All right. Welcome back. Good afternoon, everyone. I am Larry Biegelsen, the Medical Device Analyst at Wells Fargo, and it's my pleasure to host this fireside chat with the management team of Baxter. With us, we have Andrew Hider, President and CEO, and Kevin Moran, Vice President of Investor Relations. Andrew and Kevin, thanks so much for being here.
Appreciate having us.
Andrew, let's start with a big picture question. You've been at Baxter for almost a year now, and the stock has done well. You wanted to, I apologize.
All good.
Kevin.
All good.
Go ahead.
I was just going to do the obligatory forward-looking statement. Just a reminder-
So excited
Just a reminder, we will be making forward-looking statements here today. For more information, please see our IR website or our SEC filings. Okay, out of your hair now.
Sorry about that. Andrew, talk about the key changes you've made, what's gone well, and where do you still need to make progress?
Yeah. Thank you. Actually, it's been a little over a year, and boy, the time has flown. If I do a step back, one of the areas and why I was excited about the opportunity, the job, and Baxter specifically, is really where the business came from and where we can go. I'll tell you, I was able to do a bit of diligence before I said yes to understand our customers' perspective and the position Baxter has with our customers, and that's very positive.
The time has flown. When we do a look back on the last year, we've decentralized the organization. So we've gone to independent P&Ls that are focused on how to drive impact for customers, aligned around innovation, around on-time delivery, around quality, and around operational performance.
We've also launched GPS, which is our growth and performance system, really our continuous improvement program, that changing of culture to drive looking to make tomorrow better than today. Everybody gets fussed with it. I always say, "If you can measure it, you can manage it. If you can manage it, you can improve it." So we target areas that are going to drive impact and drive improvement on the business.
So we've started our journey, and I've outlined that first stage of our journey around stabilizing the business, around debt repayment, because we know we've had a challenge on our leverage, and that target and laser-focused approach to debt repayment comes from free cash flow, comes from buying down the bonds, all the above, and also our continuous improvement journey. So we've made progress. I'm pleased with where we're at. We have a lot more work to do, and we're excited about where we're going to take this, but it's about execution.
That's helpful. Congratulations on the hiring of a new CFO a few weeks ago, John Rogers, coming from Smith+Nephew . I think he starts in October. I think his relevant experience is obvious, coming from another med tech company. But love to hear from you why he was the right person. Then, when do you think you'll be in a position to host an Investor Day?
Yeah. So look, I can't be more excited to have John be a part of this next phase for Baxter. I'll tell you, having spent time with him, he is the right person for where we're taking this organization. Just a couple of minor items on this. When we launched this search, it was a desirable position, and we had a lot of people in it.
The reason why we like John is he has a lot of experience in turnaround of big organizations. So he understands the dynamics of how to get the business aligned with a critical few and drive impact. Also, the med tech piece was also important portion for us around understanding the dynamics of our market, our space, so we can weave that into our ability to out-execute and outperform.
John checks a lot of those boxes and really aligns us where financial horsepower is going to be a critical element as we step into the capital allocation phase of our journey. So excited to have him on board. October 1st is coming quick, and we can't be more excited to have John be part of the future.
How far away is the first Investor Day in many years?
While I won't comment on the timing, and we will have one at some point, it's more around execution. One of the reasons why we pulled it for earlier this year was because we wanted to build that credibility around high say-do ratio, around aligning the business for execution in what we set out to accomplish. There will be a point in time when we get there, we'll certainly notify and walk through the path forward. But right now, it's about execution and delivering results for our shareholders.
Okay. Makes sense. Let's talk about 2026. You delivered a nice Q2, 5% operational growth, and you raised the guidance from flattish to 2%-3%. How are you thinking about the second half of the year relative to the first?
