and MSA revenues, we expect approximately flat organic sales growth for 2026. As it relates to the segments, there are no changes to our organic sales assumptions.

In MPT, we expect full year organic sales to be flat to slightly up. This reflects the uncertain timing for the resolution of the Novum shipment and installation hold. Although we did not see a material impact from customer returns in the first quarter, we continue to believe it's prudent to include the potential impact from various customer responses in our guidance. Our guidance also assumes that the ship and installation hold will remain in place for the full year.

In HST, we continue to expect full year organic sales to grow low single digits, supported by anticipated contributions from both the Care & Connectivity Solutions and Front Line Care divisions.

In Pharmaceuticals, we expect full year organic sales to be approximately flat. This reflects ongoing pressures in Injectables & Anesthesia related to softer market demand, continuing supply challenges and IV push utilization trends that have been discussed in prior quarters. We expect this to be offset by continued growth in drug compounding.

Turning to our outlook for other P&L line items, beginning with tariffs. We continue to estimate a full year impact, net of mitigating actions to be approximately $80 million, which represents a year-over-year headwind of approximately $40 million as we experienced a full year impact. TSA income and other reimbursements are expected to range from $130 million to $140 million. We continue to expect full year adjusted operating margin from continuing operations to range between 13% to 14%. We expect our nonoperating expenses, which include net interest expense and other income and expense to total between $280 million to $300 million, reflecting higher interest expense and a lower contribution from other income. On a continuing operations basis, we anticipate a full year tax rate to range between 18.5% and 19.5%. We expect our diluted share count to average approximately 518 million shares for the year. Based on all these factors, we continue to expect full year adjusted earnings on a continuing operations basis, of $1.85 to $2.05 per diluted share. While we are not providing quarterly guidance, I will offer some additional color on how we expect performance to progress over the remainder of the year.

Overall, we are reiterating the broader framework we previously laid out for 2026, including the rollout of [ no mechanical ] headwinds and a more challenging comparison to the prior year in the first half, followed by expected improvement in the second half. We now expect second quarter earnings to be similar to the first quarter with slight improvement in volumes. This reflects the continuation of the higher manufacturing costs, including absorption headwinds within ITT, which are expected to be more pronounced in the second quarter. As previously shared, as we move into the second half of the year, we expect to have fully rolled through the absorption headwinds in addition to realizing an anticipated benefit from the previously discussed actions taken earlier in the year to rightsize our cost structure.

Within HST, we expect growth in the second half supported by new product launches, including Connex 360 and Dynamo. Our order in the U.S. continues to support visibility into improved performance in the second half.

In Pharmaceuticals, we continue to expect the previously discussed headwinds to persist through the first half of the year. As we move into the second half, we anticipate a more favorable comparison and improved performance. Taken together, we continue to expect a second half improvement in organic sales growth, operating margin and adjusted earnings. For clarity, I will now provide a bridge from expected first half to second half margins. First, we expect improvement in volumes in the back half, consistent with typical seasonality we've seen in prior years and the associated incremental operating leverage that comes with it. This represents approximately half of the anticipated operating margin improvement from the first half to the second half, roughly 250 basis points of the total 500 basis point implied expansion.

Second, we expect to realize the benefits from the cost structure actions taken earlier this year. This represents around 25% of the improvement to operating margins, roughly 125 basis points. To be clear, these actions are largely complete, and we expect them to be realized in the second half.

And third, we expect to roll through the higher cost inventory produced in the second half of 2025 in Q2. This represents the remaining 25% of the anticipated improvement to operating margins or roughly another 125 basis points of expansion.

With respect to free cash flow, we continue to expect free cash flow to be back half weighted, consistent with 2025. This reflects normal seasonality, the expected cadence of earnings and the expected benefit of recent cost structure actions.

In closing, I just want to reiterate that I'm excited to see the traction within the organization from Baxter GPS. And I look forward to driving improved operational discipline and support more consistent execution across the business.

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

[Operator Instructions] I would like to remind participants that call is being recorded, and a digital replay will be available on the Baxter International website for 60 days at www.baxter.com.

Our first question comes from Robbie Marcus of JPM.

Congrats on the better-than-expected quarter. Two for me. First one, just wanted to get thoughts on how first quarter translates into the reiterated guide. How much of this is conservatism, how much of this is a pull forward or different assumptions moving forward. More specifically, especially as we look to 2Q, the Street's right around flat organic sales growth. How do you feel about that? And then I got a follow-up.

Robbie, this is Kevin. Let me take this one just from a near-term modeling perspective. In Q1, I'd say it came in overall in line with our expectations. The 1 piece to call out there is we've been transparent about the potential risk of responses from Novam customers. We did not see a material impact in the quarter. But as Andrew referenced in his prepared remarks, we think it's prudent to continue to contemplate that in the guidance. As we move to Q2, I'd say, in line with our original expectations, we do expect some sequential improvement Q1 to Q2 on the top line, but still pressured year-over-year like we saw in Q1. And I think about it as pretty consistent year-over-year drivers from what we saw in Q1. So for example, the headwind from Novam sales, this will be the last quarter before we lap it. Andrew again talked about the risk of potential returns for Novum. We've talked about Pressures and Injectables. And we also said that HST's growth is going to come from the back half. And so the first half, we expect to be pressured and then we expect growth in the second half. And so to kind of sum it all up, the full year reiterated our expectation of approximately flat, kind of [ Novum ] pressures in the first half and then an improvement in the second.

Great. Maybe if I could shift the focus to 2027. You have a good amount of TSAs and MSAs rolling off. There is still a lot of end market uncertainty. Maybe highlight if there are some of the key new product launches we can be looking for next year? And I guess the real concern out there from investors is, can EPS be a positive growth number, yes, next year. So if you're willing to comment on that, how you get there and some of the top and bottom line drivers? I appreciate it.

Yes. Robbie, just a couple of items, and I'm going to start with what we've said. I'll walk through our view, and then I do want to walk a little bit on innovation. So look, while we're not providing guidance, as you're well aware, what we have gone through is that we're going to be rolling off the [indiscernible] and we expect to cover this, although we would expect to have modest growth within 2027. And we would also look to that to say we would expect to grow earnings modestly as well. When we look at our product set, not only we confidence -- we have confidence in our position with customers, and we're continuing to really outline and gain confidence in our ability to execute for our customers, we've launched some exciting new products. And I've outlined a few of these, but just to walk through. We talked about Connex 360 being a key [indiscernible] that we've launched and we've seen favorable insight from customers as well as engagement with customers as well as our Dynamo stretcher, which is a connected stretcher. And I'll tell you, we worked very closely with customers around the design, development and launch of this product and have had very strong feedback. Now it's a competitive market. And so certainly, we have to earn our right but we've seen very favorable discussions with customers and favorable uptick from engagement. So -- and I also highlighted 2 more -- while [indiscernible] still proving the point around, we are outlining novation and its impact on the future of Baxter. And we're going to continue to drive innovation as a key element of our future. We invest here. We expect a strong engagement with our customers through this process, and we would look to innovation being a -- certainly a key element of our overall growth in the future.

David Roman of Goldman Sachs is on the line with the question.

Maybe we could just dive into a couple of businesses here. Maybe I'll start with MPT. There are a lot of moving parts here considering the dynamics with Novum IV conservation. But can you unpack for us a little bit what's going on beyond some of those businesses, for example, with the IV set business? How do you protect the pump disposal business, given the Novum dynamics? And I think that's something like 4 to 5x the size of your capital business and higher margins? And what are the things that can get this business back to growth besides just the stabilization in IV utilization?

Yes. So a couple of things here, David. Let me start with our overall pump portfolio. And I outlined a bit around Novum, so I won't dig into that. We have launched Novum syringe, and that is a nice addition for Baxter. Additionally, we also have spectrum and spectrum, our LVP platform. So we continue to support the overall market. We expect that to be -- and we've had obviously strong feedback from customers, and we put this product on our IQX. So that allows us to have communication with our pump portfolio. And so overall, we feel we continue to have strong interest in our spectrum LVP pump. And we feel good about our offerings, especially the value proposition we bring to customers in this space. And with that, we would expect sets to be in line with that confidence. And just as a reminder, we do expect our pump revenue to grow in the back half of the year, and we're staying very close to our customer base through this.

And then maybe as a follow-up, I appreciate the bridge from first half to second half walk on operating margins. As you sit here today, a lot of things that you're laying out are contemplated on expectations for the second half of the year. Can you maybe just go into a little bit more detail about what are the signposts that you're seeing whether it's KPIs or orders or other customer dynamics that give you that confidence to embed such a significant ramp in the back half of the year?

So maybe I'll walk through the conference, and then we can certainly go into buckets if needed. But overall, I'd say, first and foremost, we obviously -- and you've known this business, we do have a seasonality aspect that we've continued to look at and we are validating. Number two, when I speak to customers when we engage around our product set, we see strong interest. And we've looked at -- and there's some elements, right? We've talked to in the past, our IV Solutions business, and it's rightsizing, we would expect that to normalize within 2026, which we've outlined. Number two, we continue to look at HST as more a back half area, and we've seen continued strong interest in our product portfolio. With Q1, we did have a little nuance within Front Line Care on timing. We would expect that to normalize out throughout the year, and we would expect HST to grow at low single digits. So overall, we're feeling confident in our view and it's a credible path for our ability to execute and then really deliver on the growth -- or excuse me, what we've said in our earnings on growth, but also in our operating margin expansion. And so Overall, I would say we continue to look at the business. We continue to outline our KPIs to ensure we've got clarity and folks around executing within the year.

Larry Biegelsen with Wells Fargo is on the line with the question.

Andrew, I wanted to ask on inflation. What's embedded in the operating margin guidance for gross margin in 2026? And how are you absorbing the increased cost pressures from oil, freight, chips, et cetera. Since the Q1 call, oil, it looks like it's up about $50 a barrel since you last reported? And I had 1 follow-up.

Yes. Larry. Let me walk through a couple of items here, and I'll outline how we view this as well as how we're executing towards it. To lay this out specifically, as we view oil and its impact, a reminder that we sold our Kidney Care business, and with that sale, we've gone, call it, less than 50% now is an impact on oil prices to our P&L. And so if oil stays flat as it is today, we do see this as something we can manage and mitigate and will not have a material impact in 2026. Additionally, as we see other areas, our team, and as you would expect, we've taken a very proactive approach to managing our supply chain and our supply channel. And so we are engaging very deeply with our suppliers. We were needed. We've started to look at dual sourcing, really outlining, ensuring we minimize the impact and use this as a competitive advantage for the long term. And so what I can state is as we -- as we look at our ability to minimize inflation, we've largely outlined how we want to drive this. That said, Baxter is not immune. And we continue to be very proactive, we continue to monitor. We use something called daily visual management around managing and ensuring we have our supply base. We're not immune to macro trends, and we continue to outline where we see issue, how do we impact and how do we drive that to minimize the overall impact on the business.

That's helpful. And Andrew, maybe a high-level question. With more time under your belt now, anything more you can share about the turnaround plan and any strategic changes that we could anticipate at Baxter.

Look, just to walk through, I took this job 9 months ago. And I'll tell you, I saw a compelling opportunity to create significant value, both not only near term but over the long term. And since then, my conviction has only gained to strengthened, and I am fully committed to restoring Baxter as an industry-leading company. And now why is that gain traction? I as a CEO, something called Standard work. And part of my standard work is to visit facilities, engage with our teams on how we produce product, how we drive operations as a strategic competitive advantage as well as customers. And I'll tell you the feedback from our customers is that Baxter is a trust brand. It is a brand in which they look to Baxter for innovation, for capability and to really enabling their workflow to be at a more systematic and simpler process. And so we have the ability to drive that. Now we're early in our journey. And so we've started to gain traction. We've started to see really the efforts around GPS, and I highlighted a few of those. And I guess 1 of them I would highlight is we've done over 230 events in Q1. Now no single event dictates success, it's the momentum and the build on our structure and our foundation for the future. And so look, this quarter, we met what we said we'd mean. By no means are we saying this is the end. We are laser-focused in here, we're laser focused on the future. And we've got a lot of work to do. but we've seen nice progress towards adoption of the fundamentals for how we want to get to the future and how to drive the business forward.

Vijay Kumar of Evercore ISI is on the line with the question.

[indiscernible] just looking at the performance here, excluding the comps, you guys said up low singles [indiscernible] on an underlying basis, but the guidance is calling for flattish organic. So maybe just walk us through on why wouldn't Q1 trends sustain? What are you assuming for normal step down or returns, if you will, maybe comment on HSD order performance. I know there was some timing element. Would it orders grow and what gives you confidence for HSD growth in the back half? .

Vijay, this is Kevin. I can take this one from a modeling perspective and reiterate some of the comments I shared with Robbie. So I guess, overall, Q1 came in line with the expectations. Again, the 1 item to note there is we've been very clear and transparent about contemplating the potential risk from responses from Novum customers. we did not see a material impact in the quarter. However, we think it's prudent to continue to reflect that in our guidance going forward. And when we think about Q2, it's going to be a lot of the same dynamics and year-over-year headwinds that impacted Q1. Injectables, Novum, the potential for Novum returns. We've said HST's growth is going to come from the back half of the year. And so we do expect some sequential improvement in volumes in Q2. However, it's still going to be pressured year-over-year.

Sorry, just on the order growth in the quarter?

I'm sorry, can you repeat your question?

HST order trends in the quarter?

Each -- I'm sorry, Vijay, we're having trouble hearing you. Trends of what?

Order growth for HST.

That's the timing we saw in the quarter. Got it.

Yes. So -- and Vijay, I'll walk through this, but let me get a little bit more specific. Within Q1, the HST performance was largely driven by our Frontline Care business, and there was some timing aspects within that portfolio, plus we did have some planned exits within the portfolio. And these were planned. CCS came in roughly flat for the quarter. And within that, we did see growth in PSS, which is the largest piece of our business for CCS, giving a lot of items here. Net-net, we do expect this business to grow low single digits for the year. Q1 did have -- for HST, a pretty big number last year. So as you recall, last year was a big comp to come off of. We would expect it to be weighted, our growth weighted to the back half. And we've seen strong demand for our Connected Care business. as well as how we look at the timing for FLC. And so overall, again, reiterating, we expect this business to grow low single digits and to be back half weighted.

Matt Miksic of Barclays is on the line with the question.

Congrats on a great start to the year. Yes, I wanted to follow up on just a couple of things. One on the sort of general macro factors that are causing some concerns, I guess, and in the past had been a challenge for Baxter. I think the expectation was that was going to be tougher, David talked a little bit about oil components and chips and supply teams. One of the companies in this space report some issues around chips that had been a problem. How are you mitigating those? And so how far out into the future? Do you feel like you are kind of set through the end of the year or for the next couple of quarters? And then I had 1 follow-up.

Yes. Look, and I'll walk from specifically, chips. So it's overall [indiscernible]. So from a memory chip standpoint, at this stage, we've not experienced material storages or supply disruptions. And now that said, versus that we're taking a very proactive approach to managing risk. And many areas that we're doing through disciplined forecasting, through supplier engagement, dual sourcing efforts, and certainly something that we continue to look at. As I stated earlier, Baxter is not immune. We've outlined this risk early on and we are taking countermeasures around how to minimize this and it's something we are going to continue to stay close to and something we're going to continue to monitor. But to date, we have not experienced a material shortage.

Okay. And then just a follow-up on some of the growthier areas. As we all know and as you know, sort of the search for growth drivers and innovation and shiny object, if you will, has been one of the quest of Baxter for some time. And listening to you the last 6 months or so and on this call, talk about some of the -- getting after some of the growth engines that you have within the portfolio in Surgery or I don't know if it's in HST or in Connected Care, it seems like a slightly different take on putting R&D to work to generate growth, maybe putting more wood behind arrows you already have. If you talk a little bit about that in the near to intermediate term, that would be great.

Absolutely. And I'm going to start in an area and I will answer the question, but I just -- I want to be clear, we are -- we will be known as very disciplined capital allocators. And I say that to start because, obviously, I have outlined the debt repayment. But the second piece of that is invest for growth. And part of that is how we invest in innovation. And we've outlined that in the past, but as a reminder, I view innovation as base heads, not walk off grand slams. And why do I say base heads? Because we have -- we need to have that constant drive to always be in front of our customers, listening, turning that into actionable insights and driving products that overcome the obstacles that our customers face. We have put our -- we've now positioned our business to be decentralized. So think about us as being very focused on the end markets we serve and then building it into our process and how we drive innovation. And so as we look at innovation, it is an enabler for our future. Now things take time, and I want to be very clear on that. It's early days. It's early stages. We've started to see some movement. And why do I know that with confidence. We do QBRs, which is a quarterly business review with our innovation leaders similar to our businesses. So it's the same expectation around where we spend our money and understanding that drive and making sure that we are laser focused on driving growth and driving expansion for our customers to enable their success. And so we've had a couple of early successes. We have some early wins, and I outline a few of those Connex 360 as well as Dynamo as well as by the way, we've launched a few more products in the quarter that will -- there's certainly a niche area of focus offers a continued path for our customers to see the impact from innovation. And so I would just say, over time, you'll see us on that cadence of focusing on how do we expand our value for customers and ultimately drive it from an ROIC perspective back to our shareholders.

Matt Taylor of Jefferies is on the line with the question.

I had a couple of follow-ups. I just wanted to know better what you were assuming for the Novum returns, just so we can understand if there aren't returns, what the upside could be?

This is Kevin. So we haven't explicitly quantified what the potential risk is for returns. But as you can imagine, this is something we continuously evaluate from an accounting perspective and from a guidance perspective. Thus far to date, since the ship and installation hold, it has been fairly immaterial to our results. Again, but we just think it's prudent to assume that this potential could happen. We have talked about our total pump portfolio being less than 2% of sales, and that includes both Novum and Spectrum. So you can at least ring fence the size of our total pump portfolio, of which some of that would be related to Novum.

Got you. And then can I ask a follow-up on the inflation issues. You said that oil would be manageable in 2026. I guess my question is if it stays elevated, is it still manageable in 2027? Or can you provide any framing of exposure there next year as [indiscernible] hedges roll off, et cetera.

So I'll just kind of reiterate what I stated a little earlier and then we can through the other aspect. What I stated earlier was if oil stays at its current level, we have been able to mitigate, and we would not see a [indiscernible] challenge on 2026. As far as 2027 goes, as you're -- well, we're not giving guidance today. That said, we're very focused on every aspect of our business that's going to be part of the supply chain and potential areas that we would want to mitigate.

Joanne Wuensch with Citi is on the line with the question.

I'll just put the 2 upfront. How do I think about the recovery in Injectables & Anesthesia. It sounds like that also has a back half improvement. And could you please comment on the CFO search? Thank you so much.

Yes. So let me walk through this aspect. And on to Pharma specifically and get into a couple of areas on it. First, we have taken pharma. We've outlined as we've combined this with our ITT business. lot of synergies across that business. And simply put, we do -- what we do really, really well is take high-value solutions that are patient impact and we make it easy for our customers to utilize that in their setting. And we've been able to bring that together. And so the team is excited about what that brings. We have seen a couple of challenges couple of challenges in this business. And one of them -- and I outlined last quarter and into this quarter, we had a challenge in one of our operations. And the team a GPS approach. They outlined where we had the challenge, they took short term and drilled the business and aligning around long-term countermeasure to enable this business to longer term be back on track. And so we've been able to mitigate this, and we saw that trend throughout the quarter. Additionally, we also have a challenge with the contract manufacturer. And I'll tell you, having been personally engaged in this, this is going to take time. We are working very closely with them. We have people on site to work with them to improve the supply, but this will take some time, and we are staying very close to this as it's important for our customers to get this product back on track.

