Baxter International Inc. 2026 Q3 Earnings Call

Good morning, and welcome. Today we will 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 statement 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 an opportunity. With that, I would 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 realize the full potential of Baxter. We are focused on executing in the fourth quarter and finishing the year strong while continuing to improve our say-do 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 in 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 & 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%-4%, from 2%-3%. We are also raising the bottom end of our outlook for adjusted earnings per diluted share to $2.05-$2.15, compared with our previous range of $1.95-$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 three 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. 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 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 collaborations, teams 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 Front Line Care's growth in the quarter. Additionally, the Dynamo Series Smart Stretcher 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 increased our full-year outlook. At the same time, we advanced each of our three 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.