I'll start with this, and I want to put a caveat. No single quarter is going to define us, and I would say it was a decent quarter, and we're pleased with the progress we've made. A lot of that stems around the tough decisions we made to get to where we are. So we're pleased with the progress, but we have a lot of work to do for the second half of the year. Our teams, while we will certainly take the moment to celebrate, we quickly go to what do we need to do to finish the year strong and continue the momentum that we've started.
From a math standpoint, the first half, we grew about 2%, and based on the updated guidance, we would expect second half to be at or above that. A couple of things I would highlight there that support it. One would be visibility within the HST segment, so specifically the CCS business and the order book. Recall there was really strong orders last year, and you think about that cycle to fulfillment. We have pretty good visibility there.
Number two, I would say we expect the pump portfolio or infusion systems to grow in the second half of the year-over-year. That reflects the strong demand for the Spectrum pump. I would say overall, the framework as we think about the full year has been consistent all year with stronger performance in the back half.
That's helpful. The margin guidance implies a pretty big step-up in the second half when you adjust for the tariff benefit in the second quarter. Please help us bridge the first half to second half margin ramp and confidence in that.
Sure. This is another area where we've been very consistent all year. Some first half headwinds, some mechanical impacts, and then better performance, specifically in margin in the second half of the year. There's really three main components. Number one is higher volumes, and this is consistent with typical seasonality of this business, and importantly, getting the operational leverage from those higher volumes to impact margin.
Number two would be benefits from some cost actions that were taken earlier in the year. Recall we right-sized our manufacturing and support footprint around the IV solutions business. You've already started to see some of those benefits flow through. If you look at SG&A as a percent of sales in Q2, you already saw that improve sequentially from Q1 to Q2, and we would expect that to continue.
Finally, this is probably going to be the most visible piece between Q2 and Q3 sequentially, cycling through higher cost inventory. This inventory was produced at the end of last year before we right-sized the IV solutions support footprint, and so think about a four to five-month cap and roll. We have now sold through that inventory, and so it was at least a $50 million impact in Q2. You should see that improvement Q2 to Q3. The easiest way to think about it is normalize Q2 for the tariff refund that we saw, and it's the consistent same three drivers we've talked about all year for margin expansion.
That's helpful. Andrew, on the Q2 call, you said the healthcare environment in the U.S. was stable, but you're monitoring it closely. The question is, have you seen any changes since the Q2 call from a procedure and capital equipment standpoint?
I referenced it on the call that we haven't seen a change in buying behavior, and I'll just say a couple items. As a CEO, part of my standard work is to visit customers on a frequent basis, and we have very candid conversations around not only what Baxter does well, but also where we can improve and what they're faced with in their current market dynamics.
Net-net, we're not seeing a big change in their buying behavior, and we've seen strength pretty much across our business. We announced it on Q2, and we look at this as an area that we're going to stay close to, but we haven't seen a massive change in their buying behavior.
That's helpful. Let's transition to the business. Within MPT, you have some businesses doing well, like compounding and Advanced Surgery, and some doing less well, like Infusion Systems and I njectables. I guess, talk about the sustainability of compounding and Advanced Surgery and how long it takes to turn around Infusion Systems and Injectables. I think you already, Kevin, talked about Infusion Systems growing.
Mm-hmm. Yeah, I'll just walk through a couple items. First, look, we're pleased with the performance on Advanced Surgery, and this is a product set that I've actually seen firsthand how this impacts a patient when they're in a time of need. It's a great product. Customers value it. They utilize its capabilities. So we're pleased with the performance and we want to continue to enable our customers to utilize this when needed.
Overall, look, we like the growth profile to date. We see continued opportunity. We're going to continue to drive this area. When we look at our compounding business, a couple things about this business. First, it's been a strong start to the year. That's largely driven by ANZ in New Zealand, as well as Western Europe. We're pleased with that progress. This business, top-line performance is strong, free cash flow is strong.
