Baxter International Inc (BAX) — Q4 2025 Earnings Call Transcript

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 International Inc. website. Joining me today are Andrew Hider, President and Chief Executive Officer, and Joel Grade, Executive Vice President and Chief Financial Officer. During the call, we will be making forward-looking statements, including comments regarding our financial outlook for the full year 2026 and anticipated timing and impact of our deleveraging efforts, the amount and timing of charges related to operating model and cost structure actions, the anticipated impact of various regulatory and operational matters including ones related to our infusion pump platform, and to clinical practice changes following Hurricane Helene, and commentary regarding the global macroeconomic environment including tariffs and proposed mitigating actions. 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 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 International Inc.’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 operational growth, which excludes the impact of foreign exchange, MSA revenues from Vantiv, and the previously announced exit of IV Solutions from China. We will also reference organic growth which excludes the impact of foreign exchange, MSA revenues from Vantiv, and any impact from future business acquisitions or divestitures. We plan to utilize the organic growth measure going forward. Finally, as a reminder, continuing operations exclude Baxter International Inc.’s Kidney Care business which is now reported as discontinued operations. With that, I would like to turn the call over to Andrew.

Thank you, Kevin. And good morning, everyone. Fourth quarter 2025 global sales from continuing operations totaled $3,000,000,000 and increased 8% on a reported basis and 3% on an operational basis. Total company adjusted earnings from continuing operations were $0.44 per diluted share. While the top line exceeded our expectations, adjusted EPS fell short. Joel will get into greater detail on the results, but there were a few areas that differed from our expectations we provided in October. On the top line, we saw a more modest net impact from Novum IQ large volume pump customer returns, which was favorable to results. While responses have varied, in general, customers are waiting for additional clarity on the nature and timing of the additional corrections that we will look to deploy. Margins were pressured by both an unfavorable mix of sales, as well as some nonrecurring items, including inventory adjustments. And finally, we saw a higher tax rate. The results in the quarter are disappointing and underscore the work ahead to improve performance and execute more consistently. I stepped into this role in August with confidence in the potential of the business given the central role Baxter International Inc. plays in healthcare, but also with a practical sense of the hurdles before us. As I have continued to visit our sites and engage directly with the team and customers, I have deepened my understanding of both the challenges and opportunities facing Baxter International Inc. We are in the early stages of a turnaround and have more work to do to deliver strategically, operationally, and commercially, and recognize that it will take time to implement real long-term solutions. That said, there is a strong thesis where we can take this business, and we saw some examples of this in the quarter’s results. For example, the Advanced Surgery business capped off a great year with a strong quarter, growing 11% with contributions both across the portfolio and around the globe. And the HealthCare Systems and Technologies segment had another quarter of consistent performance, including a contribution from the recently launched Connect 360 Monitor in the Front Line Care division. We are also preparing for the launch of the recently announced Dynamo series stretcher, the latest innovation in our portfolio of smart beds, services, and connected care solutions. Innovation will be a critical element to our success, and we recognize the importance of bringing new innovation into the market. Accordingly, you should expect a heightened focus going forward and continued investment in R&D at or above historical levels. As I said during our last earnings call and reiterated last month, I am focused on three main priorities. These are stabilizing the areas of the business that require increased focus, strengthening our balance sheet, and driving a culture of continuous improvement and efficiency. We are moving with focus and urgency on each of these, and our teams are driving relentlessly to improve execution and performance across the enterprise. It is with this in mind that we have decided to hold off on our Investor Day. Let me share a few updates on our priorities and the actions we have taken. Stabilize: just a few weeks ago, we internally announced a new operating model that is designed to simplify our organization, accelerate innovation, and improve performance. Most significantly, we are delayering levels of leadership, including removing the segment management layer, and embedding critical functional roles directly in each of our businesses. This will allow each leader to have full P&L responsibility for their business with fully aligned commercial, R&D, manufacturing, medical, and targeted