As far as longer term, when we think about this business. The [ fit ], the area is really aligns around our ability to bring strong capabilities to the markets and compounding has been a piece of that as well around high value, high -- or excuse me, high growth, where we focus on ensuring that we also identify margin and how we attack the margin.

As far as the CFO goes, look, that is well underway. We have started the search. We are seeing tremendous interest many of the variables that brought me to Baxter around our strong position with customers, the brand and potential for the future is the same that we're seeing. And so it's well underway. We're in a fortunate position with the need of being in place and a broader team continuing to execute, [indiscernible] on executing. And so we're focused on getting a CFO that understands execution as well as knows our business. And you can expect we'll update at the appropriate time.

Jayson Bedford of Raymond James is on the line with the question.

Congrats on the progress here. Just a quick 1 for me. On the Novum fix, you mentioned that you'll be prepared for any necessary submissions. So I guess the question is, do you anticipate that you'll have to refile? And if so, will you notify us if you do?

So as far as Novum goes, and I'm just going to walk through -- and we don't have any updates today. I want to be very clear. But I'm very pleased with the progress and level of engagement I'm seeing from our teams as they continue to address the open Novum field actions and support needed from our customers. As we stated, our guidance assumes that the ship and hold will remain in place during the year for Novum LVP. To be clear, we continue to diligently finalize additional hardware and software corrections to resolve the open field actions. And once those are available, we'll implement them in accordance with regulatory authorities and including any necessary submissions. And so we are moving. We have a strong portfolio with our Spectrum LVP, and we continue to stay very close with our customers through this process.

Okay. And just maybe as a quick follow-up. It sounds like the returns are not material, but is it safe to assume that you're seeing kind of a stabilization of returns, if I think of 1Q versus 4Q and 3Q?

That's correct. So in Q1, we did not see a material impact from the Novum LVP returns or exchanges, but we have factored this possibility into our full year guidance. And this guidance does assume that those shipment [indiscernible] hold installation remains in place throughout the year.

Andrew Hider, I turn the call back over to you.

Thanks, operator, and thank you for your questions today. As we shared, while we're still early in our turnaround, our team is moving with urgency and discipline and our efforts are gaining traction. Through Baxter GPS, we're aligning our organization around us shared standards of excellence and building a culture of continuous improvement. We're now operating from a stronger foundation and focused on driving more consistent performance, accelerating growth and meaningful innovation, expanding margins, strengthening cash flow, and reinforcing our balance sheet to create durable, long-term shareholder value creation.

Thank you for continued interest. We look forward to sharing updates on our progress next quarter. Stay safe, and goodbye for now.

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

Let's get started. Thanks again for joining us, everybody. Very happy to have with us at our conference Baxter. And from Baxter, we've got Joel Grade, EVP, Chief Financial Officer; and we've also got Kevin Moran, new addition to the Baxter team recent sort of new addition to the Baxter team in IR. And I want to send it over to Kevin for a couple of comments on compliance.

I'll be quick. First of all, just one, thanks for having us here. It's been a good conference. And two, just a reminder that we will be making forward-looking statements. And for more information, please just visit our IR website or SEC filings.

Perfect That's good. I wish I could be as concise with these thing. So with that, Joel, one of the obligatory questions for any of the global multinationals that we cover is around the conflict in the Middle East, the price of oil. So in particular, I don't know if it's the easy part of the 2 questions, but maybe just can you -- have you given some idea of the size of that business. I think investors have found it helpful to understand is this sub-5, sub-2 or how to think about the business in that region?

Yes. Thanks, Matt. And again, thanks for your interest in Baxter. Yes, I call the sub-2. So it's -- we do have some business there, but again, it's small.

Okay. And then any operations? Manufacturing or other, obviously, people in...

I mean we have some commercial people [indiscernible], but that's -- but really, it's primarily that. And again it's sub-2 on the revenue side.

Okay. Well, best to the folks who are in that region. In the last week or so, things have changed a bunch. Second part of that is oil, price of energy. I think there was a time, and some of it was maybe justified some of it was maybe a bit of a knee-jerk reaction over the past say, 4 or 5 years that went and energy prices went up, Baxter was going to get hit. It was kind of the simple investors street reaction. How has that changed post that and maybe how should we be thinking about the way higher energy or resin or transportation costs would be absorbed.

Maybe I'll start with the punchline. The punch line is that the exposure that we have today relative to what we said at our 2022 Investor Day is somewhere less than half.

Okay.

Okay? So in other words, at that Investor Day, I think was said that there is about a -- for every $10 of movement in barrels, $25 million of impact. So again, punchline is, it's less than half of that. Now there's -- I'll sort of take this from a couple of different angles. Thing one is what I'm going to call our exposure to oil in particular. And that is less today.

And the reason it's less than it was at the time of that Investor Day is really around our Kidney business, and particularly our PD business. That was -- that business is very much a -- was a home delivery business. We had a fairly extensive last mile that we were exposed to at that time that -- now that we've actually obviously separated from Kidney, we don't have that same exposure. So that's really kind of thing one. And again, I'll call that the exposure to oil side.

The other is just on the materials side, again, there are certain materials, obviously, that are driven by the oil price. And even in that scenario, whereas in the past with when we had the material cost is exposed, obviously, for all that, today, for part, we have MSAs with Kidney. And for us, that business that actually is something we can pass through as part of the MSA price. So while we still do have some exposure there. I would say to that a lot of decent piece of that is obviously covered by the MSA. And then the other thing I would say is just from a timing perspective, and there's a lot of movement in spots right now. Again, just sort of the timing of how that all flows through.

We obviously -- materials cost could capitalized for us and sold as we roll out those products. And so it's -- there's a lag in that even.

Sure. Is that like a 2-turn like 6- to 9-month lag? Or is it...

That's probably on the lower end of that.

So, 6-month lag.

But I think that's -- but I just think -- so just to summarize again on the punchline, exposure for us is somebody a little less than half of what it was in the last time we've talked about that back in 2022 for a [indiscernible] multiple.

Okay. And so a combination of -- this is the good part of being cost plus, I guess, in MSA is that, that goes through. And then it's a combination of that and the elimination or elimination of the PD home delivery part is what constitutes that half reduction.

Yes. Again, we simply don't have that level of last mile delivery that we had in particularly our PD business at [indiscernible].

And just to underscore that point. I've talked to folks who have this muscle memory idea about Baxter. I mean Baxter has its strengths and weaknesses and challenges ahead of it, opportunities. But there's this association with just trucks and diesel and things like that. So without the delivery, without -- and that not only being home delivery, but oftentimes, home delivery in like places, emerging markets or developing markets around the world. So a big lift in the PD delivery side that's now gone away.

But in terms of trucks going to hospitals? And how much of that is still on your P&L or how to that are you doing new distributors? How should we think conceptually about your exposure to a bunch of Baxter trucks driving in and out of hospitals?

I mean we do still do some direct delivery in certain categories of products, but -- and as you've already said and others, it does go through distribution. I would say what I have outlined here in terms of our total exposure, is captured by the fact that that's how our model is set up.

Okay. All right. So some distribution, some trucks but that's super helpful. All right. So maybe -- so on to sort of like fundamentals, a bunch of changes in the -- since the Vantive not the least of which you've got a new skipper running things at Baxter. Maybe talk a little bit about -- the term BPS comes up a bunch, new operating model comes up. Sometimes we hear these and as folks who haven't run divisions or corporations or managed operations for global, sometimes the -- where the -- what this actually means when the rubber hits the road, it's hard for us to kind of understand. So maybe explain what are the underlying benefits of this, where are you in terms of rolling it out? And when will investors maybe start seeing some of the benefits of this?

Yes. Let me put just a little bit of context around this, and then I'll get to direct answering to your question. I mean, I think one of the things that's important to remember is that from a timing perspective, I think some of these changes that we're talking about here with a new leader to do operating model. I think I'll really at -- I guess, I'll call it a good jumping off point to some degree for our company.

Why do I say that? I say that because back in January of 2023, the company outlined some strategic changes that had to happen post the Hillrom acquisition that included sale of BPS that included sale of [indiscernible] and that included verticalization of the business structure. And I think that resulted just really on 3 years of a lot of moving parts, some you call possible just distracting and really are focused on those areas as opposed to really trying to -- how do we run this business more effectively and consistently.

And so I think now that we're through those things, I think this is where I could now go back and say, "Hey, this is why this timing, I think, works well for us right now." So with Andrew coming in, he obviously brings with them a really strong background of operational and having run a number of businesses, obviously, in GE and Danaher, obviously, as a CEO at ATS.

And [indiscernible] focus and sort of continuous improvement focus on it. And obviously, with that comes what you talked about now with GPS and growth and performance systems. And I think the -- this is really around how do we think about running -- the operating model at which our company runs in terms of the cadence, the ways that we expect resets goals, we track goals we set through KPIs. There's a regular operating cadence in ways that I think is fairly substantially different than happened in the past.

And so what's -- so on the kind of what's different side as it relates specifically to GPS. It really is around that operating cadence. And again, target setting, goal setting and getting KPI tracking in a much more rigorous way. So from an investor perspective, what does that mean to me, what that ultimately means -- and again, this doesn't happen overnight. But what this does mean over time is that we are -- I would expect us to be a much more consistent company that consistently operates in a more efficient, effective way and predictable way. Somebody that is more efficient, effective at our forecasting and our predictability of our own results in the sense that, again, the way these cadences allow us to measure, predict performance in a better way. And then ultimately, obviously, I think about it as a cycle that allows us to ultimately expand margins, generate more cash and then reinvest in innovation and growth.

And so that's kind of a summary of how I think about that. And I'd say the other changes since he's come in, there's been a couple of things that I would call out that are important. One is a -- some restructuring changes that have happened that have -- I'd say, thinned out management layers that have been a part of sort of his view of how do we get it, he and all of us closer to the business closer to our customers and obviously, in a more streamlined way across the organization.

The second part of it is really around just the broader structural elements. And some of this comes into where we talk about stranded costs, but just reducing infrastructure in the areas to ensure that we are getting a more nimble, agile organization. And then third, really focused even more so on innovation. And I think the -- we've talked about some new product launches. We'll probably get into that in a second. But I expect you should hear more and more of that from us as we go forward. But again, we're more focused, again, better execution and a better ability to continue to reinvest.

Got it. Yes. I mean just to having covered the company for a while, there was a time when there was a lot of costs being taken out of the organization. There was some kind of ship-shape program that was put in place. This goes back a bunch of years -- and so I would imagine some of that fruit's already been picked, but this may be takes that up a level or...

I think that's a good way to think about it, because like -- again, I want to -- I'd like to say this to make sure I reinforce a key point here. This is not a, hey, we're taking out, trying to SG&A our way to prosperity. That's not what this is about. But when you think about the -- Kidney was 30-plus percent of our business. And there is an infrastructure in place I'd say particularly outside the U.S., that business had a 70-30 split OU.S., U.S., which is much more OU.S. than Baxter is. Right now we're around 55-45 U.S. would be in the 55%. And so there's just things that -- and just one example of things where infrastructure needs to be realigned with the way the business is. And so it's not just a, "hey, we're just trying to take cost out to drive profitability." It's really trying to set up our business to make decisions to be better for our customers and more focused in that way. And so I think that's really the key.

Got it. So some -- we think about portfolio management all the time at some geographic portfolio geographies sort of management and decisions that you're making, it sounds like as well. Okay. Fair enough. So let's talk about maybe some of the performance exiting as you wrapped up sort of last year. And sort of some of the things that we're working and kind of came in ahead of plan, Advanced Surgery and HST. Maybe -- I know -- we all know kind of where you've set guidance, which is, call it, for stability, and we'd like to see there some conservatism in there. but it's not overly ambitious here with the stage of the new management, new program, kind of all the things that you just talked about. But what's happening at those businesses that's working and how durable and sustainable is that this year? This is Advanced Surgery and HST.

Yes. So maybe I'll start with that. I mean I think, look, our Advanced Surgery business, really continues to produce a set of very differentiated products that I think are extremely well received. There's really good global demand for those products. There's -- I think surgeons see those products [indiscernible] is, again, unique and differentiated in the industry. And again, that business continues. Again, it had a really good year last year, but it's had a series of good years, and I anticipate that as a continued strong area and then margin accretive business for us.

I think CCS is the other one, as you've called out here, look, we've had a continued strong order book in that business. I think the -- one of the questions we often get is, have we seen hesitancy from a capital spend standpoint from the industry broadly, and we really haven't. And that's one of those things that we just continue to -- obviously, we certainly have a close eye out for it, but not something that we've seen and our order book remains strong there. And so I think, again, we had a little bit of what I would call the novel in the fourth quarter in the sense that we had a lot more business ship outside the U.S. and particularly to our emerging market countries than the U.S. But again, I don't -- I look at that as a quarter a bit of a lumpy business at times versus the long-term trend. And so feel good about that space.

I think -- if I just run down a couple of other businesses.

Sure.

I think the -- in the front line care business, that was also a business and this year that kind of returned to a growth state. I think the primary care markets have -- we have predicted this coming into '25 that there would be some stabilization in the primary care markets, and we saw that. And so again, I think that was an area that we see as a, again, a continued area of sort of building strength for us. Obviously, those are really -- so both the parts of HST in general and a decent year. And again, we continue to expect that heading into '26.

I think about our ITT business, again, I think the what are the areas that has been, again, some of the impact on our guidance, if you want to call it that and sort of what's on the opposite direction there is really around -- it's really 2 parts. One, we've said now that we don't expect Novum. We don't expect to be selling Novum pumps through 2026. We certainly remain committed to that and continuing to do good work to get that back to market as soon as possible. But we -- but that has been, I'll say, a detriment from a guidance standpoint. And we also -- last -- in the fourth quarter, we basically said that once we have some clarity around that, there would be an expectation of some different customer behaviors. And we didn't see as much of that in Q4 so we've carried some of that risk into 2026 as well.

And then from a solutions perspective, I think the -- one of the things we've tried to be really clear on is the fact that we do have a new baseline of essentially a demand for our solutions products. That was somewhere in the 10% to 15% range from relative to pre-hurricane. So those are some of the things going in the opposite direction.

And then in Pharma, in the Pharmaceutical business, certainly on the positive side from a growth perspective, our drug compounding continues to be a very strong growth area. Do I expect that to be at 18% ending in the next year? No, I don't, but that is a business that continues to grow well. And it's -- while it's margin dilutive, it is our shortest cash cycle in our business.

On the flip side of that, we have continued to have some challenges in the injectables and anesthesia space. And some of that is, I'll call market driven, some of it is on us. And we've talked about the fact that the -- there were some operational challenges that we identified in that business. We think we're making good progress on that, and we do expect that to improve as we head into particularly the second half of '26. Some of the things, the IV push and some of the protocols that came out of the hurricane are still having some level of challenge in that space.

Okay. So a bit of a reset in IV solutions, which I think for some part of last year, there was some hope that those would sort of reverse back to historical trends and now are sort of saying that this is where we are.

That's right. This is kind of where we are. And look, we remain a market leader in that space. It's a really good business for us. We're very positive on the long term of that business. But you said it well, that's kind of where we are right now.

And then on the pump side, the sort of business planning or guidance assumption that you're not going to sell any pumps this year -- is that sort of -- is that sort of because you see something that's going to happen towards the end of the year that will enable you to sell pumps next year? Or is that in the absence of visibility and some kind of certainty, that's -- we're just going to -- we're going to go with that assumption until we know different.

Well, let me just say something slightly different. We will sell pumps this year. We will sell Spectrum pumps...

Yes, and then Novum.

I know, but I just want to make sure that was really clear. We -- on the Novum side, specifically, I would say it's more that we don't yet have complete clarity and again, working with customers, working with regulators -- and again, have a really good dialogue all along the way. And we still -- we have a lot of customers who are using our Novum product safely based on the protocols we have set. But I'd say just given that lack of complete certainty. We've chosen to talk about it in that way. And obviously love that to be opportunity to beat, but I'm certainly not calling that.

Sure, of course.

I did just want to emphasize, again, we -- this pump portfolio we have, our spec -- there's a very solid demand for our Spectrum pumps. And we're selling them well. We're -- we've got inventory and production to match the demand for those products. And so that's been a workhorse pump for us. Prior to Novum, even while we launched Novum and now again, the demand remains strong for that. So we will -- our pump sales continue to be solid there.

Okay. And just to make you mentioned frontline care. But that -- I mean, I think, again, the investor perception has been, Hillrom has -- the Hillrom businesses have struggled kind of consistently. And I think -- I mean, it seems like surfaces actually had a pretty good year last year. It was really frontline care that's now kind of joined the pack on the right side of growth and kind of momentum again, which...

I think that's right, Matt. I mean I think if you look last year in general, we had a solid year, I'll call it, in our HSC businesses. I think the thing which obviously were the former Hillrom. And I guess what I would say to that, too, is that is an area that is really front and center, around innovation. So a couple of things that we've recently talked about, specifically regarding our Connex 360.

Yes. That's a get segue, new products.

Yes. It's a next-generation monitoring device. Again, lots of good nice features within the monitoring itself, but also cyber and ease of uploads for updates and things it's very state-of-the-art product, and we're really excited about that. And then on the CCS side, our structure Dynamo, we're really launching into that space. And again, this is a product developed with customers in the way that you really get this is where we like to talk about customer-centric innovation. Something we're really excited about. We expect that to come to market in the relatively near future and expect to see some of those benefits in the second half of the year as well.

Okay. So maybe just on margins, we're going to have to make it quick because we're running down on time. But I'll just say returning to below 3x leverage is an important goal right now. And then it's sort of like we'll talk about use of cash after. It's a fair way to characterize the cash flow strategy here. But what are some of the sort like puts and takes on margins in a nutshell, if you would describe this year over last year?

Yes. I'd say a couple of the puts and takes on margins on the one hand, we capitalized a lot of our inventory costs that were higher last year because, again, particularly on our solutions business, we expected an improved recovery on the demand. And so as we capitalize those, we head into '26. And as we sell those products, obviously, we're still selling what I'd call a higher cost inventory, but we're doing that really until the second half of the year. So that's one just kind of mathematical thing that I would think about. In the first half of the year, we also had a tariff impact again, we didn't have it in the first half of '25 that we're having now in the first half of 2026.

So those are on the downside. But again, as we think about some of the areas of improvement, number one, some of the work that we've done to restructure. We talked about we expect to see some of those benefits heading into the second half of the year. The fact that we now have leveled out our staffing and our warehouses, our manufacturing facilities relative to demand ultimately will flow through our capitalized inventory and show improvement in the second half of the year as well.

Some of the new product launches we talked about will allow us to begin to improve in the second half of the year. And so there's just a few of these key areas. And we talked about from a Pharmaceutical standpoint, some of the operational challenges that we had in -- who identified in Q4, we do anticipate those improvements to happen. And of course, there's a few onetime items in the fourth quarter that we don't expect to recur as we head in 2026.