Certainly, we need to continue to drive on margin expansion. But overall, we would look at this as a higher growth than base business in Baxter, but it is one that I would say it has been a strong growth year to date. As far as the flip side, and we have talked a little bit about IV solutions, so I will not get into that specifically, but on the Injectables and where we are with our anesthesia, we have had some challenges from a supply chain perspective from a contract manufacturer, and we are staying very focused on how to drive that as far as supply capability.
We have largely improved our own internal challenge, so we have gotten that to be a strength. Still driving it, still staying very focused on it, and we have also deployed some of our own employees at the contract manufacturer to help them overcome some of the obstacles.
We see a light at the end of the tunnel, but we are staying very focused on really the metrics that we see on getting the product to market. We have seen some release, but we want to keep this going. We want to keep this as an area that we can drive into.
The light at the end of the tunnel, so maybe 2027 is better?
We would expect this to be 2027 is better.
Any update on Novum IQ and the field corrections you talked about on the Q2 call?
A couple items. First, we like our total pump portfolio, and Kevin talked a little bit about Spectrum. To give you insight, we are continuing to innovate on Spectrum LVP. We launched IQX, which allows our Spectrum portfolio to talk to our Novum syringe. So Spectrum LVP, Novum syringe now talk together, positive for our customers. We have also launched PeerVue in that, which allows our customers to really drive impact on their process.
Both are very good for our situation. As far as Novum LVP, we are seeing nice progress in the testing and results. That said, we need to continue to align around the agencies or the FDA, as well as the Canadian agency, to make sure we align to ensure the product is ready for the relaunch. No update. I would just say we are making steady progress. We are pleased with our progress, but we want to make sure we get everything right on that relaunch.
Okay. IV solutions, I guess the question is, has it turned the corner?
This was one, when I first joined, we had taken the prior hurricane as kind of our test on what is going to happen in this market. Fast-forward, by the end of Q3, early Q4, so probably early Q4, we realized or started to realize quickly that maybe there is a nuance here, so we did a lot of assessment. I will get to the punchline. The new baseline is where we are today, so the new norm is the current market situation. So I would say we have now lapped that, and now it is where we can build from. So it was a good Q2. Remember, the baseline was a little low.
While we certainly are pleased with the progress, it is about how we continue to drive this business moving forward, and we have now lapped, so we would expect this business to be back to what its norm on growth rates would be.
Norm is low single digits?
Low single digits.
And price? There was a time when people were excited about some of these new GPO contracts for Baxter. Are there still opportunities there?
There are, and as we go into any re-signing, we look at that as an area that we would target, and it certainly is something that's on our radar right now.
Just to build on that, price has actually been a headwind in 2026. Recall in 2025, when we had two of the three GPOs go into effect, we saw over 100 basis points of benefit. It has been a headwind in 2026. The next GPO is effective in 2028, and a little premature to talk about potential economics, but still a little ways out.
When you say headwind, you mean negative year-over-year, or less of a benefit than that 100 basis points?
Less of a benefit.
Less of a benefit.
Not negative?
Not negative.
Got it. That is helpful. HST, you are launching several new products. You talked about it earlier at CCS this year. How should we think about the impact to HST growth in the second half and into 2027 from CCS?
I would just say we have been clear all year, we expect our growth to be back half weighted. This is due to the order book. Again, strong orders at the end of last year. It also reflects continued traction from new product launches, both Dynamo and CCS, as well as in the Front Line Care business, the Connect 360 Monitor. I would say no change.
That is helpful. Front Line Care , just one follow-up on Front Line Care . It was soft in the first half of the year. It sounds like you expect that to improve. Is that fair, based on what you said?
Yeah. Front Line Care grew, I think, 2% on a full-year basis last year. It was down in Q1, but it was up 2% again in Q2. We expect the entire HST segment to grow low single digits. I think between CCS and Front Line Care , you should think about them both growing in that same range.