functional support and, importantly, full accountability to the results. These changes are significant and are designed to reduce complexity, eliminate barriers for decision making, bring us closer to our customers, and help us to improve our sales and distribution ratio. We have also taken actions within our IV Solutions business to rightsize the support footprint to align to the lower demand environment which we believe is a new baseline in the market. In Pharmaceuticals, in addition to market demand softness, supply and backorder challenges have impacted revenue and driven unfavorable product mix. Specific initiatives to address these are in progress; however, it will take some time to bear fruit. Overall, across the enterprise, we are taking actions to further strengthen our focus on quality and improve on-time delivery. Balance sheet: our two customer value creators. We continue to focus on improving our cash generation and leverage. In line with our expectations, free cash flow generation exceeded $450,000,000 in the year and continuous improvement. As a reminder, operational efficiency is at the center of what we are driving. As you know, a key element of this is our Baxter Growth and Performance System, Baxter GPS, which we rolled out in October to ensure continuous improvement, enterprise efficiency, and a growth and performance mindset are integrated into our day-to-day work. We recently held our first annual President’s Kaizen, where I was impressed by the resolve each of our leaders demonstrated in driving change for the better with a focus on 10 events that will drive cross-business impact. With focused week-long sprints, teams tackle critical opportunities aligned to our eight value creators. The work underway is helping us reduce complexity, better anticipate customer needs, accelerate innovation, commercialize faster, and deliver value sooner. We are focused on improving every aspect of our operations, and we will be consistently measuring our performance to deliver just that. Importantly, this is not a one-off event. It is how we are building a continuous improvement culture where everyone is empowered to make things better every day. Before I turn it over to Joel, I just wanted to reiterate the key steps we are taking. We have streamlined the organization for greater accountability. We have launched GPS to drive continuous improvement. And we have tightened our focus on innovation to better meet customer needs, all to drive improved performance and long-term shareholder value creation. Now I will turn it over to Joel. Joel, over to you.

Thanks, Andrew, and good morning, everyone. Fourth quarter 2025 global sales from continuing operations totaled $3,000,000,000 and increased 8% on a reported basis and 3% on an operational basis. Performance in the quarter reflects growth across all segments. On the bottom line, total company adjusted earnings from continuing operations were $0.44 per share. Results in the quarter reflect unfavorable product and geographic mix, some nonrecurring items including inventory adjustments, and a higher tax rate partially offset by the positive impact from pricing in select segments. Now I will walk through our results by reportable segment. Commentary regarding sales growth in 2025 will be on an operational basis. Sales in our Medical Products and Therapies segment, or MPT, were $1,400,000,000 and increased 4% in the quarter. Performance in the quarter reflects growth in Infusion Therapies and Technologies, or ITT, as well as continued strength in Advanced Surgery. Within MPT, fourth quarter sales from our ITT division totaled $1,100,000,000 and grew 1%. Performance in the quarter was driven by growth in IV Solutions, which benefited from a favorable comparison with the prior year period, partially offset by lower infusion pump sales due to the previously discussed shipment and installation hold of Novum LVP. Within IV Solutions, underlying U.S. demand remained below historical levels. As previously discussed, fluid conservation practices embedded with clinical practice changes in the market following Hurricane Helene remain. In infusion systems, results in the quarter reflected the net impact of lost sales due to the ongoing shipment and installation hold of the Novum LVP, customer returns, and transitions to Spectrum. Relative to our prior guidance, this net impact was more modest in the quarter. While customer responses have varied, in general, many are understandably waiting for additional clarity on the nature and timing of additional corrections that we will look to deploy and of the release of the ship and installation hold. Sales of Advanced Surgery totaled $328,000,000 and grew an impressive 11%. Results in the quarter reflect continued solid demand for our portfolio of hemostats and sealants, strong commercial execution across regions, and steady procedure volumes. MPT’s adjusted operating margin totaled 15.4% for the quarter, decreasing 110 basis points over the prior year period, and reflects increased manufacturing and supply costs, unfavorable product mix, inventory adjustments, and higher costs related to tariffs. These factors were partially offset by positive pricing in the quarter. Kidney Care TSA income positively contributed as well. In HealthCare Systems and Technologies, or HST, sales in the quarter totaled $827,000,000, increasing 4%. Within