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

Good morning, ladies and gentlemen, and welcome to Baxter International's Third 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 third 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 John Rogers, Executive Vice President and Chief Financial Officer. 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 fourth quarter. The anticipated impact of various regulatory, operational and quality matters, including ones related to our infusion pump platform and ongoing supply 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 statements slide at the beginning of our investor presentation and our SEC filings for more detail. In addition, please note, on the 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 to our press release and our earnings presentation. On the call, we will reference organic growth, which excludes the impact of foreign exchange, MSA revenues from Vantive and 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, John 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. Before discussing the quarter, I want to welcome John Rogers to Baxter as our new Chief Financial Officer. John joined us on October 1 and has a strong track record of leading multiple complex organizations through transformation and performance improvement. His deep financial and operational experience aligns well with our strategic priorities, and I look forward to partnering with him as we continue to advance our turnaround. Now I will turn to the quarter. Our third quarter performance provides further evidence that our turnaround is gaining traction. We continue to advance our strategic priorities and delivered results ahead of our expectations. As a result, we have greater confidence in the full year and are raising our outlook for both organic sales growth and adjusted earnings per share. As I said last quarter, I am encouraged by the steady progress we are making. We have a lot of work ahead of us to rise the full potential of Baxter. We are focused on executing in the fourth quarter and finishing the year strong, while continuing to improve our CAD ratio and deliver more consistent performance. All of these efforts support our objective to create long-term shareholder value. With that, let me turn to a few highlights from the quarter. Third quarter global sales totaled approximately $3 billion, an increase of 5% on both a reported and organic basis. We saw broad-based growth, with every division contributing and both segments growing across the U.S. and international markets. Advanced surgery, drug compounding and infusion systems were the largest contributors in the quarter. Adjusted earnings were $0.58 per diluted share. While this exceeded our expectations, it represents an expected year-over-year decline due to the discrete tax benefits recognized in the prior year. End market demand remained generally steady during the quarter, with continued strength in advanced surgery and a healthy order book in Care and Connectivity Solutions, or CCS. We continue to closely monitor the external environment, including macroeconomic uncertainty. We are raising our full year outlook for organic sales growth to a range of 3% to 4% and from 2% to 3%. We are also raising the bottom end of our outlook for adjusted earnings per diluted share to $2.05 to $2.15 compared with our previous range of $1.95 to $2.15. Throughout the year, we have communicated a consistent framework for 2026, known mechanical headwinds and more difficult comparisons in the first half, followed by improved performance in the second half. Our third quarter results are a meaningful proof point that performance is progressing in line with that framework. Let me now turn to the progress we are making against our 3 strategic priorities: Stabilizing the business, strengthening the balance sheet and embedding continuous improvement across Baxter. Our first priority, stabilizing the business. Across the portfolio, we are seeing more consistent execution and further indicators of improved business performance. For example, in our CCS business, an on-time shipment metric improved 8% year-over-year. Additionally, our Advanced Surgery business improved the quality measure by nearly 20% year-over-year. We also saw improvement related to the supply challenges with a contract manufacturer within injectables and expect a more limited impact going forward. We are encouraged by this progress while recognizing there is more work to do to drive greater consistency across our portfolio and manufacturing operations. To that end, we have made the decision to discontinue production of cephalosporin products, which are currently manufactured at our Round Lake, Illinois specialty injectable facility. Importantly, this action is not expected to create a market shortage for these products. And by repositioning the facility exclusively for non-ceph production, we will simplify and streamline our operations while supporting supply continuity of the non-ceph portfolio. An additional benefit of this action is that it helps address some of the complexities you've referenced in the recent FDA warning letter we received related to an inspection conducted at the Round Lake facility earlier this year. We have taken significant steps to strengthen quality systems and operations at the site and across our network, including implementing corrective and preventative actions and other enhancements designed to improve quality and operational performance. Product quality, patient safety and supply reliability are top priorities and we are committed to addressing the observations and working closely with the FDA throughout the process. Our second strategic priority is strengthening the balance sheet, and we have made clear progress in the third quarter. Free cash flow was strong at $448 million in the quarter, bringing our year-to-date free cash flow to over $700 million. We also completed a successful tender offer in September, another meaningful step towards achieving our near-term net leverage objective. We remain confident in our ability to achieve a net leverage ratio of approximately 3x by year-end, sustaining strong cash generation and further strengthening the balance sheet remain near-term priorities. Over time, a stronger balance sheet will increase flexibility, including the opportunity for additional internal investment, strategic tuck-in acquisitions and share repurchases while maintaining a disciplined approach to creating shareholder value. As a reminder, we would assess any potential acquisition using a disciplined framework focused on strategic fit, market assessment, our ability to operate and integrate the asset through Baxter GPS and expected financial returns. Our cultivation process is ongoing, and our funnel remains strong for future potential additions. Our third strategic priority, embedding continuous improvement across Baxter. Baxter GPS is becoming increasingly integrated into how we operate, strengthening productivity, execution, discipline and accountability. Year-to-date, we have completed more than 700 continuous improvement initiatives across Baxter. These events targeted all value creators. We have more than 200 currently in flight and approximately 350 additional initiatives planned. Let me give you a few recent examples of where our teams are applying Baxter GPS to improve both commercial execution and performance. In Front Line Care, teams improved blood pressure cuff manufacturing cycle times by more than 10%, expanding production capacity without additional capital investment. In our Advanced Surgery business, we have held events focused on strengthening inventory management and improving cash conversion. Across our global services teams, Baxter GPS is driving measurable improvements in execution and customer service. Through cross-functional collaboration, team streamlined key fulfillment processes, reducing alternative shipment back orders in certain areas of the business by more than 50%. This results in improved customer service and better inventory management. As I've shared before, no single initiative will define our future. The value of Baxter GPS will come from the accumulation of repeatable improvements that translate into better operating and financial performance over time. Innovation is another important element of our strategy and is essential to sustaining portfolio growth and strengthening Baxter's competitive position. We are seeing continued adoption and customer interest across several recently launched products. For example, Connex 360 continues to gain traction with customers and contributed to Frontline Care's growth in the quarter. Additionally, the Dynamo Series Smart structure was recently recognized for its user-centric design by the human factors and ergonomics society. These offerings enhance our portfolio and expand our ability to deliver differentiated solutions to customers. In summary, our third quarter results provide further evidence that Baxter is moving in the right direction. We exceeded our expectations for sales, adjusted earnings and free cash flow and increase our full year outlook. At the same time, we advanced each of our 3 strategic priorities. As we look ahead, our focus is on building greater consistency in how Baxter operates and performs. That means addressing where we need to further improve and building on what is already working. Disciplined execution will be key to driving stronger performance and sustainable value for shareholders. I will now turn the call over to John to provide more detail on our third quarter results, including segment level performance and our updated 2026 guidance. John, over to you.