Super helpful. Well, thank you, Joel. Thank you, Kevin. Good to see you both. Appreciate you joining.

Thanks, Matt.

I appreciate everyone's interest.

On the unplugged day here at Citi headquarters. And very, very pleased that the next presentation is with Joel Grade, the name from Baxter in case you missed that. And Joel, thank you for being here again. I love this conference and thrilled that you're participating.

We're happy to be back. I had the flu last year, so I was missed at last moment. So it's great to be back here, Joanne. And just a reminder, I will be making some forward-looking statements. My legal and IR team told me I needed to say that. So that's...

As long as you don't read it word forward for us. I appreciate that.

I haven't memorized that one.

Okay. So starting big picture, and we're starting all these conversations big picture because the underlying fundamentals of MedTech despite what the stocks are doing, strike me as actually being solid, stable. And the things that I usually worry about pricing, patient volumes, CapEx, snow days, whatever it may be, to the degree you can, could you share with us what you're seeing?

Yes. So I would say, first of all, I generally agree with your comment. I think the fundamentals of the -- again, you said it, despite valuations to some degree are decent. I think they are -- I think volumes, patient volumes, procedure volumes, some of those things, I think, are in a decent place. We talked about capital spend and the concerns about that.

We really haven't seen that, and it's reflected in some of the order volumes in our CCS business. So I would say, again -- and we don't really have a lot of things that from a input side or like sort of hyperinflationary or anything like that. So I think there's some -- I think the marketplace in general is in a decent spot.

And I think that's certainly encouraging as we continue to go forward. There are obviously a few things in our world that are offsetting some of that. I'd say the most prominent being the impacts of the marketing IV solutions. I think one of the things that since the hurricane happened, there certainly have been some clinical changes in the way that hospital systems are utilizing IV fluids.

And so that is one part of our -- I would say unique to us, but important to us that actually is a market that does have some impact. We've talked about the fact that overall demand in that space is probably 10% to 15% down from where it was pre-hurricane.

And that's sort of almost our new baseline in that area. And so that's certainly one area that I would call out. And I would say almost residual to that or sort of combined with that to some degree is we're seeing some of those impacts in our pharmaceutical injectables space, too. I think some of the IV protocols, including IV push and some of the other things are sort of trailing that as well and have impacted that space to some degree.

So while again, there's some -- there's certainly -- I don't in any way disagree with your comment on some of the fundamentals being solid. We certainly -- there are some things that are part of our world that are throwing a little bit of that again with some softness in those areas.

Excellent. One of the things that's also different or new for Baxter over the last year is there's a new CEO or new share from town, some might say.

That's what they say.

That's what they say. So without costing you your job, what are you seeing in terms of sort of the change in tempo and maybe how it's flown through to changes and thoughts around guidance.

Yes. I think I would maybe just start out with the idea that there's -- I think the timing of Andrew's arrival is good for Baxter. Why do I say that? Well, these last few years, there's been a lot of, I'll say, distraction. We've sold BPS. We've had the kidney sale. We've had the -- a lot of things that were announced in January of '23 related to some of the verticalization of the business, et cetera.

And I think we're through a lot of that now. And to the degree to which this -- I almost look at it as a bit of a jumping off point. We've, to some degree, established sort of tried to be really clear on here's where we are as a company. But I think Andrew's arrival comes to us at a time where we have the ability really now to build from this base of kind of here we are.

So I think timing-wise, that's good. His background, I think, fits well with what Baxter needs. He obviously comes to us with really kind of an operational background in terms of his time with GE, with Danaher, obviously, certainly at ATS. And I think that our need to continue to be more consistent in terms of how we operate, how predictable we are is, I think, aligns really well with the skills and things that he brings to the table. And I think -- and I think since he's been here, there's really, I guess, a couple of areas maybe I'd call out of, kind of what's new and what's different with Andrew being around.

I mean, first and foremost, you hear him talk about GPS, which is really kind of this operating model that really allows for more consistent operating cadences, more consistent measurements of how we operate and the tracking mechanisms to ensure we're on track or off track. And I think that's really an important part of how we operate. I think it's going to lead itself to more consistency in terms of our performance.

The second thing I'd call out is just there's been some restructure that's happened since he's been in. There's been certain layers of management and certain -- just parts of restructuring the business that actually, I think, are going to certainly allow him and others to be closer to customers, closer to the businesses, but also align our -- again, our organization and our structure in a way that allows us to be both more sized right for volume, but also more nimble in our decision-making.

And that includes, by the way, some of the, I'll say, kind of additional evolution of some of the verticalization that was already started. And then finally around innovation. I think you will hear from him and us moving forward like more consistent innovations. You've heard a couple of things now already with our Connex 360 in the frontline care space as well as the -- our stretcher. We talked about Dynamo, the new stretcher platform. And so I do think he is really continuing to focus the organization on innovation. So those are things I think are really good outcomes of him being here.

There's a phrase you used in there. The evolution of verticalization. I don't know if I've heard that phrase before. So describe to me what that means for Baxter.

Yes. So you'll remember that when we -- part of the goals of the three years from starting in January '23 was to verticalize the business. And what that meant was really this idea of having this more end-to-end ownership of P&L that includes, say, the commercial and manufacturing versus what was previously a country-led structure where you had countries that sold that weren't necessarily -- didn't have responsibility for kind of the end-to-end P&L. And while that started to happen when -- prior to Andrew's arrival, I think what Andrew has done is continue to more -- move more and more functions within that.

And so you'll hear him talk about decentralized his view that there's -- that really truly is an end-to-end decentralized ownership of those businesses, that -- which includes more areas that are actually underneath that vertical. And so it's -- I think when I refer to an evolution in that way, it is more and more of the functional areas that are actually now under what is the -- actually now the division presidents within our...

And I would assume that, that streamlines decision-making. I would assume that maybe streamlines cost also -- and maybe remove some layers of organization.

Yes. And yes, in all those things. And also from an accountability standpoint, it's -- obviously, it's -- I'd say, clarity on role definition and accountability is probably the other part I would add to what you said.

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Okay. I want to go back to something you spoke earlier. You gave me like five different leads off of one of your answers. So I think almost sell-side analysts like. But you talked about the IV solution conservation in the U.S. hospitals. And you've pivoted this past quarter from walking from recovery back to where it is pre -- or where it was pre-Hurricane Helen to this is a new baseline. And what was the recognition that allowed you to say, Okay, fine. This is where we are and how do we build from here?

Yes. It wasn't necessarily one thing, as you can imagine, but it was one of those things that as we continued to evolve in the year, meaning we originally started with a perspective that there was an expectation of what was going to happen from recovery.

We somewhat indexed that based on 2017 hurricane that was -- I don't know, I'll call it a proxy for what we thought may happen. Having said that, that was a smaller bag. Those are many bags that were produced at that time. And what became clear as the year continued to evolve is that there just simply a change in clinical practices.

Now we did a lot of things to try to validate this for ourselves because number one, we wanted to be really clear with ourselves that this is a clinical practice change and not a share loss. We had hundreds of conversations with customers. We also had external, I'll say, external sources that went out on a no-name basis and interviewed customers and said, "Hey, how -- what are you thinking about this?

And all of it so much came back to the fact that you know what, there are clinical practices that have changed. And in fact, here's our new baseline. And that impacted us last year in the sense that we had the assumption of that recovery set us up for years how the staffing levels in our manufacturing, inventory production levels. But -- so it's really important for us to understand this internally and then to be transparent with you all externally that basically said, look, here's kind of our new baseline, and we're going to continue to build from here.

And there's -- it also impacted some of the premix products within Pharmaceutical. And so does that go back to a new -- is this a new baseline also from here?

We're certainly assuming that. Now there's a couple of elements to the premix story and that I'd say one is, as you said, there's IV pushing in some of these protocols that changed that have impacted the injectables on the pharma. There's also some element in the marketplace there that I would say there's been more purchasing of vials than the premix.

Again, that's something certainly -- that's been a value add for us for a long time. I think over time, that will return, but that certainly has been an impact. But then there's also an element of that space that was on us that we called out in the fourth quarter that said, hey, look, there's -- we've had some supply challenges, and we've had some production challenges that we've identified that we are on top of and expect to improve really starting, I'd say, in the second half of next year. But yes, to answer your question directly, there is an element of this that contributed to some market challenges in the injectable space as well in pharma.

Okay. I lasted, I think, 20 minutes now before I got to the Novum pump. And I can't last anymore, sorry. So are we calling this a recall, a shipping pause or just forgive me, OL.

We are calling it a voluntary ship hold.

Voluntary ship hold. So what are the dynamics of this voluntary ship hold and the path to getting it on held?

So the voluntary ship hold in and of itself basically said that we, Baxter, as it sounds like, voluntarily stopped shipping this -- our de Novum product. There's really two areas that are kind of say, what do we need to solve. One of the areas is really around, again, not to get too detailed on this, but sort of the way when there's transitional infusions, there's been some impacts in terms of under or over infusions based on when there is a transition in terms of the infusion. And then the other is really just the loading of a set.

There's a potential impact on how a set is loaded. Those 2 things are what we're working through. Now to be clear, those are things that even today, we have protocols about how customers can safely use our products. And there's many customers still doing that. And so they're continuing to use our products safely. And so as we work through these things, again, this doesn't -- it's not -- we're just not shipping new products, but there's still -- again, there's a number of customers that are still using those.

Now we haven't set a time line on what that looks like, but we have said for 2026 that from a guidance perspective that we are not anticipating shipping Novum further in 2026. We did say that on the call. The other thing I would just say is that we're certainly continuing to work closely with our customers and working with the regulatory authorities along with us because I think we certainly think that's a best practice so that when the time comes and we -- the ship hold goes away that we won't have any surprises in that way.

.

But as a voluntary ship hold, you were responsible for lifting it, not the FDA. .

Yes. .

Okay. There were some hubs which were already shipped. I would assume people -- some chose to keep it while others may have returned it or replace it. Is there a way to sort of parse out those that were like, I'll take a spectrum instead of a Novum I'll keep this.

We -- so again, any of those -- and all of those things could and are happening. We haven't actually parsed it out, so to speak. Now the thing to keep in mind is you may recall in the fourth quarter, part of our top line guidance included I'll say, accounting for some of those uncertainties that these things could happen.

Clearly, in the fourth quarter, they happened less than we had anticipated them happening. And so as I think about carrying some of that risk, I would say that we've carried some of that risk or uncertainty, if you will, into 2026 because at such time as we do have more clarity from a kind of timing and where we go from here standpoint. Again, some of those things could happen. But at this point, like I said, they -- we haven't provided that clarity. And so there -- I'll say some of the actions or what could happen with the customers has been somewhat muted at this point.

Okay. What was the impact to gross margins in the fourth quarter from all of the ship hold stages?

Again, I -- we haven't actually quantified the margin impact specifically from the ship hold. There's a few things that did happen from a margin perspective in the fourth quarter. I think, again, and they fell in a few different categories. One was what I'm going to broadly classify as mix that I would break down as sort of business mix, a product mix and ultimately a geographic mix, I'll call it. And so from a business mix standpoint, it was things like, again, our compounding grew at 18%. Our injectables and anesthesia grew minus 9%. That's obviously a significant kind of business mix issue.

From a product mix perspective, to your point, the original view that we'd be shipping Novum is different than we ended up. And so that's certainly part of that. And I would say other parts of our business, there were certain things that were lower margin -- more lower-margin products shipped than higher-margin products. That was part of the mix issue. And then I would say in CCS specifically, we had a somewhat -- and I'll call it an anomaly in this way, but a disproportionate amount of product shipped to GEM countries relative to our U.S. shipments. I don't look at that as a trend. I look at that as that it happened in this quarter, and it was one of those things that, I would say, relatively speaking, the margin profiles from our U.S. business is higher than it is in our GEM markets. And so that was also impactful. So that was one thing. The operational items we talked about from injectables pharma was part of the margin impact there.

And then also, we did say there are some what I'll call nonrecurring items. We called it out specifically those $40 million that we're not expecting to impact '26. Obviously, that's the word nonrecurring for that. And so there's a few of those items that ultimately contributed to some of the margin challenges.

There were some new products that are starting to percolate that.

There are.

There are. The two that I picked up on the fourth quarter were Connex 360 and Dynamo. There are others that I'm sure we'll talk about. There's an acute care stretcher and I'm sure you're going to fill in on some of the others. But let's talk about -- at least start there with Connex 360 and Dynamo, what are those products and why are they important?

Yes. So Connex 360 is in our Front Line Care, which is obviously part of HST. It is a next-generation monitoring device. It is -- has all the kind of neat features of U.S. security and easy updates, and it's a very kind of broad-ranging device to monitor a wide variety of things all in one spot. And so this has been something that we actually rolled out brought to market in the fourth quarter. We had some, I'll call, minor benefit from that in Q4, but something that we see as really exciting new thing and customers have received it really well and part of -- certainly part of the growth story as we head into 2026, and particularly the second half of the year as that starts to ramp up.

The Dynamo is our stretcher. It's really our first, I'll say, serious for into the stretcher space. It's a connected stretcher. It has, again, something we kind of officially announced at JPMorgan and look to bring to market, I'd say, in the -- like in the early part of Q2. Again, something again really -- customers are really excited about. We -- when I think about customer-centric innovation, this is something we developed really in conjunction with customers. So there was something that we're really addressing some of their needs and really the kind of next-generation area and where particular company had a pretty stronghold in that space.

So really excited about that. And I think, Joanne, the maybe the important takeaway in this is like we're not a company that has sort of one big bang thing. I know no one got a lot of attention, understandably so because it was kind of the, I don't know, the one thing that we -- and there hadn't been a lot of other things for a while. But as you think about our innovation going forward, I do think you're going to hear more and more about some of these really neat products and again, key to our organic growth heading forward.

You postponed the analyst meeting. And is it likely to come back on in 2026?

Yes, still working through that. I wouldn't say that the -- so maybe, first of all, why did we do that? I think the -- I'd say the overarching reason for that is really a couple of things. One, from a prioritization standpoint, our -- you heard Andrew talk about stabilizing the business, going and solving the balance sheet, implementing continuous improvement. These -- from a priority standpoint, those days are a lot of work. And I think it was really important for us to prioritize that. Second is our new org structure is actually pretty new -- and so allowing some time to settle in and get that kind of in place better before we do that.

And then third, just being candid, I think getting a few quarters under our belt where we continue to perform with consistency, I think puts us in a better position to have a really credible Investor Day that says, hey, here's look forward and then with confidence, people can -- I think that's just some humility that I think is the reality is where we're at today.

Yes. It takes a lot of time for a fresh management team. Artificial intelligence, digital care, I'll throw robotics. Where does Baxter participate in that? Or how does it become incorporated into your practice? Maybe a better way to asking the question.

I would say that there's really a couple of areas that AI plays a role. Number one, in the spirit of how do we help our customers think through issues that they have and be a, I'll say, a solutions provider for some of the challenges that they're facing. Certainly, there's -- we have opportunities and things we're working through together that are incorporated in some of our products that are really designed to allow that to happen in a better way, whether it's medication delivery, whether it's just certain areas that that I think are just are interesting in that space. We do use it in some of our, again, manufacturing operations as well for certain areas that automations that whether it's quality, whether it's certain things that utilize AI.

And then there's a back-office component to that. I can tell you from running even in my finance organization, there's a lot of analytics and reporting and things that we do that actually drive efficiency, hopefully better decision-making and allow our people to spend more time helping make good decisions versus generating content. And so that's the way we -- those I'd call it kind of the 3 areas that are probably most prominent in terms of how we use AI at Baxter.

But there isn't a Software-as-a-Service aspect to it, is there?

Yes. Not really at this point. I think -- again, I think there's -- it's certainly like with everybody, it's still evolving. And that's not really a part of it at this point.

I'm going to get into the financials, which I know you know well. But I want to ask the question, things have changed a lot on tariffs since the earnings call just a few days ago. Can you on your thoughts of those changes?

Yes. I wish I could give you a more satisfying answer than I'm probably going to give you. But the reality of it is it's not yet clear on what that looks like. Now obviously, I think probably like most companies, we're putting a lot of kind of war room effort, if you want to call it that, to really get a determination of where that's headed. Having said that, obviously, as this thing evolved last year, we tried to be very clear and transparent with you all. And again, as things were even moving along from the earlier part of the year to the later part of the year, as soon as we have some clarity on that, we will continue to do that. At this point, I don't really have anything -- anything really to report just because it's -- again, it's not necessarily clear on where that's headed.

Okay. When you started to put together guidance, there are a number of puts and takes, many of which we've already spoken about. Would you call your '26 guidance conservative, realistic?

I think yes, maybe the word prudent would be the word I would use. I think it's -- when I think about our attempt to be transparent with what are some of the challenges in the business, what are some of the opportunities in the business. I think it lands in a place that hopefully balances those things in the right way.

And it doesn't include Novum. We know that. -- and it does include a recovery in certain franchises, including HST.

Yes. I mean, I would say maybe a few kind of key things to think about from both kind of a top and a margin perspective. And then maybe I'll comment a little bit on there's kind of an H1, H2 element to this as well. So maybe on the top, the things, I guess, I would contemplate, a, you just said the first one was just, we're not planning to have further sales of Novum in '26.

The second really is around the sort of baseline of IV solutions. We really haven't factored in any kind of growth or recovery in that space. It's kind of hey, here's our new baseline on that. And as we've said, that same thing really applies in a lot of ways to our U.S. injectables.

However, again, the one part of that, that I think is a bit of a caveat to that, again, is we do expect some second half improvement based on the fact that, again, we've solved some of the supply and operational issues in that space.

To your point on HST, I think we've continued to see a strong order book on the CCS side. This is an area that people often ask, hey, have you seen, are you concerned about capital spend, this and that and the other thing? And again, we really, really haven't.

And so we continue to anticipate solid performance in that area. And on the Front Line Care side, we projected that in 2025 that, that would return to kind of a more stable place. We saw that. That as you've seen throughout the year, that business has continued to be -- again, I would say, solid, and we expect that to continue as we head into next year.

And then so I think those are some of the top line items. On the margin side, there's a couple of things that I'd say are important to contemplate. One is just the -- some of the work that we're doing from a structural restructuring standpoint is we anticipate some of the benefit of that really happening in the second half of the year.

And so -- so that's one element of this. There is also a mathematical thing where we capitalized in 2025, some of the -- what I'm going to call some of the inefficiencies, if you will, that happened mostly in our solutions business were capitalized into our inventory. And so we head into '26 as that rolls into the first half, where we're selling against, I'll call it, higher cost inventory. As that has been impacted positively where we have our staffing levels set more appropriately to reflect the new baseline. We anticipate some of that margin improvement that will happen in the second half of the year as well.

So when I think about first half margins versus second half margins, second half sounds like it's going to be accelerating in both gross and operating margins versus the first half.

Yes.

Okay. Is it every quarter it gets better? Or do I think about it collectively?

Yes. I would say sequential, there will be -- I would call it sequential improvement as we go through the quarters of the year. And again, certainly, H2 being again generally better than H1. And so I would just -- again, I would say -- and obviously, the other part of it is last year, our tariff impact we did not have in the first half of the year. So there is a bit of a comparison there. And then the other comment I'd just make in the first quarter is that you may recall post hurricane last year, the first quarter, we actually had a pretty strong Delta distributor build in Q1. Again, we're up against that as well. So there's a bit of a comparison issue there. And so those are a few of the things I would say are kind of some of the puts and takes around our overall guidance for the year.