Okay. That's helpful. Andrew, just curious on the portfolio. How are you feeling about the portfolio at Baxter? I'm asking in the context of Front Line Care. It's mostly like the old Welch Allyn business, which is a lot of physician office products. We think of Baxter more as a hospital product company. Why does the Front Line Care business fit in the portfolio? Maybe zoom out on the whole portfolio.
Yeah. I'll walk through a couple items on this. First, if you look at what our customers are faced with today and what they're faced with over the, call it, the months and years to come, they're looking at alternative sites of care. They're looking at different ways to approach the patient to have a high level of care for that patient and understand the data.
I'll tell you, given our breadth right now, Welch Allyn actually positions us very well for whether you're in the doctor's office to alternative sites for surgery to in the hospital, and it allows us that continuity. The second item is, as you look at Baxter, and you do a step back on our broader portfolio, we have patient monitoring. We've got the beds platform, which is a smart bed, allows us to collect data off that bed.
We do nurse call, we do other areas around that aspect with CCS. We do the pump portfolio, which also has data collection. It allows us to help to understand that workflow to drive greater impact. I would say this, we're not there. But we're moving closer and closer to that mark to really collect the insight to have tangible impact for our customers.
I'll just say, as our customers move to a challenged space where, whether it's nursing staff or the ability to support for patient care, we want that flexibility. We want the ability to draw data to drive greater impact, to support patient care over whether it's in a doctor's office setting to an alternative site, to in the hospital and really maximize that capability for our customer set. It allows us to have an even greater impact on that.
I have asked you the question a few times on earnings calls, and now I guess what I am hearing you say is you are happy with the portfolio at Baxter today.
Yeah. I would say, look, we are always going to assess portfolio. If you look at our portfolio today, we have stuff in the invest and grow. One of the exciting products that we have is our ambulatory cardiac monitoring platform with Bardy. That is in a very exciting area, which we also have white space to be able to build out capability, and you are going to see us laser-focused on that.
We like that area. We have Advanced Surgery that also fits in there. We also have the sustain. Sustain is, think of things like the IV solutions. We have a strong position in the market. We have high value with customers. We are a trusted brand. We want to continue to maximize that capability. We also have some fix.
I will tell you, over my tenure, we are going to be looking at our portfolio to make sure it aligns with high value creation. While I would say, look, we are pleased with where we sit today, that is going to change, that is going to evolve, that is going to grow. That is going to also look at things and say, maybe it is not a fit over a long period of time. You are going to see us go through those cycles, and I would say it is more pruning than anything. We have gone through a lot of stages to get to where we are today, and we are going to maximize that performance as we said, to where we are.
One big picture question. You have made a lot of progress. Anything been harder than you expected?
Yeah. When you look at the business, I would say, look, I've been so impressed with Baxter's team alignment to continuous improvement. I would say we launched GPS a month into my tenure. A month into my tenure. I was just in our facility in Pluvigner, and that's Pluvigner, France. I was in our facility in Saalfeld, Germany, last week.
To see the team's excitement about continuous improvement, not at just operational, but how we're turning this into technology, utilizing AI to become stronger, faster, better for patient care, for customer care, and aligning that to impact, to bringing this to life. I've been so impressed with that capability and that strength. I would say some of the things that I've been frustrated, one of them, and I'll be upfront, the leverage.
We had thought when I came in last year that we were going to be under 3x. If you recall, my first earnings call, we took the year down, we took the quarter down, and we took the dividend down to $0.01 to send the signal that we are laser-focused on getting our leverage to under 3x. Because we've said it for years, and we didn't achieve it.
That stabilize is real, that debt repayment is real. Because we want to deploy capital allocation as a strategic enabler. By having a higher debt load, it limits us. We don't want to be limited. Because once we get through that, then you can start to look at where you might invest from an M&A perspective, a tuck-in M&A, where technology fills the white space.
We know if you have to go through a clinical trial, it takes years to get there where we can bring stuff in and have the Baxter position to bring that to market at a faster pace. We've got to have a higher CD ratio, we've got to deliver free cash flow so we can really drive down that, but we're on our journey.