Thanks, Andrew, and good morning, everyone. I'm genuinely excited to join Baxter in this important stage in the company's turnaround. Over the past few weeks, I've been listening and learning through conversations with Andrew, the leadership team and colleagues across the organization. And I've been particularly impressed by Baxter's essential portfolio, its leading positions across the continuum of care and in particular, the dedication of our employees. I've also seen Baxter GPS in action and have been impressed by how deeply it is already embedded in the organization. At the same time, I do see meaningful opportunities to sharpen execution, accelerate growth, strengthen cash flow generation and consequently create long-term shareholder value. And I'm very much looking forward to working alongside Andrew and the leadership team. With that, I'll walk through the details of Baxter's third quarter financial performance as well as commentary on our updated outlook for the remainder of 2026. Third 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 $0.58 per diluted share, a decrease of 16%. This decline reflects an expected higher effective tax rate as the prior year quarter benefited from discrete tax items. Now I'll walk you through our results by reportable segments. Commentary regarding sales growth will be on an organic basis. Sales in our Medical Products & Therapy segment, or MPT, were $2.1 billion and increased 6% in the quarter. Within MPT, sales of our Infusion Therapies and Platforms division totaled $1.8 billion and increased 4%. Growth was driven by infusion systems, drug compounding and IV solutions. This growth was partially offset by lower sales in injectables. Growth in Infusion Systems was driven by Spectrum IQ and also included contributions from our portfolio of Digital Solutions and our administration set portfolio. Demand for our drug compounding services remained strong in the quarter and grew 9%, reflecting the value proposition we provide to customers in this space. We continue to see strong demand for these services in the international markets we serve as health systems look for scaled, quality-focused outsourced solutions. Performance in the quarter also reflects growth in IV Solutions, now off the new lower baseline level of demand following clinical practice changes in the market. Sales of Injectables declined 3%, primarily reflecting price deflation and the impact of manufacturing challenges at our Round Lake facility. As Andrew noted, we have taken significant steps to strengthen quality systems and operations. As part of these efforts, we are discontinuing production of cephalosporin products at the end of October, but we'll continue to support customers under contract into 2027. These products are expected to contribute approximately $50 million in sales and $30 million in operating income in 2026. Importantly, this action will simplify our operations and support improved performance of the facility. During the quarter, we recorded $39 million in restructuring costs related to these actions. As a reminder, these restructuring costs are excluded from our non-GAAP earnings. Consistent with the first half of the year, we also saw an impact from supply challenges related to a contract manufacturer. Importantly, as Andrew referenced, we saw improvement within the quarter and expect a more limited impact going forward. Sales in Advanced Surgery totaled $342 million and grew 12%. Results reflect 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 20.9% for the quarter, increasing 10 basis points compared to the prior year period. Results reflect increased sales volumes and benefits from previously implemented enterprise cost actions, partially offset by lower contribution from pricing and the impact of mix, including strong growth in drug compounding coupled with lower sales of injectable. In our Healthcare Systems & Technologies segment, or HST, sales totaled $806 million and increased 4% in the quarter. Within HST, sales of our Care and Connectivity Solutions, or CCS division, were $498 million and grew 5%. Within CCS, performance was driven by contribution from both Global Surgical Solutions and Patient Support Systems, including continued execution against the U.S. backlog and strength across international markets. To date, we have not observed any change in U.S. hospital capital spending and our order book continues to reflect solid demand. Nonetheless, we continue to closely monitor the environment, including the potential impact of inflation and interest rate pressures on hospital capital investment decisions. Sales of our Front Line Care, or FLC division, were $308 million and grew 3%. Performance in the quarter reflects continued strength in connected monitoring, driven primarily by strong demand for Connex 360. Partially offsetting this growth was the impact of planned global product exits previously discussed. HST adjusted operating margin totaled 17.2% for the quarter, increasing 140 basis points. Results reflect the benefits from previously implemented cost actions and increased sales volume, partially offset by the impact of mix. Finally, other sales, which solely represent MSA revenue from Vantive totaled $68 million. As a reminder, these sales are included in our reported growth but are not reflected in our organic growth. Now moving through the rest of the third quarter P&L. Adjusted gross margins were 38.3%, a decrease of 110 basis points, driven by mix of sales and a lower year-over-year contribution from pricing. Adjusted SG&A totaled $637 million or 21.4% of sales, an improvement of 80 basis points. This reflects the benefits from our implemented cost actions. Adjusted R&D spending totaled $118 million or 4% of sales. Other operating income, which includes TSA income and other Vantive-related reimbursements totaled $48 million in the quarter, in line with the prior year, albeit favorable to our expectations. The favorability was driven by Vantive related expenses and therefore did not contribute to earnings. As we look ahead to a post-TSA environment, we remain focused on reducing the impact of stranded costs and improving our cost structure. Altogether, these factors resulted in an adjusted operating margin of 14.5%, a decrease of 40 basis points. The year-over-year change reflects the impact of mix, including strong growth in drug compounding and Global Surgical Solutions and lower sales in Injectables. Results also reflect a lower contribution for pricing, partially offset by increased sales volumes. Net interest and other expenses totaled $61 million in the quarter. The adjusted tax rate for the quarter was 18.3%, driven primarily by mix of earnings across jurisdictions. As a reminder, the prior year period benefited from the release of reserves withholding taxes and other discrete tax benefits. In total, adjusted earnings for the quarter were $0.58 per diluted share. Before turning to our 2026 outlook, I want to comment on cash flow and liquidity. Third quarter free cash flow totaled $448 million, improving sequentially from the second quarter and bringing our year-to-date total to $705 million. This reflects improved operational performance and disciplined execution across targeted areas of working capital. Results in the quarter also benefited from the timing of certain cash receipts, including the IEEPA tariff refund recognized in the prior quarter and proceeds from a legal settlement. We continue to make progress in improving cash flow generation and strengthening our balance sheet. During the quarter, we completed a $600 million cash tender offer, retiring $864 million of debt and further advancing our deleveraging efforts. In connection with the transaction, we recognized a pretax gain of approximately $253 million related to the earliest extinguishment of debt. As a reminder, this item is excluded from our non-GAAP earnings. Reducing leverage remains our top near-term capital allocation priority and the actions we have taken year-to-date, combining with our operating performance and cash flow generation, give us increased confidence in achieving our target of 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 4% to 5% on a reported basis. This reflects current foreign exchange rates, which is 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 FX and MSA revenues, we now expect organic sales growth of 3% to 4% for 2026. This reflects our strong year-to-date performance and our latest expectations as we close out the year. As it relates to the segments, in MPT, we now expect full year organic sales to grow low to mid-single digits. This reflects stronger year-to-date performance across our businesses, driven by drug compounding and advanced surgery. In HST, we continue to expect full year organic sales to grow low single digits, supported by anticipated contributions from both CCS and FLC divisions. Turning to our outlook for other P&L line items and key assumptions. TSA income and other Vantive-related reimbursements are now expected to range between $165 million to $175 million. Higher TSA income and other Vantive-related reimbursements are expected to be broadly offset by higher Vantive-related expenses and therefore, are not expected to contribute to earnings. We continue to expect full year adjusted operating margin of 13% to 14%. We now expect our nonoperating expenses, which include net interest and other expense to total between $245 million to $255 million, reflecting lower interest expense following debt reduction associated with our recent cash tender offer. We continue to anticipate our full year tax rate to range between 18.5% and 19.5%. We now expect our diluted share count to average approximately 519 million shares for the year. Given the strong performance year-to-date, we are raising the low end and narrowing our full year adjusted earnings from $1.95 to $2.15 per diluted share to $2.05 to $2.15 per diluted share. In closing, I'm encouraged by both our third quarter results as well as the continued progress we are seeing across the organization, including the growing momentum behind Baxter GPS. As we begin to look forward to 2027, we are encouraged by our progress year-to-date and the actions we have taken to strengthen the business. We will provide a comprehensive outlook for 2027, including detailed guidance on our fourth quarter earnings call in February. With that, we can now open up the call for Q&A.