And how are you thinking about pricing? There's a period of time where you can raise prices and then you had two to three GPOs, which were going to be renegotiated? Where are we in that cycle?

Yes. So last year, two out of the three large GPOs were -- they were -- the negotiation itself happened at the end of '24, but the impacts started in January and February of 2025. And so the benefit we got from those renegotiations. Last year, again, we actually guided last year to have about 100 basis points of pricing improvement on an enterprise-wide basis, which we actually realized, unfortunately, got absorbed by some other things that happened, but that was a kind of a 2025 phenomenon. 2026, again, there will be some kind of a cost of living increase, if you will, on those GPO contracts and our pricing in general, but not the same large impact that we had in 2025 from a pricing standpoint. Just one other thing to remember, the 1/3 of those GPOs that will be actually -- we'll be renegotiating that in the later part of this year and with the impact of that in 2027.

Do you have a back order on anything?

Yes. Other than in our pharmaceutical business is based on some of the operational stuff, we've talked about -- our back orders are actually in a pretty good place. So we don't have an issue for that. That's the one area I'd call out.

And how are you thinking about capital allocation?

Yes. So I think for now, I mean, we're certainly focused very clearly on delevering the balance sheet.

So 3x.

Yes, 3x is our target. We focused on achieving by the end of this year. But certainly, debt pay down. The other thing I would say though, and I want to remind people that even with that, though, our internal focus on R&D and capital spend is also again sort of one-on-one with that. And so obviously, what we haven't done, again, we had a little bit lower R&D spend in the fourth quarter, but that's not other than call it, an accounting reclassification.

As we go forward, our R&D is very much into where we've historically been in the mid-4s plus. So capital allocation-wise, again, internal investments focused on paying down debt, obviously, delevering our balance sheet are really the key focus is right now.

We obviously -- this will see the impact of the dividend cut that we had. Obviously, once we achieve our 3x target, then certainly looking forward to that time and being able to then refocus some of our capital allocation really around how we drive value, whether it's bolt-on tuck-in M&A, whether it's share repurchase, those types of things. But for now, we're clearly focused on delevering the focus.

I can imagine the cutting of the dividend decision was very difficult. Is that accurate? Okay. So you have some -- I'm making this up, you have extra cash did you say, okay, we're going to make this acquisition. Do you say we're going to repurchase shares? Or are you motivated to be like now I can put the dividend back.

Yes. I mean, I guess the way I would answer that is I think the -- I would not anticipate changes to our dividend in the near term. I think for now, we've got some debt coming due and early part of '27. We'd like to be able to pay that down with existing cash. Certainly, obviously, continue to positively impact our leverage situation. But again, I would not anticipate near-term changes to our dividend.

Okay. What do you think at this stage the Street needs? And what do you think they misunderstand?

I think the biggest thing I would say is a little bit back to maybe where we started this conversation around this idea that we're at, what I almost call a jumping off point or a point to build from. I think Baxter has gone through a lot of stuff. And I think we find ourselves in a place where we have the opportunity to be, again, a more -- again, a focused organization, one that I think needs to start, again.

Andrew has talked about this. There's -- we're going to -- stabilizing our business is an important part of this today where we accomplished that. We accomplished again, focused on delevering the balance sheet, and we really start to drive this continuous improvement mindset in the organization. And I think we've rebased our solutions. We've rebased our -- in a lot of ways, our pharmaceuticals on the injectable side.

And I think this is -- again, this is a place where now a lot of the distraction and a lot of the things that were going on give us an opportunity now to build the organization from here. And I think the other one is from a cash flow perspective. I do think we -- these last two years from a free cash flow perspective has been pretty tough. '24 had a lot to do with sort of the cash that we spent on separating Vantive.

'25 included some of that yet, but also obviously, expenses that were -- what I call the payables came due for the hurricane. So we paid a lot of cash in the early part of last year for that. In addition to kind of the challenges we had with our inventory build from both the Novum pump situation as well as the not recovering as quickly as we wanted to from the IV Solutions perspective.

I think as we head into '26, we certainly expect a better free cash flow the focus on working capital, a more efficient inventory, the -- again, not paying hurricane expenses, I think puts us in a position again to continue to make good progress on our deleveraging and therefore, closer and closer, obviously, in addition to the dividend cut, closer and closer to a point where we'll actually be able to -- as we head into '27 and beyond, really start to think about making better and different investments.

So Joel, when we are together this time next year, what do you think we're going to be talking about.

Yes. I mean what I look forward to talking about is getting through having a year in 2026, where we continue to, again, build credibility with all of you in terms of our operational execution, our performance relative to expectations, our performance again relative to stabilizing our business, deleveraging our balance sheet and really continuing to move the company forward from an innovation perspective and just in general, a place that, again, people feel better and more confident about. I can tell you, again, as I said it, I think we find ourselves at a good jumping off point and really, really excited about the year ahead and look forward to talking all about it with you a year from now.

I look forward to the quarters. Thank you so much for joining us, and we'll see you soon.

All right. Thanks, everyone. Appreciate your interest in Baxter.

Good morning, ladies and gentlemen, and welcome to the Baxter International's Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded by Baxter and is copyrighted material. It cannot be recorded or rebroadcast without Baxter's permission. If you have any objections, please disconnect at this time,

I would now like to turn the call over to Mr. Kevin Moran, Vice President, Investor Relations at Baxter International. Mr. Moran, you may begin.

Good morning, and welcome. Today, we will discuss Baxter's fourth quarter results along with our financial outlook for the full year 2026. This morning, a press release was issued with our preliminary earnings results and updated outlook. The press release and investor presentation are available on the Investors section of the Baxter website.

Joining me today are Andrew Hider, President and Chief Executive Officer; and Joel Grade, Executive Vice President and Chief Financial Officer.

During the call, we will be making forward-looking statements, including comments regarding our financial outlook for the full year 2026 and anticipated timing and impact of our deleveraging efforts, the amount and timing of charges related to recent operating model and cost structure actions, the anticipated impact of various regulatory and operational matters, including ones related to our infusion pump platform and to clinical practice changes following Hurricane Helene and commentary regarding the global macro economic environment, including tariffs and proposed mitigating actions.

Forward-looking statements involve risks and uncertainties, which could cause our actual results differ materially from our current expectations. Please refer to today's press release the, forward-looking statements slide at the beginning of our investor presentation and our SEC filings for more detail.

In addition, please note that on today's call, all our comments will be on a non-GAAP basis unless they are specifically called out as GAAP. Non-GAAP financial measures are used to help investors understand Baxter's ongoing business performance. GAAP to non-GAAP reconciliation can be found in the schedules attached to our press release and our investor presentation.

On the call, we will reference operational growth, which excludes the impact of foreign exchange, MSA revenues from Vantive and the previously announced exit of IV Solutions from China. We will also reference organic growth, which excludes the impact of foreign exchange, MSA revenues from Vantive and any impact from future business acquisition or divestitures. We plan to utilize the organic growth measure going forward.

Finally, as a reminder, continuing operations excludes Baxter's Kidney Care business, which is now reported as discontinued operations.

With that, I'd like to turn the call over to Andrew.

Thank you, Kevin, and good morning, everyone. Fourth quarter 2025 global sales from continuing operations totaled $3 billion and increased 8% on a reported basis and 3% on an operational basis. Total company adjusted earnings from continuing operations were $0.44 per diluted share. While the top line exceeded our expectations, adjusted EPS fell short. Joe will get into greater detail on the results, but there were a few areas that differed from our expectations we provided in October.

On top line, we saw a more modest net impact from Novum IQ large volume pump customer returns, which was favorable to results. While responses have varied in general, customers are waiting for additional clarity on the nature and timing of the additional corrections that we will look to deploy. Margins were pressured by both an unfavorable mix of sales as well as some nonrecurring items, including inventory adjustments. And finally, we saw higher tax rate.

The results in the quarter are disappointing and underscore the work ahead to improve performance and execute more consistently. I stepped into this role in August with confidence in the potential of the business given the central role Baxter plays in health care, but also with a practical sense of the hurdles before us. As I've continued to visit our sites and engage directly with the team and customers, I've deepened my understanding of both the challenges and opportunities facing Baxter.

We are in the early stages of a turnaround and have more work to do to deliver strategically, operationally and commercially and recognize that it will take time to implement real long-term solutions. That said, there's a strong thesis on where we can take this business. And we saw some examples of this in the quarter's results.

For example, the Advanced Surgery business kept off a great year with a strong quarter, growing 11% with contributions both across the portfolio and around the globe. And the Healthcare Systems & Technologies segment had another quarter of consistent performance, including a contribution from the recently launched Connex 360 monitor in the Front Line Care division. We are also preparing for the launch of the recently announced Dynamo Series structure, the latest innovation in our portfolio of smart beds, services and connected care solutions.

Innovation will be a critical element to our success and we recognize the importance of bringing new innovation into the market. Accordingly, you should expect a heightened focus going forward and continued investment in R&D at or above historical levels. As I said during our last earnings call and reiterated last month, I'm focused on three main priorities. These are stabilizing the areas of the business that require increased focus, strengthening our balance sheet and driving a culture of continuous improvement and efficiency.

We are moving with focus and urgency on each of these. And our teams are driving relentlessly to improve execution and performance across the enterprise. It is with this in mind that we have decided to hold off on our Investor Day.

Let me share a few updates on our priorities and the actions we have taken. Stabilize. Just a few weeks ago, we internally announced a new operating model that is designed to simplify our organization, accelerate innovation and improve performance. Most significantly, we are delayering levers of leadership, including removing the segment management layer and embed critical functional roles directly in each of our businesses. This will allow each leader to have full P&L responsibility for their business with fully aligned commercial, R&D, manufacturing, medical and targeted functional support and, importantly, full accountability to the results.

These changes are significant and are designed to reduce complexity, eliminate barriers for decision-making, bringing us closer to our customers and help us to improve our say-do ratio. We've also taken actions within our IV Solutions business to rightsize the support footprint to align to the lower demand environment, which we believe is a new baseline in the market.

In pharma, in addition to market demand softness, supply and backward challenges have impacted revenue and driven unfavorable product mix. Specific initiatives to address these are in progress. However, it will take some time to bear fruit. Overall, across the enterprise, we are taking actions to further strengthen our focus on quality and improving on-time delivery, our two customer value creators.

Balance sheet. We continue to focus on improving our cash generation and leverage. In line with our expectations, free cash flow generation exceeded $450 million in the quarter. And continuous improvement. As a reminder, operational efficiency is at the center of what we are driving. As you know, a key element of this is our Baxter Growth and Performance System, Baxter GPS, which we rolled out in October to ensure continuous improvement, enterprise efficiency and a growth and performance mindset are integrated into our day-to-day work.

We recently held our first annual President's kaizen, where I was impressed by the resolve each of our leaders demonstrated in driving change for the better with a focus on 10 events that will drive cross-business impact. Through focused weeklong sprints, teams tackle critical opportunities aligned to our 8 value creators. The work underway is helping us reduce complexity, better anticipate customer needs, accelerate innovation, commercialize better and deliver value sooner. We are focused on improving every aspect of our operations and we will be consistently measuring our performance to deliver just that.

Importantly, this is not a one-off event. It's how we're building a continuous improvement culture, where everyone is empowered to make things better every day. Before I turn it over to Joel, I just wanted to reiterate the key steps we're taking. We have streamlined the organization for greater accountability. We have launched GPS to drive continuous improvement, and we have tightened our focus on innovation to better meet customer needs, all to drive improved performance and long-term shareholder value creation.

Now I will turn it over to Joel. Joel, over to you.

Thanks, Andrew, and good morning, everyone. Fourth quarter 2025 global sales from continuing operations totaled $3 billion and increased 8% on a reported basis and 3% on an operational basis. Performance in the quarter reflects growth across all segments. On the bottom line, total company adjusted earnings from continuing operations were $0.44 per share. Results in the quarter reflect unfavorable product and geographic mix, some nonrecurring items including inventory adjustments and a higher tax rate, partially offset by the positive impact from pricing in select segments.

Now I'll walk through our results by reportable segment. Commentary regarding sales growth in 2025 will be on an operational basis. Sales in our Medical Products & Therapies segments, or MPT, were $1.4 billion and increased 4% in the quarter. Performance in the quarter reflects growth in Infusion Therapies & Technologies, or ITT, as well as continued strength in Advanced Surgery.

Within MPT, fourth quarter sales from our ITT division totaled $1.1 billion and grew 1%. Performance in the quarter was driven by growth in IV Solutions, which benefited from a favorable comparison in the prior year period, partially offset by lower infusion pump sales due to the previously discussed shipment and installation hold of Novum LVP.

Within IV Solutions, underlying U.S. demand remained below historical levels. As previously discussed, fluid conservation practices embedded with clinical practice changes in the market following Hurricane Helene remain and continue to weigh on volumes. In infusion systems, results in the quarter reflected the net impact of lost sales due to the ongoing shipment and installation hold of the Novum LVP customer returns and transition to Spectrum. Relative to our prior guidance, this net impact was more modest in the quarter.

While customer responses have varied in general, many are understandably waiting for additional clarity on the nature and timing of additional corrections that we will look to deploy and of the release of the ship and installation hold.

Sales of Advanced Surgery totaled $328 million and grew an impressive 11%. Results in the quarter reflect continued solid demand for our portfolio of hemostats and sealants, strong commercial execution across regions and steady procedure volumes.

MPT's adjusted operating margin totaled 15.4% for the quarter, decreasing 110 basis points over the prior year period and reflects increased manufacturing and supply costs, unfavorable product mix, inventory adjustments and higher costs related to tariffs. These factors were partially offset by positive pricing in the quarter. Kidney Care TSA income positively contributed as well.

In Healthcare Systems & Technologies, or HST, sales in the quarter totaled $827 million, increasing 4%. Within HST, sales of our Care & Connectivity Solutions, or CCS division, were $537 million and grew 4% globally. Performance in the quarter was driven by double-digit growth in our surgical solutions business and continued momentum across our patient support system portfolio.

Total U.S. capital orders for CCS increased nearly 30% compared to the prior year, driven by broad-based strength across patient support systems, care communications and surgical solutions, and our order book remains strong. To date, we have not observed a slowdown in U.S. hospital capital spending. However, given the broader macroeconomic uncertainty, we continue to closely monitor the situation.

Front Line Care sales in the quarter were $290 million and increased 3%. Performance in the quarter reflects increased demand in our cardiology and patient monitoring portfolios, which includes our recent launch of Connex 360.

HST adjusted operating margin totaled 15.2% for the quarter, decreasing 330 basis points compared to the prior year. These results reflect unfavorable product and geographic mix, increased corporate allocation expenses and higher costs related to tariffs. TSA income partially offset these increased expenses.

Moving on to our Pharmaceuticals segment. Sales in the quarter totaled $668 million, increasing 2%. Within Pharmaceuticals, sales of our Injectables & Anesthesia division were $352 million and declined 9%. Performance in the quarter reflects a decline in our injectables portfolio driven by a difficult comparison to the prior year period as well as softness in certain premix products, largely consistent to dynamics discussed last quarter related to IV infusion protocols and increased use of IV push in select hospital settings.

Our anesthesia portfolio declined high single digits, reflecting softer demand for select inhaled anesthesia products. Drug Compounding grew 18% and reflects continued strong demand for our services outside the U.S.

Pharmaceuticals adjusted operating margin totaled 5.8% for the quarter. These results reflect increased manufacturing and supply costs, an unfavorable product mix, price erosion, inventory adjustments and increased corporate allocation expenses following the sale of Kidney Care. These expenses were partially offset by Kidney Care TSA income.

Finally, other sales, which represent sales not allocated to a segment and primarily include sales of products and services provided directly through certain manufacturing facilities were $7 million in the quarter. MSA revenue from Vantive totaled $84 million. As a reminder, these sales are included in our reported growth. However, they are not reflected in our operational growth for the quarter.

Before moving on to the rest of the P&L, an important reminder on our continuing operations reporting. Following the sale of our Kidney Care business, certain corporate costs that did not convey with the business are now allocated across our segments in both cost of goods sold and SG&A along with income from the TSA, which is currently recognized within other operating income.

In addition, as previously discussed, we reclassified certain functional expenses from SG&A to cost of goods sold beginning earlier this year. These costs support manufacturing and are now treated as indirect expenses subject to inventory capitalization and recognizing cost of sales when sold.

Fourth quarter adjusted gross margins from continuing operations were 35.5%, a decrease of 900 basis points compared to the prior year. Fourth quarter adjusted SG&A from continuing operations totaled $637 million or 21.4% as a percentage of sales, a decrease of 330 basis points from the prior year period. Results reflect disciplined expense management and the benefit from the reclassification of certain functional costs.

Adjusted R&D spending from continuing operations in the quarter totaled $116 million or 3.9% as a percentage of sales, which came in lower than our expectations. This reflects reclassifications of certain product support and sustaining activities in the cost of sales and therefore does not reflect our anticipated level of R&D spend going forward.

TSA income and other reimbursements totaled $50 million in the quarter and came in line with our expectations. As previously discussed, the associated expenses related to this income are reflected in other lines of the P&L, including cost of goods sold and SG&A. Altogether, these factors resulted in an adjusted operating margin of 11.8% on a continuing operations basis, a decrease of 340 basis points compared to the prior year period.

Results reflect unfavorable product mix and nonrecurring items including inventory adjustments, partially offset by positive pricing in select segments and the benefits of TSA income.

Net interest expense from continuing operations totaled $58 million in the quarter, a decrease of $32 million versus the prior year period, reflecting lower interest expense following the paydown of existing debt with proceeds from the Vantive sale.

Adjusted other nonoperating income below $15 million, driven primarily by amortization of pension benefits, compared to the prior period. The continuing operations adjusted tax rate for the quarter was 27.2%, driven primarily by mix of earnings across jurisdictions. In total, adjusted earnings from continuing operations were $0.44 per share for the quarter.

Before turning to our 2026 outlook, I want to comment on cash flow and liquidity. Fourth quarter free cash flow was $456 million, bringing full year free cash flow to $438 million. Performance in the quarter reflects improved cash flow generation and seasonality, including progress across select areas of working capital as well as continued focus on execution as we close out the year.

We continue to focus on strengthening cash flow generation and maintaining discipline around working capital, foundational elements of our financial strategy. Improving the balance sheet continues to be a key area of emphasis, and we intend to deploy cash towards reducing leverage in line with our capital allocation framework.

Now our outlook for the full year including some key assumptions underpinning the guidance. For full year 2026, we expect total sales growth to be flat to 1% growth on a reported basis. This reflects current foreign exchange rates, which are expected to contribute approximately 100 basis points to top line growth for the year. In addition, reported sales are expected to include a headwind of approximately $25 million from MSA revenues from Vantive. This represents approximately 30 basis points of impact on reported growth

Excluding the impact of foreign exchange and MSA revenues, we expect organic sales growth of approximately flat for 2026. As it relates to the segments, in MPT, we expect full year organic sales to be flat to slightly up. This reflects the continued uncertainty around the Novum situation, including the potential impact from various customer responses. It also reflects the assumption that the ship and installation hold will remain in place for the full year. And as previously discussed, we believe that the market is at a new baseline in our IV Solutions business.