That's helpful. Maybe sticking with capital allocation. Your goal is to get net debt to EBITDA down to 3x by the end of this year. Did you accomplish that with the recent $860 million tender offer last month?
It's a good offer. Actually, our team really did an excellent job in this. We spent $600 million to take down $850 million. I mean, strong return. Really, really proud of the team's results there. That comes from our ability to drive free cash flow. If you look at that, it gets us in a position to be more confident in the ability to be at 3x or less by year-end.
That allows us to start to lean into the capital allocation discussion for next year. We're not slowing down. I'll tell you, having done this many times, it starts with cultivation. The best deals we do are going to be cultivated deals. Cultivation takes time. We're training our presidents, we're enabling our presidents to start to cultivate.
They've now built funnels in their core areas where it aligns with the strategic enablement for profitable growth. They're starting that journey around how to truly look at cultivation as an enabler, how to build your funnel around opportunistic areas where we see a strategic enabler, and knowing it's going to take time. Getting there allows us to start to think about things differently, capital allocation-wise.
What is your philosophy around capital allocation? Some CEOs like to have an algorithm, this percent, return to shareholders, et cetera. Some CEOs prefer to maintain some flexibility. What's your philosophy?
Okay, a couple things. First, if you join my team, you get two books, and one book is called "The Outsiders." The reason you get that is I want you to know how I think about capital allocation. You guys know this, but as a reminder, there's five points that we look at for capital allocation, and we're going to look at all five.
Internal investment is one we're going to continue to support. Greatest return to shareholders. We're going to look at M&A, strategic M&A, as an enabler, and share buybacks when we see the opportunity. I would say we like the flexibility because one of the things when we talk about capital allocation, things will move, but we don't want to be beholden to something.
We will set the parameters, and John and I will be working through this to set the layout and structure. But again, things are dynamic, and you might be cultivating an asset for years, and then all of a sudden it becomes available. You want to be in a position to outpace your competition for adding that as of high value for our business. The net-net is it is all aligned to long-term shareholder value creation, and we are going to keep driving that.
That is helpful. All right, so let us turn to 2027. Everyone says, "Hey, we are not going to provide any updates. We are not going to provide any guidance." But everybody gets the questions. You are not being picked on. Kevin knows that. So I guess the first question on 2027, on the Q1 call, I think you talked about modest sales growth and some EPS growth in 2027, despite the TSA headwind. You did not reiterate those comments on the Q2 call. So my question is, what changed?
Yeah. So look, to be quite candid, we are focused on 2026. As we know, Q1 was a point, Q2 was a point. Q3 and Q4, we got a lot of work to do. While certainly we will update on 2027 when we get closer to that time period, we have got some results to deliver on. We owe it to our shareholders, we owe it to our customers, we owe it to our employees on execution and delivering on those results. So while we are not saying something changed, we are just focused on getting through this year because 2027 is through 2026 and delivering strong results in the back half of 2026.
That makes sense. Okay. I guess I was going to ask if you think organic growth could be better in 2027 versus 2026, but I do not think you are going to bite on that.
I can repeat the same answer if you want me to.
Got it. Well, then just on EPS. We know you've got a couple headwinds. You've got, I think, the tariff refund this year. You've been transparent about that. That's about $0.11. You do have the TSAs going away. We're all trying to figure out what that means. We came up with about a $0.10 headwind for that. That's our own math. Then the recent debt refinancing may be a little bit of a good guy.
So we're coming up with maybe about a $0.15 headwind next year to EPS. I guess the question is maybe, A, what are the pieces we should think about, and B, any of the reaction to our numbers? The puts and takes, and just whether you'll bless any of the numbers. The $0.11 you've disclosed.
To start off, I think I have to repeat, we will provide more color at the right time. I think part of that color is the context of the puts and the takes. I know there's a lot of focus on TSAs right now, so what I will say around that is when TSAs roll off, we will have had two years to contemplate its impact. So in 2026, we do have the midpoint of the guidance is $160 million of TSA income.