[Operator Instructions] Your first question from the line of Travis Steed with Bank of America.

I wanted to ask about the warning letter and the product discontinuation. I heard $50 million in revenue and $30 million in op income in '26. Maybe just help us understand more what's going on there, why the decision to discontinue the product. And does this make it harder to grow EPS in '27 versus '26 when you take into account all the puts and takes on the model. I think it's at a 2% headwind via our math on '27 on EPS.

Yes. Let me walk through this and kind of outline the decision here. Look, this reflects our ongoing evaluation of our portfolio and manufacturing operations. And by doing this process, by walking through this, we're repositioning our Round Lake eclusively for a non-cep production. And this is will simplify operations and really support greater supply resiliency. And as we look at the remaining portfolio, it enables us to continue to drive that portfolio for the future. Additional benefit is as we look at this, by reducing this complexity, it does help address some of the issues referenced in the warning letter. So while we do see certainly some areas that the team is looking to offset with the reduction of the ceph production line. It is an area that is allowing us and enabling us to streamline our approach our process and will enable us to really reduce complexity at this specific facility.

Okay. And I don't know if there was anything on '27, but I also wanted to ask about M&A because it seems like they're talking about M&A a little bit. Just curious if you could kind of outline the areas you're interested in the size of the deals you're willing to do and how you think about the ability for deals to be dilutive versus accretive to earnings?

So let me walk just a little bit. First, look, we're pleased with our free cash flow performance, and that really puts us in the ability to start this conversation. And as a reminder, we reiterated our approach to be approximately 3x by year-end, which was our target and alignment, which enables us to move to that next stage. When we look and I outlined this in my prepared remarks. But as a reminder, when we look at the criteria and our disciplined approach for M&A, it's going to be under 4 areas. First, there's strategic rationales. So oftentimes, we're looking for technology, we're looking for geographic expansion. We're looking for areas that we can penetrate and bring the full breadth of Baxter. Number two, the specific market areas to enable our ability to drive expansion. And we're going to look at areas that we view over a long period of time are going to continue to align with the future of Baxter. Number three, how we're going to integrate and operate the asset. So what do I mean by that? We look at management teams. We look at the ability to deploy Baxter leaders in. We look at GPS enablement, and how we can support the business to outperform, to drive expansion in its market. And then lastly -- and this gets to -- really, the heart of the question is around financial return. And of course, we're going to look at things like ROIC. We're going to look at how earnings are going to perform over the period of time and margin profile and other things also like recurring revenue. And so there are many areas we look at for potential additions. I did also reference around how we view tuck-ins for this next phase. And that means that we like our position in many areas and tuck-ins could be a natural progression. Additionally, our funnels are growing. We have a mantra ABC, always be cultivating. And our teams are cultivating key targets. And just to wrap this a little bit in a bow, we've also looked at our business and said, there's 3 major buckets. There's the invest and grow in areas we want to continue to support on growth, both organically and inorganically. For example, we like the cardiac monitoring space. We like the advanced surgery space. We like key areas across our portfolio that are going to enable us to really drive and support that longer-term growth profile. And then there's a sustain and then there's also some areas we want to fix and improve. And so this is I would say, an evolution of our approach and process. And it's back to our safe ratio. We need to get to the approximately 3x times. And once we do that, we can really start to look at the next phase in this journey.

