Baxter International Inc.

Good morning, ladies and gentlemen, and welcome to Baxter International's first quarter 2026 earnings call. Your lines will remain in a listen only mode until the question and answer segment of today's call. At that time, if you have a question, you will need to press the star and one key on your touch tone phone. If anyone should require assistance during the conference, please press the star then zero on your touch tone phone. 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 investor section of the Baxter website. Joining me today are Andrew Heider, 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 Vantiv and 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 one question and one brief follow-up so that we can give as many people in the queue an 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. We'll 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 in all three 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 roadmap in place to improve results and drive shareholder value. I have clear insights into 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 nine 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 36 cents per diluted share versus 55 cents 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 one-time 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 for both tariffs and higher manufacturing costs, including absorption, pressure, operating margin. While we did not see material impact from Novum LVP related 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. 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, 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're on the right track and showing progress on our three 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 backorder challenges at one of our manufacturing facilities that was impacting revenue and driving unfavorable mix within pharma. During the quarter, we made significant progress in clearing backorders 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 confidence 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 six 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 de-layered 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 portal 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, and 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. To date, 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, improved visibility, simplified 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 oars begin 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 be joining 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 36 cents 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 and 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 cells due to the previously discussed ship and installation hold of Novum LVP and an unfavorable comparison to the prior year due to a one-time distributor build within Ivy Solutions following Hurricane Eileen. Within Ivy 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 transitions 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 and technology segment, or HST, sales in the quarter totaled $705 million, decreasing 2% due to a decline in the frontline care division. Within HST, sales of our care and connectivity solutions, or CCS division, were $435 million, flat compared to the prior year period. The patient support systems or PSS 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. Frontline 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 premixed products. As Andrew referenced, during the quarter, we made significant progress in clearing back orders at one of our manufacturing facilities. Additionally, supply constraints associated with a 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 these 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 a segment, and primarily includes sales of products and services provided directly through certain manufacturing facilities, were $14 million in the quarter. MSA revenue from Bantam 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 through 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 36 cents 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. 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 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 Bantam, 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 NPT, we expect full-year organic sales to be flat to slightly up. This reflects the uncertain timing for the resolution of the Novum ship 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 impacts 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 and connectivity solutions and frontline care divisions. In pharmaceuticals, we expect full-year organic cells to be approximately flat. This reflects ongoing pressures in injectables and 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 experience a full-year impact. TSA income and other reimbursements are expected to range from 130 to 140 million. We continue to expect full-year adjusted operating margin from continuing operations to range between 13 to 14%. We expect our non-operating expenses, which include net interest expense and other income and expense, to total between 280 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 we 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 right-size our cost structure. Within HST, we expect growth in the second half supported by new product launches including Connex360 and Dynamo. Our order book in the U.S. continues to support visibility and to improve 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 it driving improved operational discipline and support more consistent execution across the business. With that, we can now open up the call for Q&A.

Thank you. We will now begin the question and answer session. If you have a question, please press the star and one key on your touch tone phone. If you wish to remove yourself from the queue, please again press the star and one. If you are using a speakerphone, please lift the handset to ask your question. So that we may be respectful of everyone's time, please limit your comments to one question with one brief follow-up if necessary. We appreciate everyone's consideration as we would like to provide as many of you as possible the opportunity to ask a question. We will pause for a moment while the list is being compiled. 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 Robbie Marcus of JPM. Your question, please.

Oh, great. Good morning and 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 pull forward or different assumptions moving forward? More specifically, especially as we look to QQ, the streets right around flat organic sales growth. How do you feel about that? And then I got to follow up.

Hey, 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 one piece to call out there is we've been transparent about the potential risk of responses from Novum 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 Novum 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, you know, we expect to be pressured. And then we expect growth in the second half. And so to kind of sum it all up, you know, the full year reiterated our expectation of approximately flat, kind of known 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 question 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. Appreciate it.

Hey, Robbie, good morning. Just a couple 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 the 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 out the TSAs, and we expect to cover this. Also, 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 do 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, you know, I've outlined a few of these, but just to walk through, you know, we talk about Connect360 being a key product 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. And I also highlighted two more, while mine are still proving the point around, we are outlining innovation, 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 certainly a key element of our overall growth in the future.

David Roman of Goldman Sachs is on the line with a question. Please state your question.

Excuse me. Thank you. Good morning, everyone. Maybe we could just dive into a couple of the 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 four to five times besides 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?

Yeah, so a couple of things here, David, and good morning. 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, 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 that 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 confidence 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, you know, there's some elements, right? We've talked to in the past, our IV solutions business, and it's right sizing. 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. Within Q1, we did have a little nuance within frontline care on timing. We would expect that to normalize out throughout the year, and we would expect HST to grow and call it low single digits. So overall... we're feeling confident in our view and it's a credible path for our ability to execute and not only deliver on the growth expect, 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 focus around executing within the year.

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

Good morning. Thanks for taking the question. You know, Andrew, I wanted to ask on inflation. You know, what's embedded in the operating margin guidance for gross margin in 2026, and how are you absorbing the increased cost pressures from, you know, oil, freight, chips, et cetera, you know, since the Q1 call? You know, oil, it looks like it's up about $50 a barrel, you know, since you – you know, last reported and had one follow-up.

Yeah, good morning, Larry. Let me walk through a couple 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, reminder that we sold our kidney care business. And with that sale, we've gone less than 50% now as 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, has taken a very proactive approach to managing our supply chain and our supply channel. And so we are engaging very deeply with our suppliers. Where 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 look at our ability to minimize inflation, We've largely outlined how we want to drive this. That said, Baxter's 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 understood. But 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, you know, 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? Thank you.