You should assume a lower than corporate average margin on that. That's not $160 million of drop-through, so it is a much smaller number. That will be a headwind next year. Then when you think about the cost, both COGS and SG&A, an element of that, the direct piece, will go away as soon as we stop providing the activity.
That comes out pretty quickly. There's also a piece that will take more effort, so think shared IT costs and things like that. The punchline on TSAs is there will be a headwind next year. We have consistently talked about needing to take the stranded costs out as we exit the year, and that we will provide the overall puts and takes for 2027 in totality at the right time.
The only other item I'll just add is we were very specific on the tariff to separate that. That was a one-time event, and we were very clear on what that meant because it's about execution on the business and really driving that through the end of 2026 to get ready as we step into 2027.
Okay. That's helpful. Well, we've got five minutes left here, and Kevin didn't think I would get through all my questions.
Impressive speed.
Yeah. Well, you guys were efficient. A question I have gotten on Injectables. We did not talk about it, is are there enough molecules out there, new molecules going generic, that allow you to grow that business? And we have not heard you talk much about that.
Yeah. When we look at our position, we like the space we are in, we like the air. We are focused on ensuring that we are strategically aligned with where the market is going, and our teams are doing a lot of work around this. We do have some areas that we are, I would say, resolving, and I talked a little bit about the focus on operational. I had highlighted a facility that was a challenge for us. We have now largely put that behind us.
We have a contract manufacturer that we are on-site resolving. And we did have a little bit of challenge on our facility in India. I would say that facility got back online, back on track very quickly, where actually the team did such a good job around minimizing that overall impact, having a supply of inventory, and then being able to bring the product line back on track. We feel that we are in a good position, but we are very focused on ensuring that we continue that alignment for a higher value product set for the markets.
And before, Andrew, I give you the opportunity to make closing remarks, what are some of the things you are excited about, new products? You talked about a couple, but what are some of the other new products you are excited about?
If I do a step back, couple items. First, innovation is going to be an enabler for our future, and we're excited about what that's going to deliver. Just to think through and talk through some items. First, we launched Connect 360 Monitor in our Front Line Care business. Customers are really positive feedback on that product set and what it enables.
Then we launched Dynamo, our new connected stretcher platform. I'll tell you, it was an area that we needed a new product set. I was able to sit through, right before we launched it, with a lot of the customers that were engaged with the thinking around making sure it met the needs of our customer. They're on this form that allows us to gain tangible, actionable insight.
When we launched, I tell you, it's been a really strong feedback from our customers around we have built a product that they want to use. We're excited about that. As we look forward, the ambulatory cardiac monitoring business, a lot of opportunity, continue to drive that business to be a part of supporting patient care outside of the hospital. When I think about our Advanced Surgery business, we're looking at new avenues, new white space that we can continue to add on as a potential.
Then as we go down through, even into our ITP business around capability, not only with the pharma platform, but then also how we bring new solutions to market. The business is really aligned to ensuring that we listen to customers, build that capability into our process, and ultimately innovate to drive new solution sets in the market. I talked a little bit about the IQX and our PeerVue. It's these constant drives around building and listening to customers for response.
That's great. Andrew, we've got a minute and a half left. Really appreciate you being here. First Wells Fargo Healthcare Conference, I believe.
It is.
Hopefully not your last. I will give you the last minute to make any closing remarks.
Well, first and foremost, thank you very much for hosting us. What a tremendous experience. I will just say, look, we have a lot of work to do, and I like to characterize, I have been pleased with the progress, but we are not yet happy with the results yet. We have outlined our stabilize, de-lever, launch, and continuous improvement as our first phase of that journey. We are making nice progress in that journey, but we have got a lot of work to do. We are excited about the future and delivering it, constantly building the future of Baxter. Thank you so much. Have a great day.
Thank you.