In HST, we expect full year organic sales to grow low single digits. This reflects expected contributions from both the Care & Connectivity Solutions and Front Line Care divisions. In Pharmaceuticals, we expect full year organic sales to be approximately flat. This reflects continued pressure in Injectables & Anesthesia related to softer market demand, supply challenges and ongoing IV push utilization trends that have been discussed in prior quarters.

Turning to our outlook for other P&L line items, beginning with tariffs. We estimate a full year impact net of mitigating actions to be approximately $80 million, which is a year-over-year headwind of approximately $40 million. TSA income and other reimbursements are expected to range between $130 million to $140 million.

We expect full year adjusted operating margin from continuing operations to range between 13% to 14%. This primarily reflects lower gross margins driven by unfavorable product mix, including the impact of lower manufacturing volumes and reduced contribution from pricing. These pressures are expected to be partially offset by improvements in SG&A, including the recent restructuring actions.

We expect our nonoperating expenses, which include net interest expense and other income and expense, to total between $280 million to $300 million. This reflects higher interest expense from the recently completed debt neutral transactions and lower contribution from other income. On a continuing operations basis, we anticipate a full year tax rate to range between 18.5% and 19.5%. We expect our diluted share count to average approximately 518 million shares for the year.

Based on all these factors, we now anticipate full year adjusted earnings on a continuing operations basis of $1.85 to $2.05 per diluted share. While we will not be providing explicit quarterly guidance, I want to offer some perspective on the expected cadence of results over the course of the year. Overall we expect the first quarter to be the most challenging with improving performance thereafter.

Specifically, the ITT division has an unfavorable year-over-year comparison in Q1 due to the onetime distributor build in the prior year. Additionally, ITT results in the first half are expected to reflect absorption headwinds from the rollout of higher cost inventory produced in the second half of 2025. We also expect to see a second half benefit from the recently taken actions to rightsize our cost structure. Therefore, we expect ITT performance to improve throughout the year assuming relatively stable demand.

Within HST, new product launches are expected to contribute to stronger growth in the second half of the year compared to the first half, including Connex 360 and Dynamo. In Pharmaceuticals, we expect the previously mentioned headwinds to continue in the first half of the year. As we move into the back half of the year, we anticipate a more favorable comparison and improved performance.

Finally, as a reminder, the first half of the prior year saw benefit to operating margins related to the timing of certain functional costs being reclassified in the cost of goods sold. Collectively, these factors support our expectation that organic sales growth, operating margin and adjusted earnings per share will be back half weighted.

With respect to free cash flow, similar to 2025, we expect it to be back half weighted due to our normal seasonality, expected cadence of earnings as well as recent cost structure actions.

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

[Operator Instructions] I would like to remind participants that this call is being recorded, and a digital replay will be available on the Baxter International website for 60 days at www.baxter.com.

Our first question comes from David Roman of Goldman Sachs.

I wanted to start with one strategic question and had one financial follow-up. Maybe firstly for you, Andrew. As you just think about the number of moving parts you're trying to navigate here, strategic review, catching up on innovation, deleveraging, what are you doing to ensure sustainability of the business as it relates to the competitive dynamic? And how are you gaining sufficient visibility to drive the forecasting process?

Yes. So David, look, let me start by just walking through -- part of my standard work as a CEO is to visit customers on an ongoing basis. And I'll tell you, the message is loud and clear that we are essential to not only supporting but to enabling their ability to bring high level of patient care. And we're an essential and trusted brand through that. As a reminder, we touch over 350 million patients per year.

All that said, we need to get better and we are not satisfied with our current performance. And you've heard me consistently talk about not only near term. And to walk through, it starts with stabilizing the business, and I've outlined that in my prepared remarks. To get more specific, we are driving the accountability at the lowest levels in the organization. Additionally, it's about strengthening our balance sheet. And lastly, our focus on continuous improvement and really enabling that such that we focus on the customer and streamline the organization to be able to execute at the pace we expect.

We're early in our journey but we're making progress. Now to date, we've aligned around streamlining the organization. We've launched GPS and we've heightened our focus on innovation and back to listening to our customers and launching products. It starts with our Connex 360 that I talked about. And then additionally, we launched earlier in the year or talked about launching early in the year the Dynamo structure platform. So while we're making progress, we have a lot more work to do.

Yes. David, and it's Joel, I'll take the forecasting piece of this thing. And clearly, improving our forecasting accuracy is a major priority, and we're attacking that in a very structured way through the Baxter GPS. And look, I certainly understand and appreciate the frustration and the volatility of our historical results. We have and we'll continue to be transparent about the challenges we're facing and the actions we're taking to address those challenges as well as and obviously the assumptions underpinning the guidance.

But GPS gives us a more disciplined operating rhythm, clear accountability and a lot more continued visibility to the drivers of our performance. So as you've heard us talk about focusing on demand planning, we also focus really around our cross-functional alignment for our commercial teams, our operational teams, our finance teams and just building a more rigorous daily, weekly operating mechanisms that really surface issues earlier and allow us to course correct more quickly.

So look, all designed to reduce volatility, improves the predictability of our results over time and, as Andrew likes to say, drive a really consistent say-do ratio in the organization. So we know we have work to do and we're attacking it that on.

And then maybe just as a follow-up here. Can you just remind us on where you are and the progress you're making on reducing the G&A and support costs that today are getting reimbursed by Vantive via the TSA and how we think about the runoff of the TSA over the course of the year and into next year and your retained cost? Like can that be a one-for-one offset? And maybe just help us think through the nature of the operating dynamics there.

Yes, sure. So a couple of things there. Number one, for 2025, one of the things we've said is that, including cost takeout and TSA income, we had about 40 basis points, I'll say, remaining impact on the year and we are on track to that. And so it's in that's been successful that way. We continue to make good progress on our cost takeout. And you've heard Andrew talk about streamlining the operating model. That's a continued work stream on this.

We continue to streamline our operations to meet demand. We've talked about that as well from a volume perspective. And then again, this work is done in relation to our stranded costs as well. And so our TSAs do start to tail off some in 2026, Obviously, they really go into 2027. As we've said, we are committed to eliminating our stranded costs by the end of 2027, and we remain on track to do that. So again, feel good about that progress and again it allows us to work -- you're hearing us talk about today, is targeting that goal. So hopefully that helps.

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

Two for me. Joel, maybe just to follow up on David's question, especially as the TSAs roll off. And I know it's early here, but do you think you'll be able to grow earnings next year as the TSAs roll off where you said today?

Just to be really clear, next year meaning 2027 or 2026?

2027.

2027. Look, we're certainly not forecasting or issuing guidance on that today. Do I anticipate growth? Yes. But I don't know that we -- as we've talked about, Robbie, the TSA typically are 24 months. Our deal was closed on January 31, 2025. So the majority, I'll say, of the TSAs fall off in the early part of 2027. And again, we do expect to continue to work through that for the year, and we can finish that out by the end of 2027. Again, we're not giving specific guidance on growth at this point.

Great. Maybe a follow-up question. The gross margins obviously came in well below where the Street was and operating margin as well. I was hoping you could just bridge us from the fourth quarter '25 to the 2026 guide, how much shifted from below gross cost of goods into cost of goods. And if you could also help put a finer point on first quarter so we could get a better sense of cadence through the year.

Sure. So maybe I'll start. Again, we haven't provided specific numerical guidance, but I'd certainly reiterate that I anticipate Q1 is going to be our most challenging quarter. There's a number of reasons for that, Robbie I mean, number one, I call this our normal seasonality. Obviously, Q4 tends to be a larger quarter than Q1. So our margin pass-through, again, there is some typical detriment there.

Now there's also a prior year comparison remember, at ITT. And while that's not a sequential driver, it does mesh a little bit of the seasonality that we talked about because our comparison in Q1 year-over-year between with onetime distributor build in 2025 is a little bit lumpy. So at the time we sized that at about 150 basis points to total company sales, so $4 million, $5 million impact. And so the headwind in the year-to-year growth in Q1.

There's also continued uncertainty on Novum returns. One of the things we talked about in the last quarter was sort of an uncertainty around customer behavior. That uncertainty, I think still exists to a degree and really carries into this year. And so the customers are a bit of a wait-and-see mode still. And therefore, as we referenced last quarter, there's an ongoing risk for customer responses there.

This is all top line. The Drug Compounding in Q4, 18% growth, probably not necessarily sustainable from that number. So obviously, expecting that to be lower in Q1. And then from a margin perspective, again, I already run some of the lower volume. There's also what I'll call, absorption headwinds. So again, in 2025, we have some of these higher manufacturing costs. And that ended up in our inventory capitalization. That has been rolling out as we sell those products, obviously, in the first half of the year really but also certainly in Q1. And so that's an incremental headwind the margins. We've not given specific guidance around the number on that.

And then the other thing is we continue to expect pharma margins to remain pressured due to softness in Injectables & Anesthesia. And that's really just the overall mix of the business. So I guess, finally, what I'd say from an EPS perspective, Robbie, the incremental interest expense, that kicks in in Q1. And so that's certainly something to expect there. So that's -- so again, hopefully, that helps with the guidance there.

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

Andrew, maybe my first one for you is you mentioned customers are awaiting how you resolve Novum, right? But your guidance assumes Novum ship will remain in place for the full year. Have you communicated this to customers? Like what have you told customers, right? I understand the guidance assumption, but are customers willing to wait for a year for Novum to resolve? .

Yes. Vijay. So let me walk this through a little bit here. So first and foremost, customers can and are continuing to use the device according to existing constructions and mitigating actions. We've continued to make progress on our Novum solution and the corrections, close. And as we go through testing, as we go through really identifying the longer-term solutions, we will update.

As a reminder, we have a strong pump portfolio. We have our Spectrum LVP that we utilize through this transition, and I even walked through earlier in the year, we've launched Spectrum with the IQX platform. And it enables us to really not only work with our customers, but to have a total pump portfolio with Spectrum being our LVP and Novum being our syringe and Novum a newer product set that we've launched in the recent history.

And so while we're going through our Novum updates, we have a strong that we can bring to market. And as a reminder, we're also launching early Q2 PUREVUE on the IQX platform. And PUREVUE is designed to really support our customers and their ability to identify and work on fluid processing. So we're continuing to innovate, continuing to build on. And given our pump platform, we are in a position to support our customers through this.

Understood. And maybe my second one is here, Andrew. You mentioned the operating model change. Curious on what has changed from prior model rate? How is this model better? And what's the impact or implication of free cash flow? I know you mentioned P&L responsibility. Is free cash flow going to improve from fiscal '25?

Yes. So I guess I'll take the first part and then I'll let Joel walk through a little bit around the cash process. Look, just a few weeks ago, we internally announced the new operating model. And it's designs around simplifying our organization, accelerating innovation and improving performance. And we are putting the accountability at the lower levels in the organization.

And I would say most significantly -- or one of the areas is delayering at the top level, removing the segment management and embedding critical functional roles directly into the business. And so this allows us to really further eliminate the barriers for decision-making, and it's streamlining to listening to our customers and ultimately helping us improve our say-do ratio and execute on a more consistent basis. So this approach is really moving down that decentralizing and streamlining the organization with black dot accountability.

Yes, Vijay, and then I'll take the cash piece of it. Certainly, as you've heard Andrew talk about regularly and myself as well as improving our balance sheet. Cash generation continues to be a top priority for the company. We do expect in '26 that free cash flow will improve versus 2025, driven primarily by stronger working capital performance and as well, obviously, we don't expect to repeat some of the onetime that happened in 2025, specifically the expenses for the hurricane.

From a free cash flow perspective, we do also -- similar to 2025, we do expect it to be somewhat back half related. That includes a charge in Q1 related recent operating model and cost structure actions as well as some of the seasonality that we typically show. But we also do expect to talk about from a P&L standpoint, our earnings that tends to be skewed towards the second half of the year due to some of the structural impacts that have been recognized -- we expect to recognize in H2, again, as well as some of the impacts from the manufacturing side of our business in terms of adjusting to better volumes.

Confident in that light because again some of the impacts are driven by actions that are in flight. So again, the structural cost work, in flight. The work around adjusting our manufacturing operations for better impact on volumes, in flight. And so I think -- and then the biggest thing in year-over-year drivers I mentioned is really around working capital. Inventory management, improved receivables election, processes and tighter control over payables process, including, I'll say, commercial terms.

So look, GPS is playing a role in this well. We got some more consistent operating teams, better visibility to reduce volatility and that overall strength in our cash conversion. So again, we do expect cash flow to continue to move in the right direction as we execute through 2026. Again, we saw some of that already in the fourth quarter of 2025.

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

Two for me. One on the gross margin, one on pharma. Joel, could you please give us a little bit more color on the Q4 gross margin? How much of the year-over-year decline was due to tariffs, mix, reclassifications and the onetime items you called out? And how much lower do you expect the gross margin to be in '26 versus '25? I assume it's more than the decline we see in the operating margin guidance? And I had one follow-up.

Yes. Thanks, Larry. Appreciate the question. So from, again, I'll call gross margin and again overall operating margin standpoint, certainly, a few factors played into this. I mean, we had unfavorable mix of sales. So again, with business mix, the geographic mix, product mix, that certainly was a key element to this. We also had, as we referred to earlier, some higher manufacturing and supply costs really for a couple of different reasons.

One, obviously, some of the challenges we had aligning, again, our labor to volumes, but also some of the impact that Andrew mentioned related to some of the challenges that we've seen in pharma. Those factored into this as well. The nonrecurring items, again, I would classify that as it's around $40 million of the impact that were related to gross and operating margins in the quarter. So certainly, those are things contemplated as part of that. So I would say that's really the main drivers there given I indicated about $40 million of that is not occurring.

And Joel, 2026 versus '25 gross margin? I didn't hear that. .

Yes. Again, we haven't given specific guidance on that. I guess what I would say a little bit to the commentary that I had as it relates to sort of the Q4 and Q1, I'd say there is some of these impacts that we expect to continue into 2026. And I think about a little of this as H1, H2 kind of part of the year. In other words this is going to continue to improve over the second half of the year.

But there's really two factors, I'd say, in H1 that I would consider as part of -- one is what I'll call mathematical and then one is more just kind of actions that are driving outcomes. So the mathematical piece. Again, we do have some normal seasonality in our company between H1 and H2 from a pure volume perspective. That, certainly, we'd expect to continue then. Our cadence reflects a more challenging first half with the improvement in the second half.

I think the absorption headwinds, again, this is something that in the first half, we have higher costs of the inventory that we capitalized. And that obviously, we saw benefits there that's going to then roll into the first half of this year. So that's essentially a headwind in the first half of 2026. So those are the mathematical pieces as well as tariffs. Remember, we didn't have tariffs in the first half of last year.

Then this relates to the action and riding outcomes. There's a couple of elements to this. One is the structural cost takeout that we've talked about. The impact of that is obviously, again, those actions are in place. Again, confident in the work that we're doing. But the outcomes of that are primarily going to be impacted in the second half of the year. And then in terms of aligning our manufacturing labor with our volumes and our production costs, again, that impact will start to show itself in the second half of the year. So again we're still taking the hit, if you will, from the capital as we sell those products in the first half of the year.

That's helpful. And Andrew, thanks for giving us the P&L by segment. Pharma has an operating margin of 9%, was even lower in Q4. My guess is compounding, which is your fastest-growing business, doesn't make a lot of money. What are you doing to improve the margins in this business? And why does it make sense to keep a low-margin business like compounding that seems to hurt your kind of mix every quarter? .

Yes. And I'll walk through kind of the fundamentals of a pharma and really outline it. So overall, we like the fundamentals of this business. And just a couple of items. We've also taken this part of the organization and we've combined it with our ITT business. And the reason being is it's synergistic with that organization and its common customers, common call points. And there's an opportunity to improve the business. And we have and we're continuing to take actions to do so.

Additionally, there has been some areas that have been in our control that we've been challenged with. And through GPS and through this identification with driving the accountability at the lowest levels, we've taken critical actions around aligning to improve. And one of them is around operational execution. And not to get into too much specifics, but we saw one of our facilities really hindered by the ability to drive output. And we took an active team around this. They've already improved. They're continuing to improve. We're going to see that performance through the improve to the first half of the year.

But more importantly, it's around how do we not get back into the situation? How do we build this and have this being sustained performance? And the role GPS plays in that is around identification and critical action.

The second piece within our control is we have a supplier challenge. And to be quite candid, it was an area that we identified, we are working through. It is going to take us a part of the year to get through this, and we're identifying how we have alternatives to continue to support the product. We are continuing to ship. That said, we are looking to identify long-term solutions. So to answer your question head on, we like the fundamentals of the business. We've got some work to do here, and we need to continue to align around the value creation we have for our customers.

And Larry, two other things I would maybe just add to that. I think number one is in the -- some of the margin challenges that we saw in Q4 are certainly, as Andrew said, that starts to improve in the second part of the year. But we still anticipate that being an impact in Q1. And then the second piece of this, just the one reminder as it relates to the compounding business. I mean, yes, certainly, that mix impact is a margin impact as well in terms of the relative level of growth in compounding to our injectable anesthesia. The one thing about that is it is our fastest cash cycle in the business. So that is one area that, just as a reminder, that is a benefit from that particular business. .

Travis Steed of Bank of America is on the line with a question.

Just still a little confused on what to put in the model for Q1 to understand kind of the slope of the recovery in '26. And is revenue kind of down low single digits, down mid-single digits? Are gross margins flat, down sequentially. What kind of earnings should fall in Q1 versus kind of the second half of the year? Just any more details on how to model the Q1 .

Yes. Thanks for the question. So again, we haven't specifically given a numerical guidance on the quarters. Again, the thing I would just continue to reiterate is the fact that, again, there's a number of these key elements that are impacting Q1, again, even I'd say as we even contemplated that relative to Q4. Again, I'll just run through a couple of them again. And again, there's a volume and seasonality impact that occurs. There's the continued elements of uncertainty around our Novum -- customer behavior around our Novum LVP returns.

Again, there's a likely -- as I just referenced on the last, continued challenges from a pharma perspective, as it relates to our overall margin. And again, the headwinds from an absorption standpoint, we again, we capitalized into our inventory costs, some of these higher costs that experienced in 2025. As we head into 2026, we -- again, those are going into our costs. And so as we sell those products, those are essentially selling higher-priced inventory as we head into the first quarter and H2 in general. So those are some of the main issues that are driving that, and again on EPS level, interest expense kicking in. I think those are really the key drivers I would think about as to why our first half and specifically first quarter remains particularly challenging.

Okay. We'll hopefully get more off-line. Two little kind of nitpicky questions. One, just kind of curious if you're assuming share gains or share losses in infusion pumps this year. And OUS Care & Connectivity Solutions was up $50 million sequentially. Was there anything kind of onetime in that line item?

Yes. So I guess I'll start with the first question here. Look, we have good opportunities as we go into the year. And as a reminder, Spectrum is a workhorse in the space. And that only is a workforce. We continue to innovate on the platform. And now that it speaks with Novum syringe, we're continuing to be confident in our ability to bring high value to the market we serve.

Can you repeat the second part of your question? I'm sorry.

Yes. International Care & Connectivity Solutions was up $50 million sequentially. I don't know if there was anything onetime in there. It looked like a big growth rate in the international business.