Yeah, look, just to walk through, I took this job nine 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 is only gained and strengthened. And I am fully committed to restoring Baxter as an industry-leading company. And now, why has that gained 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 trusted 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 journeys. 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 one 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 meet. By no means are we saying this is the end. We are laser focused on the year. 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.

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

Good morning, Andrew, and thank you for taking my question. Maybe just looking at the Q1 performance here, excluding the comps, you guys did up low singles, right, on an underlying basis, but the guidance is calling for flattish organic. So maybe just walk us through on why wouldn't, you know, Q1 trends sustain? What are you assuming for normal step down or returns, if you will, and maybe comment on HSNP order performance? I know there was some timing element

would it order through and what gives you confidence for hsp growth and back half hi vj this is kevin i can i can take this one from a modeling perspective and reiterate some of the comments uh i shared with robbie so i guess overall q1 came in line with the expectations um again the one 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, HST order growth in the quarter?

I'm sorry, can you repeat your question?

HSNT order trends in the quarter.

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

Order growth for HST.

The timing we saw in the quarter. Got it. Thank you.

Yeah, so, you know, and Vijay, I walked 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 that 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. So overall, again, reiterating, we expect this business to grow low single digits and to be back half weighted.

Matt Nixick of Barclays is on the line with the question. Please state your question.

Hey, good morning. Thanks for taking the questions and the color, and congrats on a great start to the year. Yeah, I wanted to follow up on just a couple things, one on the sort of general macro you know, uh, uh, factors that are, that are causing some concerns, I guess. And in the past had been a challenge for, for Baxter. I think the expectation was that was going to be tougher. Uh, David talked a little bit about oil, um, you know, components and chips and supply chains. Um, you know, one of the companies in this space reported some, some issues around chips that had been a problem. You know, how are you mitigating those? And so how far out into the future do you feel like you are kind of set, you know, through the end of the year or, you know, for the next couple of quarters? And I had one follow-up.

Yeah, good morning. Look, and I'll walk from specifically, Jeff, so that's overall, like, So from a memory chip standpoint, at this stage, we've not experienced material shortages or supply disruptions. And now that said, we're taking a very proactive approach to managing risk. And many areas that we're doing through discipline forecasting, through supplier engagement, dual sourcing efforts, and certainly something that we continue to look at as as i've stated earlier baxter's not immune we've outlined this risk early on we are taking counter measures around how to minimize this and it's something we are going to continue to stay close to and and something we're going to continue to monitor um but but to date we have not experienced a material shortage okay um and then just uh follow up on some of the some of the growthier areas um

you know, as we all know, and, uh, as you know, um, sort of the search for growth drivers and, and innovation and, and, and shiny objects, if you will, has been, you know, one of the quests of back there for some time and, and, um, listening to you last, you know, six months or so. And on this, on this call, talk about some of the getting after some of the growth, uh, engines that you have within the portfolio, uh, in surgery or, you know, 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 could talk a little bit about that, you know, in the near and intermediate term, that would be great. Thanks.

Absolutely. And I'm going to start in an area, and I will answer the question, but I want to be very clear. We will be known as very disciplined capital allocators. And I say that to start because obviously I've 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 baseheads, not walk-off grand slams. And why do I say baseheads? Because we need to have that constant drive to always be in front of our customers, listening constantly. turning that into actionable insights and driving products that overcome the obstacles that our customers face. 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'm very clear on that it's early days it's early stages we've started to see some 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 early successes. We have some early wins. And I outlined a few of those with Connect360 as well as Dynamo. As well as, oh, by the way, we've launched a few more products in the quarter. That while there's certainly, you know, a niche area 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 a question. Please state your question. Matt Taylor of Jefferies is on the line with a question. Please state your question. Matt Taylor of Jefferies is on the line with a question. Please state your question. Matt Taylor of Jefferies is on the line with a question.

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

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, you know, 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.

Gotcha. 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 any framing of the exposure there next year you know inventory roll through the hedges roll off etc so so i'll just kind of reiterate what i what i stated a little earlier and then then we're going to walk through the other aspect what i what i stated earlier was if oil stays at its current level

we have been able to mitigate and we would not see a real challenge on 2026. As far as 2027 goes, 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 Wunsch with Citi is on the line with a question. Please state your question.

Good morning, and thank you for taking the questions. I'll just put the two up front. How do I think about the recovery in injectables and anesthesia? It sounds like that also has a back half improvement. And could you please comment on the CFO search? Thank you so much.

Yeah, so let me walk through this aspect, and I'll walk through pharma specifically and get into a couple areas on it. First, we have taken pharma, we've outlined this, and we've combined this with our ITT business. A lot of synergies across that business, and simply put, what we do really, really well is take high-value solutions that are patient impact and 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 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 took GPS approach. They outlined where we had the challenge. They took short term and drove 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 that trend throughout the quarter. Additionally, We also have a challenge with a contract manufacturer. And I'll tell you, having being 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, 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 aligned around our ability to bring strong capabilities to the markets. And compounding has been a piece of that as well around high value, 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 Anita being in place and the broader team continuing to execute and align her 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.

Thank you so much.

Jason Bedford of Raymond James is on the line with the question. Please state your question.

Good morning, and congrats on the progress here. Just a quick one 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, you know, 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've 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 ship and hold installation remains in place throughout the year.

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

Thank you, operator, and thank you for your questions today. As we've 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 a 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 your 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.