Baxter International Inc. (BAX) Earnings Call Transcript & Summary

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.