Yes. I mean I would just say, in general, that business has been performing well. I don't know that there's anything one time. I would say, in general, in the overall [ CP incidence ], we had a strong order book. We've talked about that. We've had some competitive wins from a customer standpoint and a capital spend in general. Earnings is really kind of strong across our geographies. So I don't know if there's anything unusual onetime there. It's just that, that business has continued -- a continued strong business and they continue to improve outside the U.S., which was sort of a headwind last year. .

Danielle Antalffy of UBS is on the line with a question.

Andrew, I appreciate it's not been terribly long. But I guess I'm just curious about looking at the Baxter portfolio in its totality, sort of how you feel about the state of the portfolio today, Appreciating you're not going to be doing probably M&A anytime soon. But, a, sort of where you see the most exciting opportunities with the current portfolio that might be underappreciated by investors? And then, b, where you think there's opportunity to sort of ramp up the product portfolio .

You bet. And if I missed something, Danielle, certainly feel free to jump in. I'll take this as you outlined in the question. So look, Baxter is fundamental, and it's fundamental to the health care system. And as I mentioned earlier in the call, it's a trusted partner. We have market leadership across multiple product categories. We have a resilient portfolio and deep customer relationships that really give us a competitive advantage.

Now as we go forward, innovation will be a critical element to our success. And as we look at innovation as an enabler, it's really extremely important as we bring new innovation to the market and not only from listening to our customers and identifying the pain points to solution, but also just that staying in front of our total portfolio of product set. So there's an opportunity to not only improve our performance but GPS becomes the foundation for how we really drive disciplined not on the operating rhythm but also clear accountability and clear enablement to listen to our customers, streamline our ability to bring strong capability to the market and really have real-time visibility to bring innovation to solve issues and to solve challenges that our customers face.

So I like the fundamentals of where we sit. Certainly areas we need to continue to challenge on and there are some areas internationally that we're looking at. We do have smaller exits that we're looking at in '26 as we look at our total portfolio. And as far as areas where I just -- I called it out in the call. We're pleased with our performance in our in many of our businesses, but more specifically, in how we bring our solution from not only our Advanced Surgery business, but the capability we have in that space and how customers really look to Baxter to support and have high value when they're treating and working with patients.

But we have many of those. MPT has areas we're looking at as well as HST and as well as pharma. So more to come. And if I could just characterize how we think about innovation for the future, it's a base hit discussion, not walk off grand slam. It's about that constant drive to launch products, to launch solutions that really enable our customers to bring higher level of care at a more efficient pace.

And lastly, on capital allocation. It is a critical element. We talked as direct on capital allocation as we do around our market strategy. And I've outlined it starts with delevering our balance sheet. And we've taken critical actions around that. When we look at the other levers, reinvesting in the business, and I walked through -- we're going to be at or above on our innovation reinvestment, expecting new product launches expecting areas to drive R&D, not just sustainment. But also as we get into future and we delever, identifying targets that can add high value from an M&A perspective. And we have a strong funnel, but we need to delever first.

So hopefully, I answered your question.

We have time for one more question. Joanne Wuensch of Citi is on the line with a question.

I'm just curious. When you put guidance together for 2026, what was sort of your philosophy of how to deliver it so you can deliver on the guidance?

Thanks, Joanne. I'll take a stab at that and if Andrew wants to add anything, he can. Look, I always view guidance -- I think I collectively view guidance as prudent and reflective of the best and most current information we have available. And then so we think about these things is trying to continue to be very transparent of the challenges we're facing, it's certainly apparent in our Q4 results. but also about the actions we're taking to address those issues.

We try to talk about some of the things that are market conditions but also things that are in our control to deal with. And so -- and actually, all that kind of aside underlying assumptions underpinning the guidance. And so as we sort of put all that together and then think about some of the key factors in the year that are happening, again, we certainly -- we talked about the fact that there's a key Novum assumption that was in there. We've talked about our IV Solutions, that we rebased that. We've talked about some of the challenges in our Injectables & Anesthesia. Some of the product mix impacts again, the manufacturing volumes that we had to adjust to and some of the -- what we say in the 2026 is going to be a reduced contribution from pricing as well as the EPS impact.

So Joanne, I guess, I'd say when we pull that all together, that's where our guidance shakes out. Certainly, again, I said earlier in the call, I certainly understand the frustration and some of our volatility in the way we hit this to get it. It matters to us a ton for our say-do ratio to be in a place where we actually we get, here's what we say, and then here's what we do in terms of that relative to our guidance. But hopefully, that -- I don't know, Andrew, anything you'd add to that?

And I would just say -- I'll echo's, it's a view of the market. It's our prudent view of how we will operate. But I just -- I want to reiterate, GPS will become who we are and how we operate. And it will allow and enable us to go very deep in the organization and drive accountability. And it's part of our journey around the continuous improvement model and how we need to continue to improve our say-do ratio. And it's an area that we'll continue to update as we go throughout the year.

And at this time, I will now hand the call back over to Andrew for some final closing comments.

Yes. Thanks, operator. Look, in closing, we're not where we want to be, but we're confronting our challenges head on and taking deliberate steps each day to better position Baxter for the long term. I'm energized by the opportunities ahead driven by the essential role Baxter plays in patient care and our mission-driven team that is committed to drive stronger and performing over a long period of time.

Thank you very much. Stay safe, and goodbye for now.

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

Welcome, everyone. I'm Robbie Marcus, the med tech analyst at JPMorgan. I'm very happy to have Baxter as our next company presenting. Andrew Hider, the new CEO, first-time presenter at JPMorgan. We will do a presentation followed by some Q&A.

Great. Good afternoon. A little silent. Andrew Hider, CEO of Baxter, and I've been here a whopping 5 months. A little bit about me. I started my career at General Electric. I was there for 6 years, then I went to Danaher Corporation. I was at Danaher for 10, ran 4 companies for them anywhere from semiconductor to x-ray diffraction, underground tank storage as well as instrumentation for dairy food, beverage and biopharma, took over a business, private company, and then I ran ATS Corporation for almost 9 years as the CEO.

I tell you that as a framework because I view an operating system and continuous improvement at the core of everything we do. And why I was excited about Baxter, it's an iconic brand that brings high value to our customers. And where we are in our journey, not only we have a lot of opportunity, a lot of areas we want to drive improvement. So we know the safe harbor statement. You can look this one up online. I won't go into detail here.

So a little bit about us. We're an essential global partner servicing our customer needs. We help over 350 million patients per year. We do business in over 100 countries. We have over 38,000 dedicated employees that are really aligned around our mission to save and sustain lives. We're over 40 manufacturing locations. And as a CEO, I have a standard work and part of my standard work is to be on site, and I've visited almost half of our facilities so far with that alignment to understand where we are in our journey and how we need to improve to get better.

And a little bit further of the insight, we're a little over $11 billion in revenue, 55% of that in the United States, rest is international. And we're in 3 operating segments: Medical Products and Therapies, Healthcare Systems and Technologies and Pharmaceuticals. And to give you a little indication around these, our technology and products really play a role in delivery for patients throughout all of our customers, across all of our sites. So whether you're in the hospital, you're an outpatient or an alternative site of care, Baxter plays a critical role in that. They depend on our solutions.

And I'll double-click on these in Medical Products and Therapies, we have our Infusion Therapies and Technologies business. Think IV solutions, the pump portfolio as well as many others. We advanced surgery. So we're in the operating room, helping surgeons when they're in surgery, enabling patient care. We're also in our health care systems and technologies with care and connected solutions. Our beds platform, as well as lighting, tables and connected products. Our customers are looking more and more for Baxter to provide ability to drive higher level of patient care with efficiency. That ability to take data and turn it into actionable insights, and we're down that journey on this business.

And then our front line care business, whether that's cardiology, respiratory or patient monitoring, continuing to expand that ability to bring high value for our customers and delivering strong solutions for patients. And then pharmaceuticals. And pharmaceuticals has a lot in common with our ITT platform. If you think about our business, the prick to the drip. We provide the solutions around that and the capability around that, whether it's specialty injectables or inhaled anesthesia to our compounding business, providing Elixirs that help patients as they're in outpatient service or other areas.

And as we think about the markets and the dynamics that our customers are faced with, we help in many areas, whether it's chronic illness and age, with an aging population and the ability to provide higher levels of service and support for these patients, Baxter helps. We're going to advancing technologies, whether it's digital, working on workflows or AI, maximizing your patient safety and maximizing your efficiency, Baxter plays a role. And lastly, care across settings. Our customers are looking at different ways to bring their value to the patient. They're going more decentralized, not just in the hospital, but also other areas. With our product portfolio, we protect and help in all areas. We provide stability and bringing that solution to life.

And as we go through our next chapter, I'm going to walk through a little bit about where we are. Because as I took this job, eyes wide open, but we've got a lot of work to do. But we've got an iconic brand. We've got some areas that we need to target, and we need to drive improvement. So it starts with stabilizing the business, really identifying and driving impact in the areas that need addressing. It's people, process, then performance with a clear area of focus of our value creators. We have 8, not 7, not 10, 8. It's that common sheet of music.

As a CEO, I don't like secret decoder rings. When I go to facilities, I want to know in 3 seconds where you're winning and where do we have to focus, red or green, not pink, purple or yellow. We have to strengthen our balance sheet. We're over 3x levered. We took decisive action around this. We need to get our balance sheet under 3x. It allows us to have that focus on capital allocation, driving expansion into our business. It's a consistent discipline on how we allocate capital, both ongoing investment and potential future new investment. If you join my team, you get 2 books. One book is the outsiders. And the reason why we give you that book is I want you to know how I think about capital allocation. It's investment to return, that alignment on innovation to drive expansion, to drive ROIC.

And lastly, we've launched our continuous improvement journey, Baxter GPS, growth and performance system with an emphasis on growth. We launched it my second month on the job. My team was pressing me, Andrew, we need to drive this in everything we do. We need to start to align around Kaizen events around the critical few. So we launched our platform, and it's now taking shape of becoming our DNA. And a little bit more about that. Baxter GPS starts with people, winning as a mission-driven team. Process, being simplified and optimized, streamlining, aligning around your customers and constantly looking to improve your process. And lastly, performance. I'd like to say we're ex-athletes. We like a scoreboard. We want to win. And when we're off, what do we do to get back on track.

Then along the bottom is our focal areas -- it's our focus areas. Our mission-first culture, save and sustain lives, customer first because if our customers win, we win. And long-term shareholder value creation, that constant drive to know that when we take action, we have to align it to shareholder value. And across the top is how we operate, our operating cadence, whether it's daily visual management or annual plans to the tools we use to drive impact. And lastly, our tracking, how we measure our progress with our 8 value creators around financial performance, people and customer to the KPIs that enable those.

And I'll tell you, the first week of the year, last week, we did our first annual President's Kaizen. 10 Kaizen events focused on impact for the business. And our leaders drove those. And it's the tone we set at the top around nobody is above continuous improvement. We will focus on improving in every area we operate, and we measure our performance. We're setting the tone around the future.

And the 8 value creators, I'm going to start on the right side, financial, revenue, margin, working capital and ROIC, that constant drive to always get better. The focus on how do we drive long-term shareholder value through these 4. But to create repeatability on those 4, it's the first 2 with people, hire from within, our internal fill rate. Are we building our talent for today and tomorrow? Turnover, making sure when we get the right people on, we don't lose them. And then customer, on-time delivery and quality, 2 areas we own.

And when I talk to customers in my meetings, tell me if you give me the product on time with the highest level of quality, we want to buy more of it. These are the 8. Whether we go to our facility in California, Puerto Rico or in Spain, we start with these 8, red or green, are you on track for your annual performance or are you off? And if you're off, what are we doing about it? How do we drive to root cause and how do we drive countermeasures to get back on track?

With that it's also innovation. When we talk about internal investment, the greatest return to our shareholders Internal investment is a key enabler. We can't be more excited about the first product, our Welch Allyn Connex 360. New platform in patient monitoring, patient care, building out capability so we can continue to add on. Our IQX infusion platform, bringing Spectrum and Novum together. So they're talking the same language. And you'll see a little plus sign there. We're bringing Pure-Vu in later this year. So we can help our customers understand the data inputs to drive efficiency, to drive improvement in their process.

And lastly, today, launching our Stretcher platform. Our Dynamo Stretcher, acute care, we are taking orders and announcing before market opens tomorrow. This product will be delivered and being delivered as of early Q2, even maybe late Q1. We can't be more excited about this platform. We took voice of customer and drove it into our capability. This safety features around ensuring that you're minimizing people falling out, minimizing bed falls, really aligning around the metrics so we can help our customers build capability. But more importantly, it's the philosophy we have around innovation, base hits that constant drive to launch products to meet our customers' needs. So you're going to hear us talking more and more around not only product launch, but extension and how we bring and create value for the markets we serve, that drive to always be in front of our customers and to always looking at what their needs are and turning into reality. Just to start.

On to capital allocation. It's 5 areas. As I walked through on the last earnings call, our #1 is getting our leverage back in line, driving to be under 3x. But while we're doing that, we're reinvesting in the business. investment for growth around CapEx and R&D. When we look at our R&D spend, aligned to ensure we're bringing vitality, new product launches, new product extensions. The innovation and R&D leaders now hold a quarterly review with me, are ensuring that we're meeting the project time lines, we're driving execution and we're launching on time, meeting the needs of the customer base.

Now when we get our leverage back in line, it opens up to the right to, M&A and share repurchases when we see it as an opportunistic area, Get it back in line and start to look at where we can deploy capital to drive further growth. And our dividend, we took down to $0.01 for a specific reason to bring our debt back in line. We don't plan on changing that in the short term. So GPS is at the core of everything we do. We look at our business, we are a market leader in the markets we support and serve. We're focused on improving margins, growth and cash generation. And our value creators align around this. We're advancing innovation across our portfolio. We're launching products and having continuity of the ability to continue to meet our customers' needs and building our capability to move at a faster pace. We're enhancing our capital allocation, lining around the critical few to ensure we've got alignment for long-term value creation. Where we sit today, driving the business such that we can meet the long-term fundamentals to continue to expand and where we want to go from a business perspective and a market perspective.

So with that, I'll now open it up to questions. Thank you very much.

Great. And we also have Joel Grade, CFO, up here to help with some of the financials. Andrew, people heard you on the third quarter earnings call, but probably still have a lot of get to know you type of questions ahead. So maybe one just to kick it off. You've been a public company CEO for a long time now coming from an industrial background. What was it that made you want to come to Baxter? And now that you've been at Baxter for 5 months, what are some of the really good things you see in the company? And what are some of the things that are action items you're taking focus on?

So look, Baxter is almost 100 years old. It's an iconic brand and the solutions we bring matter. Our customers depend on us. We take great pride in that. And that's a really strong thesis around where we could take this business for the future. And I look at where we sit in our journey, certainly, we are eyes wide open. There's a lot of work to do. The say-do ratio needs to improve.

When I look at continuous improvement, I look at what we can do with GPS, well, it's just started, it's our journey. It's how we're going to take this business for the future. Now when I came on, a couple of things. I was going to launch GPS a little later. The team pushed me. They challenged me and they said, Andrew, we need to launch this now. We know how you operate. We need to get this in motion.

Number two, when I met with customers and again, part of my standard work is to meet ongoing, I talked about our solution set, and we have a lot of opportunity to help and support in many of the key areas. And lastly, when I look at our position, we have a market-leading position in many of our areas that we support. And we need to innovate. We need to drive expansion. We need to enable this business to achieve what we set out to achieve.

That said, we've got some fundamentals to get done. That's why we've launched the GPS. We've launched the alignment around the critical few metrics. We're moving to a more decentralized model. We're putting in the power in the business units. So they can take insight for the customers and drive it into their process. But it's a journey. And so we've started that journey, but we need to continue to make progress on it.

When I think of med tech, it's top line first, second and third, new products drive the top line and then everything follows beyond that. Margin expansion is great, but if we're talking about that first before the top line, we're usually not in a good spot. So how are you thinking about innovation at Baxter? How you're spending your dollars, what's in the pipeline already? And is there something that's going to change moving forward to improve the top line?

Look, and I said this on the call, I mean, we're going to expect some modest growth as we look at this year. All that said, we have a healthy pipeline in innovation. And all of our businesses are driving innovation. Now some are going to be kind of front and center on what that looks like, whether it's our HST business or even talking about the Stretcher launch that we announced today. But innovation is going to be at the core of what we do and how we focus. And so we're doing quarterly reviews.

The area that I would say was a little bit more challenging is we spent a little bit too much on sustaining engineering. Sustaining engineering is only supporting your current product portfolio, and we're shifting that. And the team is excited about that shift. But through that, we also need to look at the number of products and SKUs. And so innovation will become something that's core to everything we do. And that alignment around vitality 1 and 3-year really drives our business forward. So we're in front of customers, bringing capable solutions, but it takes time.

One of the Kaizen's last week was a business unit, and they have multiple stages on how they launch a product. And they identified 2 of those stages having the biggest challenge. They drove the Kaizen. And through that, we saw almost a 50% reduction in cycle time, 1 week, concentrated focus, drive for results. We need to do that at a greater scale, and we need to continue that momentum. That said, it is going to take time. Any continuous improvement journey takes time, effort, and everybody wants to do continuous improvement until you're in continuous improvement, but the team is taken to it. They want to align around the critical metrics and drive and launch products and solutions in the markets we support.

Are you willing to give a percentage of what's spent on new versus existing innovation and how quickly that can shift?

So we're going to be doing an Investor Day. It's going to be the May or June time frame, and we'll get into a little bit more specific, but we spend about up to, call it, 5% of our spend on innovation and R&D. And we're shifting to making that a bigger, more meaningful piece for new product and product extension, and we're going to continue to drive that and ensure that we've got alignment to it.

I'm sure at the Analyst Day, we'll get a refresh on what your end markets are growing, your weighted average end market growth. Any rough guesses of where Baxter's end market growth sits today and how Baxter compares against them?

Yes. Why don't I take that? I think what we've historically said and we're typically at is in that sort of low single digit on an aggregate basis. Obviously, different markets are in different places on that. I think certainly, over time, the aspiration would be to outperform that. But obviously, where we sit today and think about that, that's the way where the markets are in.

Okay. As you think about Baxter, clearly, it's a market-leading company when you're interfacing with the hospital. That's what you do. How do you think about sort of what ties all the business together? And what's your core competency? Obviously, you're great at selling to the hospital. But is there some common theme, whether it's manufacturing, call points, selling? And I have a follow-up on that.

As you look at our products and technologies, we're involved in patient care throughout our customers' value channel. And so where they're providing that for patients, we're involved in that, whether it's in hospitals. And if you go in hospitals, you'll see the Baxter product portfolio, especially around a patient around their alignment to ensuring they're getting the proper care to outpatient services and alternative sites. And we can bring that stability. And that matters not only for our customers and their capability, but also as we think about the digital potential because our customers want to make sure they're aligned around efficiency, but also high patient levels of support. And we've got capability to be able to provide both.

Following up on that, you've sold the Vantive business, the renal care business. You sold the bioprocessing business, BPS. Are you done subtracting? And how do you feel about additions going forward once the balance sheet is in place?