HST, sales of our Care and Connectivity Solutions, or CCS, division were $537,000,000 and grew 4% globally. Performance in the quarter was driven by double-digit growth in our Surgical Solutions business and continued momentum across our Patient Support Systems portfolio. Total U.S. capital orders for CCS increased nearly 30% compared to the prior year, driven by broad-based strength across Patient Support Systems, Care Communications, and Surgical Solutions, and our order book remains strong. To date, we have not observed a slowdown in U.S. hospital capital spending. However, given the broader macroeconomic uncertainty, we continue to closely monitor the situation. Front Line Care sales in the quarter were $290,000,000 and increased 3%. Performance in the quarter reflects increased demand in cardiology and patient monitoring portfolios, which includes our recent launch of Connect 360. HST adjusted operating margin totaled 15.2% for the quarter, decreasing 330 basis points compared to the prior year. These results reflect unfavorable product and geographic mix, increased corporate allocation expenses, and higher costs related to tariffs. TSA income partially offset these increased expenses. Moving on to our Pharmaceuticals segment. Sales in the quarter totaled $668,000,000, increasing 2%. Within Pharmaceuticals, sales of our Injectables and Anesthesia division were $352,000,000 and declined 9%. Performance in the quarter reflects a decline in our injectables portfolio, driven by a difficult comparison to the prior year period as well as softness in certain premixed products, largely consistent with the dynamics discussed last quarter related to IV infusion protocols and increased use of IV push in select hospital settings. Our Anesthesia portfolio declined high single digits, reflecting softer demand for select inhaled anesthesia products. Drug Compounding grew 18% and reflects continued strong demand for our services outside the U.S. Pharmaceuticals adjusted operating margin totaled 5.8% for the quarter. These results reflect increased manufacturing and supply costs, an unfavorable product mix, price erosion, inventory adjustments, and increased corporate allocation expenses following the sale of Kidney Care. These expenses were partially offset by Kidney Care TSA income. Finally, Other sales, representing sales not allocated to a segment and primarily including sales of products and services provided directly through certain manufacturing facilities, were $7,000,000 in the quarter. MSA revenue from Vantiv totaled $84,000,000. As a reminder, these sales are included in our reported growth; however, they are not reflected in our operational growth for the quarter. Before moving on to the rest of the P&L, an important reminder on our continuing operations reporting: Following the sale of our Kidney Care business, certain corporate costs that did not convey with the business are now allocated across our segments in both cost of goods sold and SG&A, along with income from the TSA, which is currently recognized within Other Operating Income. In addition, as previously discussed, we reclassified certain functional expenses from SG&A to cost of goods sold beginning earlier this year. These costs support manufacturing and are now treated as indirect expenses subject to inventory capitalization and recognized in cost of sales when sold. Fourth quarter adjusted gross margins from continuing operations were 35.5%, a decrease of 900 basis points compared to the prior year. Fourth quarter adjusted SG&A from continuing operations totaled $637,000,000, or 21.4% as a percentage of sales, a decrease of 330 basis points from the prior year period. Results reflect disciplined expense management and the benefit from the reclassification of certain functional costs. Adjusted R&D spending from continuing operations in the quarter totaled $116,000,000, or 3.9% as a percentage of sales, which came in lower than our expectations. This reflects the reclassification of certain product support and sustaining activities into cost of sales, and therefore does not reflect our anticipated level of R&D spend going forward. TSA income and other reimbursements totaled $50,000,000 in the quarter and came in line with our expectations. As previously discussed, the associated expenses related to this income are reflected in other lines of the P&L, including cost of goods sold and SG&A. Altogether, these factors resulted in an adjusted operating margin of 11.8% on a continuing operations basis, a decrease of 340 basis points compared to the prior year period. Results reflect unfavorable product mix and nonrecurring items, including inventory adjustments, partially offset by positive pricing in select segments and the benefits of TSA income. Net interest expense from continuing operations totaled $58,000,000 in the quarter, a decrease of $32,000,000 versus the prior year period, reflecting lower interest expense following the paydown of existing debt with proceeds from the Vantiv sale. Adjusted other nonoperating income totaled $15,000,000, driven primarily by amortization of pension benefits compared to the prior period. The continuing operations adjusted tax rate for the quarter was 27.2%, driven primarily by a mix of earnings across jurisdictions. In total, adjusted earnings from continuing operations were $0.44 per share for the quarter. Before