Your next question is from the line of Larry Biegelsen of Wells Fargo.

Congrats on another nice quarter here, Andrew. So John, you officially joined Baxter just a few weeks ago. Where do you see the biggest opportunities at Baxter? And it sounds like you played a big role in the initiatives to improve margins, cash flow, et cetera at your prior company. You run a similar playbook here at Baxter? And lastly, just talk about your approach to guidance, and I'll leave it at that.

Larry. Look, in terms of what I'm going to be focused on in the coming weeks and months, I think first and foremost, coming up to speed with the business, really understanding the business. Obviously, as you said, I have a MedTech background, but this is very much a new product set for me. So I want to spend a lot of time with the business, with the management teams out there in the field, really getting up to speed and understanding what makes this business tick. I think in terms of the areas of focus or you've touched upon some of those already. One area, for example, is looking at our margin mix and some of the actions that we need to take and we are taking to drive improvement in that area. Also, I think, building on the great progress to date in driving both operational and functional efficiencies and how we continue to build a pipeline medium to long term and very sustainable efficiencies to help offset some of the inflationary pressures that we are seeing. I think thirdly, thinking about how we go about sharpening our capital allocation policy. As the Q3 results demonstrate and Andrew just talked about, we're really starting now to generate free cash flow and the balance sheet is starting to degear very nicely. Andrew has already mentioned, of course, the opportunity for M&A, and that, of course, sits alongside other opportunities to reinvest back into our business to drive our organic growth, whether that be R&D or investment in our manufacturing sites as well, of course, as the possibility for opportunistic share buybacks. So one thing that Andrew and I will be working on over the coming weeks and months is how we hone our capital allocation policy. And of course, there will be more to come in that regard. So those would be the sort of the key areas I suspect our focus on over the coming weeks and months. In terms of the approach to guidance, the question you asked about, as we said on the call, we're not going to set out our guidance for 2027 today. We'll leave that to the usual timing of our Q4 earnings in February. And that said, of course, there are a number of moving parts or dynamics I'm sure you should consider. First, of course, is inflationary pressures. And we do see those stepping up in '27 to a degree due to the cap and roll that we've talked about previously. But we've actually done a great job in 2026 in offsetting those. And we have line of sight to further saving opportunities in '27. So we'll be looking to mitigate the impact of those inflationary pressures. We then have tariffs, of course. We won't get the same refund benefit in '27 that we saw in '26, and we're still, of course, awaiting clarity on Section 232. We should get that sometime in the fourth quarter. So we'll have to see the net impacts of tariffs going into 2027. We also expect the TSA services related to Vantive to conclude by the end of January 2027. And the consequent headwind that, that delivers will depend on how quickly we can take out the stranded costs over the course of the year. Of course, some costs will be very much marginal costs, and they'll come out immediately. There'll be other costs, which are more fixed in nature, and they will take a little bit longer to come out. So we'll have to work through that detail. We're also going to expect an impact from planned product exits, particularly in our FLC portfolio that we've mentioned previously, and we talked on the call today about the ceph products and we said that contributed $50 million of top line and $30 million of operating income in 2026. To the earlier question, I wouldn't necessarily flow all of that through. There will be some mitigating factors with how we rolled through inventory and some alternative products that we can offset there. But that will be overall a net headwind. And we've also called out the sales mix, and I talked about. That's an area that we really want to focus on as we continue to evaluate the underlying trajectory of the various businesses like drug compounding injectables. So look, I'm 3 weeks into the role. Obviously, I understand why there's going to be a lot of focus on 2027 right now, but I'm going to need a little bit of time just to thoroughly evaluate all these different moving dynamics. And we will, of course, come back to this in much more detail when we set out our detailed guidance at our Q4 earnings call in February.

Your next question from the line of Vijay Kumar of Evercore ISI.

John, congrats and welcome. Andrew, maybe my first one for you on is the implied guidance here for around mid-single is similar to 3Q. If that's the case, and you had 3 straight quarters of mid-single top line performance. How do you think about the sustainability up at 5%, what gets better, what gets worse for fiscal '27?