Yes. So I would say that there's no -- we don't see any other short term, any meaningful change in our portfolio. I will say this, over time, portfolios change. And as we grow and we continue to expand, we're going to be continuing to look at our portfolio. But right now, I don't see any meaningful shift in that portfolio. And you're right, we're largely through Vantive and really stabilizing that business. And that was why that's the #1 priority, the #1 focus area.

As we go forward, and we'll be walking through this, we're going to have businesses that we want to invest and grow. There's going to be businesses that we want to sustain. And then there's going to be businesses in the fixed category that we have to determine where we want to take them. But if you look at investment, areas we want to drive and really have capability are obviously going to be the ones that invest and grow and expanding our penetration, expanding our capability, whether it's through innovation or through potential M&A and tuck-ins, but that's a future state where you have to get the balance sheet in line first.

So at your former company, ATS, you did a lot of deals over a number of years. Baxter has done one big deal over the past, however, many years. How do you think about when you're in a position to do M&A, how do you think about M&A? How do you think about returns, whether it's financial or strategic? And anything we could read into from your former life into Baxter here?

Yes. And I'll just say, I mean, my former business, a lot of smaller deals that added a certain capability that we need. Fast forward to where we are, we've got a strong portfolio. Our customers value our portfolio. Now we need to drive it. We need to improve it. We need to expand in areas that we know we can. But as we think through potential M&A for the future, it's going to be more tuck-in and adds to the areas that we view are high value for our customers.

I generally don't like bet the farm type of deals. And so to me, I want to understand the ROIC, where we want to take the business, the value creation for customers. And when we think about ROIC, obviously, it has to outpace our WACC, but alignment to that long-term value creation. Anything you'd add?

Yes. I think the one thing I would add too, is, I mean, obviously, Hillrom certainly is the deal that most people think about as it relates to Baxter. But I have -- there's quite a number of smaller tuck-in deals that over the years, whether it's in our Advanced Surgery business, whether it's certain molecules we've acquired in pharmaceuticals that actually have gone really well. And so I just -- I guess what I would just say there is I think there is a capability and a competency that when the time is right, the opportunity to add the portfolios in ways that you say, hey, a buy versus a build makes sense that I think we'll be well equipped to take on.

So the balance sheet is in a much better place than it was just a year or 2 ago. By your own admission, there's still more progress to be made in improving the balance sheet. On the last earnings call, you cut the dividend to a nominal amount, free up cash, I imagine, and pay down debt. What sort of progress should we expect in 2026 on improving the balance sheet? And I'll tie it into the broader dividend reduction and how you're thinking about capital priorities?

Yes, I'll start and then Andrew can weigh in. I think that's one of the key focuses you'll hear from us is really about working capital. There's -- this past year, we certainly had some challenges, both from an overall cash flow perspective, but also from working capital. On the cash side, we had a few headwinds, I'll say, as it related to Hurricane Helene. I will knock on wood and hope we don't have another one of those that's going to cause us to use cash, but also with some of the work on some of the part of the Vantive divestiture as well. But on the working capital side, some of the challenges we had in terms of what our projections were, the recovery of the Solutions business, relative to where it ended up, resulted in inventory build.

Some of the challenges with Novum that we produce product but didn't sell. So as we head into this year, really focusing on our demand planning and ensuring how that relates well to production that we've made investments in this area to get better at that to drive our inventory efficiency. We focused on the payables side, on ensuring that our commercial terms reflect those that we think are appropriate for our organization. We're a bit upside down in terms of paying our suppliers faster than we receive money from our customers. We're working hard to flip that. And then obviously, a focus on collection efforts between our sales and shared services team. So I would say the near-term focus this year is really continuing to drive our cash conversion cycle and will obviously work on that as well.

You talked about solutions and the pump business. Maybe we could touch on that 2 separate issues. Maybe if we start with the pumps, NOVUM IQ, any update on when we can expect that to get off the hold that you've placed on it and return to market?

Yes. So NOVUM LVP, so we put a voluntary ship hold on the product. We're still shipping NOVUM syringe, and we have, obviously, the Spectrum product pump portfolio as well. And we did that intensely. First and foremost, patient safety is our #1. And with any medical device, when you launch, you learn. And so we identified 2 areas, and we put them -- there's 2 field actions out that we've identified workarounds for the time being. We want to have the final solution in place, and we're working on those solutions as we speak. The team is working obviously very hard to align around those to get the final in place.

And so while we go through that, we're building out the Spectrum platform because it's a tried and true business. It's a tried and true pump. And we continue to look at opportunities to expand that with our customers. So you're right, NOVUM LVP, we're continuing to develop and build out for the long term. We've got alignment not only with our business around what those options are and how we're driving to, but then the testing that's going to be needed to ensure that. And we'll update as we have the final plans in place.

Yes. And I would just maybe remind the room, the Spectrum pump, obviously, was part of our portfolio prior to the Novum launch and a very successful part of the portfolio. Even when we launched Novum, we continue to offer Spectrum as a choice. For our customers and a large number of our customers actually continued to buy Spectrum. So I think it's really an important point here that, yes, while we certainly, again, remain committed to Novum and continued progress on that front, again, we certainly have -- there's a high level of demand for our Spectrum pump. And again, we have the inventory and the production capability to handle that demand.

You mentioned earlier, there were 3 categories. I forget the exact words you used. I think it was invest, harvest and maybe fix, and I forget the exact words. The pump business, just not only at Baxter, but across the market, it's just been an incredibly difficult one beset with a number of recalls and FDA actions. And the growth is okay, not great in the end market. Where would you put this? And is this a program that might be up for action moving forward?

So we'll be talking a lot more in our Investor Day through this. That said, we're committed to the Novum platform, and we know that the solution is -- and we're working on it right now, it's around the corner for our business. That said, we're assessing where this is going to fit and it's sustain, invest and grow or fix. And I would say this is an area that we need to get right on the solution, ensure that it aligns well for the long term and really build that capability for our customers. While we're doing that, offering spectrum, not only with the IQX platform, but then Pure-Vu being a part of that being an enabler for our customers to really drive efficiency in their process.

Maybe on the solution side, the hurricane end of 2024 impacted the business. It seems like we had a reset in 2025. How do you think that business can do moving forward from here on out?

Yes. I would say there's a couple of things on that. First of all, one of the important points here is that we essentially really reset our baseline on how we see that. I think for a large part of the year, some of the projections were around some of the recovery in that space. And it's actually really become clear that there is a change in clinical practice in terms of the way hospital systems are utilizing those products. And so I think we've done a lot of work and had external validations of this with -- and talking to a lot of customers. This isn't a case of losing customers, it's really a case of clinical practice change.

And so what we've really said is that there's almost a new baseline for us in that space that we're now essentially going to be growing from -- over time, do we think that some of those practices change or get back to a more normal, I'd say, yes, but it's not something we're predicting here in terms of how and/or when that might happen. So I think it's really important to see what the -- it's -- but it's still a great business for us, and I want to be clear on that. This is a business we're a market leader in. It provides a tremendous amount of access to hospital systems that we're in. It connects, as was mentioned earlier, very nicely with our pharmaceutical business and other parts of it. And it certainly serves as a really good funding mechanism for other things we need to invest in as a company.

So realizing you're not going to give guidance for 2026 here, maybe a philosophical question for you with respect to guidance. Numbers at Baxter have been ticking down lower over the past several years, starting with inflation, which really hurt the interest rates and the EPS coming out of the Hillrom acquisition up through last year. And I think people are really anxious to see guidance for 2026. We have a new CEO here, probably a new philosophy. How are you thinking about guidance in general? And how do you think about where you set your guidance expectations and where you obviously like to beat and raise. But what did you do in the past? And how do you think about guidance in general?

Yes. I mean -- so just to -- I'm prudent on the process. And reality is the market, understand where you are and then knowing where we want to drive our expansion. And so we'll look at all those variables and then we set the guidance around that.

Yes. And I think maybe what I would just do is take a moment to just remind some in the room like what we have said up until this point on 2026. We've talked about the fact that, again, a little bit -- we've essentially reset our baseline on our solutions business. There's public information out there that really says, hey, there's about a 10% to 15% demand decline relative to pre-hurricane levels. And so again, that's sort of almost a basis for how we think about our solutions business. And there's been some impact from a U.S. injectables business as well on that front.

On the positive side of the business, we have also talked about the fact that particularly our CCS business, as part of HST, we've had a really strong and robust order book. This is something that is a forward indicator for positive results. This is -- there -- we have not seen challenges, if you will, from a capital standpoint in hospitals. We've actually had a really strong book of orders, and so that's a good -- a positive part of the story.

Just a reminder on tariffs. This is something in the first -- basically, we had a half a year of impact in tariffs in 2025. That was about a $40 million, I'll say, net impact. So again, to think about what that looks like next year, have a full year versus a half year. Obviously, we'll still be working towards mitigation efforts, including pricing and supply chain opportunities, but that's probably the way to think about that. And then the other thing we've talked about is the fact that we will likely have some headwind from, I'll call it, below the line in the sense that we've issued new debt. So there will be some level of interest headwind there. And from a tax perspective, we had a large kind of onetime benefit in our third quarter that had our third quarter tax rate at 5%. Annualized, we talked to about around 15%. That's something that will likely be a bit of a headwind for us heading into next year as well.

So I like to think med tech is all about the products, but it can't be without the people as well. It's a vital component. Maybe speak to the morale at Baxter since you've come in, the reception you've gotten from the employees and how you feel about the people at Baxter.

Yes. So -- and I mentioned this and the mission resonates so well with our team. And I'll just say it's such a powerful enabler for our culture. And I would say the alignment to continuous improvement being the next step in that journey is really where we're taking the business. And so it's going to become our DNA, who we are and how we operate around building the best Baxter. And I would say we've seen a lot of people really be engaged and want to be a part of driving that. So I've been impressed with that aspect around looking at your business and knowing you can drive change, but it takes time. And we need to help our teams understand how to drive that and really align around it.

And we've made some leadership changes, and I've been impressed with how the leaders are taking on those roles and really aligning their business for the critical areas of impact. Testament to last week, first President's Kaizen. That is every one of my staff was on a Kaizen event. They drove an impact. They drove the message that continuous improvement is at the core of everything we do. So that culture resonates. Now we need to continue to have a high say-do ratio. We need to challenge to make sure that red is okay if you're driving action to improve. We don't hide behind it, and we're in a journey on that.

Well, great. We're out of time here. Thanks for a great discussion. Thanks, everyone, for joining.

Thank you.

Great. Thanks, everyone, for joining us this morning. I'm Vijay Kumar, the life science diagnostics and med device analyst at Evercore. A pleasure to have with us Baxter. We have Joel Grade, EVP and CFO. And from Investor Relations, we have Kevin Moran. Before we get started, I think, Kevin, some disclosures from your side.

Yes. Appreciate it, Vijay. Thanks a lot for having us here today. Just a quick reminder that we will be making forward-looking statements today that are subject to risks and uncertainties. And if you need more information, please visit our IR website or consult our SEC filings. Back to you.

Great. Joel, well, thank you for the time this morning. I think in a few -- it's been an interesting past 18 months, right? A lot of changes. And I just feel like when I go back 12 months ago, we started with so much optimism, right? We were on mid-singles. Stock was doing fine.

And then we had a couple of one-off items, timing issues, along with management change. But probably Andrew coming on was the bigger one for us. Just talk to us on -- from your perspective, what does Andrew bring? What has it been like working with him?

Yes. Yes, sure. First of all, thanks again for having us as well, and I appreciate everyone's interest in Baxter. Look, I'd say a couple of things. Andrew obviously brings with him a strong operational background. His background certainly from companies like GE, like Danaher, obviously, from his experience as CEO at ATS. I think Baxter is in need of a continuous improvement mindset in terms of how we operate, how we continue to be, I would say, predictable. And I think he's somebody who brings that to us, that tone from the top will be really important.

He said there's really 3 things he's focused on in his early days. One is really stabilizing some of the businesses that need to be stabilized. Certainly, a lot of that sits in ITT and pharma. He's talked about deleveraging our balance sheet. We need to continue to really focus on that deleveraging point.

And then again, this continuous improvement mindset that says, how are we going to become more consistent, more predictable in terms of how we operate. And I think he brings a very clear view of an operating model to this company that I think will be very important to facilitate that. So really excited to have him on board.

I think he's the right guy for this company at this time, and we're really excited to have him.

Just maybe a related question, Joel. Does Baxter's culture need to be fixed, right? And if so, like how is Andrew going to change this bring about this change?

Well, fixed is probably a strong word. I mean I think this is a company that has -- part of the culture of the company is around this idea of saving sustained lives. And I think there is a really strong purpose-driven element.

Again, we are an iconic brand. We have a strong presence in the hospital settings. And again, there are a lot of extremely medically relevant products. So I don't know if culture is the right word. What I do think we need to do a better job of, and we've talked about this even before Andrew's arrival. We need to be more consistent in terms of how we execute our business.

That allows for a number of things, obviously. Number one, it allows us to be, again, a more effective and efficient company, but that ultimately leads to margin expansion, which leads to better cash flows, which leads to better ability to reinvest in our business.

And I think the -- and I think this, again, the ability to have more consistent outcomes as an organization is really important. So I look at it more do we need to continue to get better at executing? Yes. But do I -- and I think that's what Andrew brings to the table in terms of that tone at the top.

And so again, if you call that culture, I guess I consider it just how do we get better at that.

Understood. Maybe taking stepping back, right, where we started the conversation, we started the year in mid-singles. And I feel like we really did well in Q1. We did well. And then things start changing. Maybe just do a quick review for us on what changed, what drove the consecutive guide downs.

Yes. I mean I think a couple of things. Obviously, one of the things you may have left out as part of the 18-month interesting time was a hurricane that hit. And so that certainly impacted a number of things.

I guess what I would say to you is the following. I think there was -- there's 3 areas that are really kind of have driven the change in the outlook for the company. Number one was really obviously our pump. Certainly, at the time early in the year, there was not an anticipation in the way Novum would play out. That business is actually growing quite well. And in fact, our pump sales were high. And so I think that's one of the areas that was impacting. The second was really around fluid conservation.

Obviously, we came out of the hurricane at the end of 2024 and really ramped up production back into 2025. You'll remember that we initially had our customers on an allocation through basically the end of May.

We had then said, well, we had renegotiated our GPO agreements and there are certain volume commitments that we then gave customers I'll say, a grace period. And because of the fact that we're on allocation, we're ramping production back up. But I think there is a continued expectation that we would see a further, I'll call it, lessening of what at the time we call it fluid conservation.

I think we've arrived at a place where we've said, look, I think our -- we are essentially at somewhat of a new normal in terms of that. There's certain public data out there that says, hey, there's -- people are some 10% to 15% off of where they were prior to the -- prior to the hurricane. And I think that has certainly been another impact in terms of our overall guidance.

And then the third really is around our pharmaceutical business, particularly our injectables in the U.S. I think there's been some market softness in that area as it relates to both the IV protocols, say, coming out of some of the impacts of the conservation, but then also, I would say that if there's one area that's been affected a little bit by some of the uncertainty in the medical space, it's this.

I think there's -- our value add is really our premix products in the pharmaceutical space. And in some cases, we have had customers that would go and buy vials and do premix on their own that it appears cheaper, if you will, even though we certainly believe the total cost of ownership view of our premix products is beneficial.

And I certainly think that's over the long term. I mean we've done this for many years. But those are really the main areas that I think have been impactful. And then maybe just one last point. The change in our guidance that happened as we headed into the fourth quarter was really related to how we think about the, I'll say, the range of outcomes that could happen from a customer behavior standpoint as it relates to our NOVUM pump.

There's really 3 things that could happen. Thing one is customers could just -- they can continue safely using the pump based on protocols that we have laid out for them to do so. Thing two, they could actually exchange for Spectrum pumps, and we do have a portfolio of pumps and Spectrum is certainly a well-recognized and well-used pump.

And then third is they could actually return -- they maybe have been previously spectrum users that they would have bought -- no of them, they just did return those products. And some of that uncertainty is what led us to take our guidance, the lower end of our guidance down further in the fourth quarter.

Got you. And I want to hit on all these points, but maybe starting with the Q4. I know 3Q ex the MSA PSA revenues, you guys did close to, I think, 1% operational, right, organic.

I guess, how do you go from the plus 1 or plus 1 and change to minus 2 in Q4, right, that sequential because 3Q had the full impact of pharma, Novum, like what worsens in Q4?

So again, it really goes back to -- as of the end of Q3, what we essentially said is that we didn't anticipate selling further NOVUM for the remainder of the year. That was our low end of our guidance as of Q3.

And that's unchanged essentially. What is different is that this point that I just made around sort of the different options around behaviors that could happen and the ability for them either to switch out or potentially return products.

Got you.

And so that's really the primary driver of that difference. And I would say to some degree, we essentially lowered our full year guidance from a pharma standpoint, basically related to the injectables portfolio.

So those are really the 2 drivers that impacted the guidance in the fourth quarter.

Got you. And based on, I guess, customer behavior so far, what's been customer behavior? Are they returning their products or swapping to the spectrum or continuing to use safely? Because I would think like changing these pumps, it's not easy for customers, right? I mean you've got to change your, I guess, back in IT integration, et cetera.

Yes. I would say a few things to that. Number one, we have had really solid demand from a Spectrum perspective. So I think, again, the good news, just as a reminder to folks, our Spectrum pump, even when we first launched Novum, again, we think about our pump as a portfolio.

So we actually never sunset Spectrum. We actually had always had that as a choice. And some customers actually actively chose Spectrum as a pump. And so that was something we really always -- we had continued to produce and continue to have available to customers.

And so now with some of the issues that have occurred with Novum, again, the demand for Spectrum has remained solid. And so in fact, we've ramped up production in order to ensure that we're able to meet the demand for Spectrum. And I guess the thing I would say is it is a sticky business in the sense that customers get used to certain protocols and certain ways of handling.

The thing I would remind you of, though, is that our pumps and our sets -- excuse me, our tubes and our sets are actually consistent between Novum and Spectrum. So that's one of the advantages is to kind of keeping in the family, so to speak, is we still get the sales from all the ancillary devices.

And it's not as much of a kind of a protocol change for our customers. So in fact, our Spectrum is actually in over 1,500 institutions in the U.S. and Canada today. And so it's a widely used product and one that I think in general, customers are quite used to.

Got you. Would you say, I guess, one of the scenarios where customers swapping to like non-Baxter homes. Are we seeing that? Or how would you characterize that scenario relative to the [ T3? ]

Yes. Well, again, I would say, in general, and this is where, again, I've been -- we've been encouraged by the level of demand for Spectrum. And I think we -- look, we're still very focused and excited about the Novum platform. But again, in the meantime, we're certainly -- we're continuing to enhance Spectrum. And again, the demand level for Spectrum has been really good.

Got you. Got you. I guess sticking on to and pumps. What was -- like can you quantify what the total headwind to revenues in fiscal '25 were? I think you mentioned pumps are now like low single-digit percentage of company revenues. Is that exiting this year? Or is that for full year '25?

Yes. In general, our pump sales actually are a little bit less than 2% of our total sales in general. And so that was true while we introduced Novum and the entire portfolio of pumps. And so it's a -- and again, I think the thing that's important to remember, and again, why I continue to emphasize spectrum as important is that the pumps themselves actually tend to be overall margin dilutive for us.

But the -- what goes with them is actually really important. And that's why, again, I think the idea that we have a portfolio of pumps, the idea that our customers like our -- again, in general, really like our Spectrum pumps does allow us to continue to sell those areas that are margin accretive as part of our business.

Got you. And what's been the total impact of fiscal '25? When you look at the guidance change versus the initial 4% to 5%, how much of that change was because of the Novum?

We haven't specifically quantified that, Vijay.

Okay. Okay. I guess another sort of a different way of asking that question is, what is your share in the pump market rate, whether it's the U.S. or global, however you want to characterize it, right? And how much share has Bax lost because of Novum?

Yes. Again, we haven't -- I don't know we've been very specific around that. I mean I think we have generally said our shares in the high 20s. But I think the -- and again, keep in mind, our fluids are a lot higher than that, obviously. But that's -- our pump share has generally been in that area. And I could broadly suggest to you again that whether it's a Novum pump or it's a Spectrum pump, it's a pump.

And so I think the thing that we did say earlier is that with Novum with Spectrum, we've taken about a percentage point in share. We had said that with Novum, we would expect to take a couple of points of share. And so I think it's fair to say that the share gain is less potentially without Novum.

But having said that, again, I think the -- again, we've got a strong portfolio. We have good demand for our pumps. And like I said, overall, I think it's an area of strength.

Based on comment, Joel, is it fair to say that let's assume there was no known for all of '26, and we just had spectrum, should Baxter still be gaining that 50 to 100 bps of share gains in pumps under that scenario?

Yes. Again, I think it's -- I'll say the -- we haven't gone and actually guided that. I think I'd like to wait until we have a further -- whether it's at our investor conference coming up to give you a better perspective on it.

Got you. But the historical facts are Spectrum drove share gains and you continue to gain share as of 2Q.

Spectrum, here's 2 facts that are true. Prior to Novum coming out, our Spectrum pump was taking a point of share per year. Fact number two is that we've had a number of very nice competitive wins with Spectrum as well. And so I think those -- so both of those things are true. And I think overall, feel good about our portfolio of pumps.

Got you. And the high 20s pump share, is that a U.S. number? I'm assuming that's a U.S. number. Okay. On the Novum, has Baxter identified the root cause? Any sense on when these issues might be resolved?

Yes. We haven't guided that. What we have said is that we anticipate that they will continue through 2025. We have not given further guidance beyond that. Obviously, we're certainly continuing with urgency to work with our customers, to work with regulators to ultimately come to a resolution to our voluntary ship hold. But at this point, we have not guided to that and look forward to doing so.

Got you. Is this -- I guess, this was not just a software update, right? We had some hardware components that had to be updated as well.

Yes. I think just broadly, and I'm not going to get into super technical stuff here, but it was broadly a risk of under infusion at a time when -- if the pump had been in kind of a standby mode for a time period.

And so continuing to work to resolve those issues, again -- and again, I want to be clear, there are a number of customers that are able to safely use our pump, and there are certain protocols that we put out in order to do that.

But obviously, it's a ship hold at the moment, and we'll continue to work through those.

Got you. What's been the margin impact of the Novum [indiscernible]

Obviously, there's been some incremental cost to resolve the issue. There's some way to triangulate on what the impact was?

Yes. Again, we haven't guided that. I mean the one thing I would say is, again, part of our -- the guidance we've given as part of our fourth quarter is reflective of what I would say are the impacts of some of that. And again, because if you think about a customer return is a negative revenue, if you will. And so again, as we think about the guidance that we have given for Q4 and obviously, for the full year, that's those type of items are factored into that guidance.

That's one. I mean, since you brought up margins for Q4, like historically, Q4 tends to be pretty strong for you guys, we see 100 to 200 basis points sequential step-up. I think this year, the guidance implies flat to down maybe slightly.

Is that like the 200 basis points of normal seasonality we should have seen? Is that all because of these one timing cost in nature, if you will? Or what is behind that Q4 margin assumption?

Yes. I would say a couple of things there. It's -- one are some of the things that you've suggested, but also there's -- some of it's also mix. I think when we think about our -- like, for example, in our Pharmaceutical business, obviously, an improvement or growth in our U.S. injectables is margin accretive.

Meanwhile, obviously, our growth in things like compounding is not. And so now the compounding business is important to us because it's our -- it's actually -- it's our shortest cash cycle in the entire company. And so it actually is cash generating.

But it is -- but from a margin perspective, when that is growing at a rate faster than injectables, for example, it is -- it takes -- that's part of what contributes to that as well.

Understood. Maybe switching gears to the concept of hospital fluid conservation rate. I think you made some helpful comments about how Baxter was laxed with customers, gave them some leeway on volume commitments.

Where are we now on, I guess, that process? Are you now going back to customers and saying, look, if you don't stick to these volume commitments, you'll have to pay a different price based on the contracts? Or are you implementing those?

We are having those conversations as we speak. I think -- and again, just to reiterate again, I think we've said that we see ourselves kind of at a new normal, if you will, from a baseline perspective that we will ultimately grow from.

But yes, we are having active dialogues with our customers around because the grace period is over, so to speak, on that. And again, whether it's -- we'd obviously prefer the volume commitments that absolutely that's a part of our business that particularly drives absorption in our manufacturing operations. But yes, those volume commitments are not met, then there's pricing implications to that.

Shouldn't sequentially fluid business to be better in Q4 because now we're holding customers to those volume commitments. And hey, if we don't, then the pricing changes, right, wouldn't that mathematically 3Q versus Q4 and the fluids be better in Q4?

Again, we guided based on what we think is the -- our best estimates of all those in the fourth quarter. And again, as you can imagine, those aren't necessarily easy conversations.

Understood. Understood. Maybe a different way of asking this question is someone pushes back saying, look, this is actual share loss with the IV fluids right? Like what kind of data sources can we look at and say, look, this isn't a share loss for Baxter in IV fluids?

Yes. Well, again, I think to be really clear on what I've said is I haven't -- I actually haven't used those words. What I -- the words I've used are we -- there is a change in practice that we believe is the more prominent impact there.

At the time we renegotiated the GPO agreements, and again, this is not new news. We had actually -- we took some price in our GPO contract renegotiations. And so in some cases, there was -- again, I'll say relatively minimal, but there was some share loss at the time we renegotiated the GPO agreements.

And that is independent from anything related to the fluid conservation. So again, as this thing has evolved, and again, there's public information available that talks about the fact that there are just different practices. And I think -- and you'll also recall back in 2017, we did have -- there was a hurricane that hit Hurricane Maria that hit a plant of ours solutions plant in Puerto Rico.

It was 2 years plus of a timing when that -- when some of that actually, I'll call, gradually recovered. And so I think there is some historical view of some of this happening in that way. But I -- the conversations with customers directly, again, other public sources that have had some of those conversations as well, it seems clear that there is some protocol that's changed.

Understood. And since you brought up the 2017 analysis, based on that experience, are there any leading indicators that you can look at to and say, hey, over the course of 2 years, customer behavior should change or should normalize. And when does that happen?

Yes. I mean, again, it's one example. So I guess I hesitate a little bit to use that as other than something a bit analogous. But I -- look, I think our teams are continuing to work with our customers to just educate them and remind them of both the clinical benefits of the solutions versus Gatorade for oral hydration, for example, and obviously, as well as the commitments we talked about from a GPO agreement perspective.

I don't know that there's necessarily. Again, we stay very close to our customers. And so I think that's going to just be kind of an ongoing everyday focus, if you will, to continue to drive some of that behavior in a different way. I don't know there's any really bright leading indicators there.

I guess with the conservation efforts, right, I know we saw a headwind in '25 relative to '24. But have you bottomed out? And I guess where I'm going with this is, should '26 see a further headwind?

Or should '26 be stable relative to '25? And I'm not asking for specific numbers, like directionally, what should we think like is that a plus or a minus?

I guess, again, without providing a guidance on that, I do think the -- this is -- we are at our sort of our new normal base. And whatever happens as we move forward is going to be continue to just build out, if you will, off of that base.

I guess maybe another way of asking like Q4 assumptions on your IV fluid, are we assuming Q4 to step down relative to 3Q? Or are we assuming we've stabilized on this IV fluid conservation efforts?

I would say earlier in the way I would phrase it is the following. Earlier in the year, we had anticipated a higher level of recovery than has existed ultimately and what we factored into our guidance. I don't look at it as though it's necessarily getting worse.

Okay. Okay. So Q4 is sort of similar to 3Q?

But it was, again, ultimately below earlier in the year expectation.

Sure. Sure. And then on Premix, is it fair to say much of the Premix issue -- like this is because of the pump issue, right, because of the under infusion, and that's what's driven lower Premix sales? Or is there anything outside of that that's impacted Premix sales?

Yes. I think it's a meaningful part of it. I also think, again, as I referenced a little bit earlier, there is a -- again, I'll say somewhat -- there's somewhat of a shift in that we've always sold Premix products as a value-added product.

Now if you look at it on, I guess, I'll call it a unit-by-unit basis is it's more expensive to buy a premix than it is something where you can buy the vials individually and mix them at the IDN or the hospital level.

However, again, we've always believed this, and this has been a business we've had for a long time that our Premix value add is actually a total cost of ownership, ultimately cheaper. But I do think there's been some market softness in the sense that customers have bought vials individually versus the -- some of the premix that we're seeing in addition to what you just talked about we're seeing.

Again, we do ultimately think that's transitory, but that's some of what we're seeing.

Okay. I guess on the educational side of things, what is Baxter doing to help customers understand the ROI of using Premix?

Yes. That's the work that our sales and marketing teams are doing every day because it's -- certainly, that is a -- again, it's a classic total cost of ownership return conversation to your point. And so certainly acting with urgency to continue to do that. But the one area I'd say that we've seen a little bit of softness as a result of uncertainty.

On another note, one of the questions that we often get is, hey, what are some of the -- are there other signs of some of that softness in the hospital space? And the truth of the matter is that the question we get the most is on the capital side.

I know this is different than asking, but just since we're talking a little bit about that type of a market thing, we actually haven't -- it's interesting. We've certainly been, I'll say, looking for it, watching for it, but the signs of softness from capital spend, we haven't seen at this point. And part of that, we've had strong growth in our CCS business in HST.

We've had a solid order book all year. In the last quarter, we talked about the fact we had some nice competitive wins. And in fact, our order book was up 30% year-over-year. And so we -- that's one of the other areas that we get asked a lot about, again, a little bit of softness in the pharma side, but we have not seen that in the kind of a hesitancy, if you will, from a capital standpoint.

Understood. Understood. And then maybe a last Premix question, if you will. The Q4 assumption versus 3Q, are we assuming Q4 trends to be similar to 3Q? Or are we assuming -- does the guide assume Q4 to, I guess, further decelerate from 3Q for Premix?

I guess what I would say to you is that our pharmaceutical -- we took down our total year guidance from a pharma standpoint. And so I guess you can back into the math on that.

Got you. I guess on the pharma side, like there is -- one is we had the Premix rate. But the other thing is competitive environment and pricing on the generic side. Like how has that changed at all? Like I know U.S., that's the number we look at U.S. has declined, I think, 5 of the last 7 years.

How do you characterize the current competitive environment? And is it stable, worsening? Or are we still seeing big price declines?

Yes. I actually don't think that, that is something that's really meaningfully changed because if you think about the -- that business in general, it's a constant kind of ebb and flow in the sense that new products are introduced, they then get pricing pressure.

And over time, those margins fall for competitive reasons, which is why you then continue to introduce new products. And so I don't know that, that dynamic has really changed. I think the -- I think what you've seen is a little bit of this dynamic I outlined that has impacted some of the product launches, and I'll say the positive impact of product launches has been a bit diluted based on some of the things we've talked about.

But the dynamic itself in terms of -- there's always a lot of competition in that space for price. And again, it's the reason you always have a continuous stream of products being introduced to offset some of that. I don't know that, that's changed.

Understood. And on the topic of new product introductions, is the number of products that Baxter has launched in either '25 or when you look at '26 pipeline, is that more than enough to offset some of these competitive headwinds?

Well, it's certainly -- are you talking pharma specifically?

Pharma.

Okay. Yes, I -- look, it's certainly going to be a key part of how we grow in that business going forward. And so I think -- and that's really the case every year. I think as you've heard us talk about always there's -- and again, just as a reminder to people, there tends to sometimes be a question of like, gosh, how big are these things.

We're not a big pharma, so to speak, we're in these giant launches. It's the reason there's a volume of launches is because they're kind of, for lack of a better analogy, base hits versus home runs. And so that is a continued part of our growth strategy in U.S. injectables undoubtedly.

Understood. And maybe a last question on pharma. Can you quantify what is the size of Premix versus injectables at this point in time?

Yes, we haven't done that today.

Okay. Understood. I guess switching gears to -- you mentioned orders up 30% year-to-date. But also some of it isn't that like easy comps? I think '24 was a tough year for Baxter.

What is -- I guess, when I look at the 30% orders, it feels like the outlook for capital should be really strong. And I know that business has done low to mid-singles when you look at the Hillrom piece year-to-date. Is that like -- what's the visibility of this order book, right? Does it give you your 6 months visibility, 12 months?

Yes. So let me -- there's a couple of points you raised. I want to break down a few things in that question. Some of the 2024 comps, the later part of the year, we actually had pretty strong comps in CCS, in particular in the U.S. Our FLC, because again, if you remember, our HST is basically part of the Front Line Care, part of CCS. The Front Line Care piece has certainly had easier comps year-over-year for most of the year.

And the reality of it is, is what you're seeing in the Front Line Care business is what I consider a stabilization of that business. Primary care markets have stabilized.

It's not -- again, it had some modest growth. But I would say, generally, 2025 is a year of stabilizing Front Line Care. And we anticipate, again, some level of, I'll say, returning to more of a growth in that area in 2026. For CCS, that business had a very poor first quarter in 2024, but then actually continued to grow at a, I'll say, an incrementally accelerated rate over the course of the year.

And so our year-over-year in that business has actually continued to be pretty solid. And so now your visibility question, one of the areas of, I'll say, substantial improvement we've made in that business is exactly this visibility.

And so we have a pretty clear perspective and line of sight to orders, the amount of orders that actually translate into revenue, which is actually very high. And some degree, the timing of those orders.

Now depending if it's a CCS or PSS, GSS, it could be a 3-month time period. It could be in more of a 9-month time period, depending on the type of products. But we do have a clear view of that. And so as a leading indicator for us, we actually have a pretty good line of sight to what that looks like as we head into next year.

And so when you hear us talk about things like, hey, we have -- we've had a pretty robust pipeline over the course of the year, and we expect that to continue. And again, we've had some nice competitive wins, particularly in the U.S.

It's been a little slower outside the U.S. in that business, but our U.S. business has been good.

That's great. And then when you think about pipeline and innovation, what are you excited about '26? If you can just give us pluses and minuses?

Yes. Well, I think, first of all, what we announced even in this last quarter, our Connex 360 is the next-generation monitor. It has some really, again, interesting features around cyber protection, around just certain aspects of that, that are really truly next generation from that standpoint.

And while it's relatively -- it's just being launched in Q4, so it's a minimal impact in 2025. But again, we are excited about the impact of it as part of our growth in '26.

I think the -- one of the things that look forward to continuing to talk about some of the new opportunities we have for product launches coming up. I'm not ready to do that just yet, but we'll have, again, other things we're looking forward to talk to you about.

And I would say, in general, part of what I think you'll see from us, we had a number of years where we had a lot of stuff going on that was important. from a strategic perspective, including divestitures, including really restructuring of the company that was -- but that somewhat distracted some of the innovation work.

And I think you'll see -- continue to see more of that coming from us. And again, to remind people, these are more face hits than grand slams, but they are important and there's some exciting innovations we have come out.

Understood. And maybe switching gears to margins and free cash. Like I know year-on-year comparison is it gets messed up with the stranded costs but I think the clean base we were all looking at for fiscal '24, excluding stranded costs, was 16.3% relative to those levels were down 150 basis points in '25.

Can you just give us a bridge on what were the moving pieces? How much of this is China exit or tariffs or you have MSA PSA margin dilution and obviously, the guidance change?

Yes. I mean the way I would broadly think about this is that on the positive side, again, we did guide to pricing that we -- based on the renegotiated the GPO contracts as well as some OUS pricing we took that we anticipated 100-plus -- 100 basis points of enterprise side that we anticipated, and we're on track with that.

So that's been the positive piece of the margin. On the other side of that, I mean, you've actually kind of called out a couple of them. But certainly, the biggest impact has been just from a volume perspective and from our solutions business in particular, and some of the absorption or lack thereof that's flowed through.

And really, the other pieces of it, though, are related to tariffs. That's been -- we've been pretty consistent how we've talked about that all year. I think we got to a place that said, hey, there's about a $40 million net impact from tariffs.

And I think that's basically where we'll end up on that. We also said there was a dilutive impact of about 40 basis points from the MSA margin dilution. And if you recall, there's about a 40 basis point impact from what I'm going to call unmitigated stranded costs, meaning in 2025, there is work -- we've done some good cost out work and we've had TSA income.

But we guided in the beginning of the year that said, hey, there's about 40 basis points of stranded costs that we're not going to be impacting that year. And so when you consider sort of again, the volume piece, tariffs, the MSA dilution and the TSA impact, that's really the main offsets to the pricing benefit that we had.

That's helpful. And as we look at '26, right, can you just give us the plus and minuses? Is tariffs still a headwind for you guys next year? The volume piece, the volume piece, depending on your revenue assumptions, like we'll keep the volume leverage aside. But when you look at the other pieces, right, can any of these turn in '26?

Well, I think -- so again, I'm going to save the kind of the guidance piece. I know you didn't specifically ask that, but I'm going to -- we'll give guidance at a later time on 2026. Just maybe a couple of reminders. The tariff impact is obviously, this past year is about, I don't know, I'd say roughly a half a year impact where next year, we will -- there will obviously be some -- it will be more of a full year impact. And then the other part of it, I guess, I would just say is, obviously, from a kind of a below-the-line impact, we issued.

We did issue some new debt that will result in some additional interest costs as well as the -- obviously, we had a very favorable tax benefit in Q3 and guided to a 15% tax rate this past year. That's -- again, there's going to be likely some headwind as it relates to that as well.

That's helpful. That's helpful. And then maybe the last one on free cash conversion, Joel. I mean you guys used to be really good at 80%, 90%. It's really lagged a couple of years now. Why, I guess, can '26 improve? What should '26 be? When can we get back to 80% conversion for Baxter?

Yes. So again, that is ultimately, and I'll say, aspirationally where we should be as a company. I do expect some improvement in 2026. Again, we had positive free cash flow in Q3. Our Q4 typically is our largest cash quarter. And obviously, there's a couple of headwinds that we won't be facing as we head into 2026 related to payments related to Hurricane Helene in the early part of the year and some payments as well to -- as part of the Vantive settlement.

But when you couple that with some things where we are -- we have a lot of work being focused on improving working capital. Our inventories this year were impacted significantly by pumps as well as by solutions, but focused a lot on -- and made some investments in inventory planners to really help ensure that our demand and our inventory production levels are lined up to become more efficient that way.

And certainly, a strong focus on commercial terms on both the receivables and payables side in addition to really good collaborative work between our shared services teams and our commercial organizations on ours.

Great. With that, we're out of time, Joel. Thank you for your time.

Great. Thanks. Really appreciate it, everybody.