Vijay, this is Kevin. So I think it's important context to think about. All year, we've been talking about the step-up in margins in the second half of the year. relative to the first. And we've had a clear framework cycling through some of the headwinds in the first half of the year, like the higher cost inventory. That's behind us. We're seeing the benefits from the cost actions taken earlier in the year. We saw a partial impact in Q2. We saw a full quarter's impact in Q3. And then higher sales and getting some operating leverage from that. And you can see that in our Q3 results. And so hopefully, a nice proof point to that kind of framework we've been talking about all year. As we think about Q4, our updated guidance implies a similar level of growth in Q4. So to your point, it's grown around 5% the last couple of quarters. We are expecting around that in Q4. And when you think year-over-year, similar type drivers that we called out in Q3, continued growth in our Infusion Systems portfolio, IV Solutions growing off that new lower demand baseline, HST growing, Advanced Surgery and Drug Compounding, perhaps not at the same magnitude, they have been growing really well here lately, but expect continued growth in those businesses. So I'd say a very consistent story as we look ahead to Q4 on a top line perspective. And I would say it's the same story on operating margin as well. The implied Q4 operating margin contemplates is similar magnitude is what we saw in Q3, and don't expect any big call out sequentially Q3 to Q4, similar strength in the top line, similar mix, continued benefits from the cost actions. That should continue in Q4. And so I think the takeaway is, Q4 should be another quarter that supports this framework that we laid out at the beginning of the year as far as improved performance. I believe the second part of your question was, how do we kind of think about that going forward? And as John referenced, we're not giving 2027 guidance here today. We'll do that in February. But in general, I would just reiterate, we're predominantly in low single-digit type markets. And in 2026, we're performing a bit higher than that. It clearly benefiting from some favorable comparisons. IV solutions, this new baseline, we're annualizing the impact of the [indiscernible] and installation hold. Again, Advanced Surgery and Drug Compounding, their comps are going to get increasingly difficult going forward. We've referenced some product exits are going to have some impact on the top line. But we will come back in February with a comprehensive view on what we expect 2027 to be. But right now, I'd say we're focused on the continued execution in Q4.

Understood. That's helpful, Kevin. And John, one quick one for you. Thanks for laying out all the moving pieces on the margins. By my math between TSA, inflation tariffs and ceph discontinuation, almost feels like it's a couple of hundred basis points margin headwinds in '27. I'm just curious on -- are we thinking about margin headwinds for '27 the right way the magnitude of impact?

Yes. Look, I set out in my response previously that there are clearly some margin headwinds. There are also some margin tailwinds and we've got good visibility of cost saving opportunities in the business. I've been very impressed actually with the level of detail and the rigor and the discipline that the organization is already deploying in driving efficiencies through the business. So like in any situation, there are puts and takes, and that is the case for '27. We are not going to get drawn at the moment on what the net impact of those is going to be. We'll set that out in a little bit more detail in February. But as I said, look, there are clearly puts and takes. I set out some of the headwinds, but equally, there are some tailwinds and some very good progress already made and a good pipeline developing of saving opportunities going into 2027.

Your next question from the line of Patrick Wood of UBS.

Beautiful. Welcome, John. Two quick and dirty ones upfront. The generic injectables business, obviously, there's a lot going on there in general. One of your peers also as a warning letter as some of us remember what happened in the 20s for drug shortages. And given it's such a high-margin business, general outlook there for you guys, obviously, one of your peers is going to be capacity constrained? Is there a tailwind from that? Or are you restricted? Anything around there would be amazing for question one. And then just quickly question 2. Sorry if I missed it. You mentioned the contract manufacturer effect. Any rough sizing of that and whether that situation has been resolved going forward? So if I missed that.

Look, I'll walk through a couple of items first. But going to the non-ceph production, it really does allow us and enables us to simplify our operations. And I mentioned a little bit earlier, but it supports greater supply resiliency. And therefore, by making this decision, and these are never easy decisions. It aligns well with really the future of that site, that organization. And we do view it gives us capability by reducing that complexity to continue to drive this product for our customer base in the non-ceph space. On the second piece of the question around the contract manufacturer, we've made good progress, and we're staying very close with this manufacturer to ensure we are front and center on this production process and capability. And so while we're not giving an overall impact, what I can say is that we've made progress, and we're going to continue to keep this front and center to ensure this is something that we can work to mitigate over time.

Your next question from the line of Joanne Wuensch of Citi.

Can we pause on the Advanced Surgery -- can you hear me okay?