turning to our 2026 outlook, I want to comment on cash flow and liquidity. Fourth quarter free cash flow was $456,000,000, bringing full-year free cash flow to $438,000,000. Performance in the quarter reflects improved cash flow generation and seasonality, including progress across select areas of working capital as well as continued focus on execution as we close out the year. We continue to focus on strengthening cash flow generation and maintaining discipline around working capital, foundational elements of our financial strategy. Improving the balance sheet continues to be a key area of emphasis, and we intend to deploy cash towards reducing leverage in line with our capital allocation framework. Now our outlook for the full year 2026, including some key assumptions underpinning the guidance. For full year 2026, we expect total sales growth to be flat to 1% growth on a reported basis. This reflects current foreign exchange rates, which are expected to contribute approximately 100 basis points to top line growth for the year. In addition, reported sales are expected to include a headwind of approximately $25,000,000 from MSA revenues from Vantiv. This represents approximately 30 basis points of impact on reported growth. Excluding the impact of foreign exchange and MSA revenues, we expect organic sales growth of approximately flat in 2026. As it relates to the segments, in MPT, we expect full-year organic sales to be flat to slightly up. This reflects the continued uncertainty around the Novum situation, including the potential impact from various customer responses. It also reflects the assumption that the ship and installation hold will remain in place for the full year. And as previously discussed, we believe that the market is at a new baseline in our IV Solutions business. In HST, we expect full-year organic sales to grow low single digits. This reflects expected contributions from both the Care and Connectivity Solutions and Front Line Care divisions. In Pharmaceuticals, we expect full-year organic sales to be approximately flat. This reflects continued pressure in injectables and anesthesia related to softer market demand, supply challenges, and ongoing IV push utilization trends that have been discussed in prior quarters. Turning to our outlook for other P&L line items. Beginning with tariffs, we estimate the full-year impact to range $130,000,000 to $140,000,000. We expect full-year adjusted operating margin from continuing operations to range between 13% to 14%. This primarily reflects lower gross margins driven by unfavorable product mix, including the impact of lower manufacturing volumes and reduced contribution from pricing. These pressures are expected to be partially offset by improvements in SG&A, including the recent restructuring actions. We expect our nonoperating expenses, which include net interest expense and other income and expense, to total between $280,000,000 to $300,000,000. This reflects higher interest expense from the recently completed debt mutual transactions and lower contribution from other income. On a continuing operations basis, we anticipate a full-year tax rate to range between 18.5% to 19.5%. We expect our diluted share count to average approximately 518,000,000 shares for the year. Based on all these factors, we now anticipate full-year adjusted earnings on a continuing operations basis of $1.85 to $2.05 per diluted share. While we will not be providing quarterly guidance, I want to offer some perspectives on the expected cadence in results over the course of the year. Overall, we expect the first quarter to be the most challenging, with improving performance thereafter. Specifically, the ITT division has an unfavorable year-over-year comparison in Q1 due to the onetime distributor build in the prior year. Additionally, ITT results in the first half are expected to reflect absorption headwinds from the rollout of higher cost inventory produced in 2025. We also expect to see a second half benefit from the recently taken actions to rightsize our cost structure.

Therefore, we expect ITT performance to improve throughout the year assuming relatively stable demand. Within HST, new product launches are expected to contribute stronger growth in the second half of the year compared to the first half, including Connect 360 and Dynamo. In Pharmaceuticals, we expect the previously mentioned headwinds to continue in the first half of the year. As we move into the back half of the year, we anticipate a more favorable comparison and improved performance. Finally, as a reminder, the first half of the prior year saw benefit to operating margins related to the timing of certain functional costs being reclassified into cost of goods sold. Collectively, these factors support our expectation that organic sales growth, operating margin, and adjusted earnings per share will be back half weighted. With respect to free cash flow, similar to 2025, we expect it to be back half weighted due to our normal seasonality, expected gains in earnings, as well as recent cost structure actions. With that, we will now open up the call for Q&A.

I wanted to start on one strategic question that had one financial follow-up. Maybe firstly for you, Andrew. As you just think about the number of moving parts you are trying to navigate here, strategic review, catching up on innovation, deleveraging. What are you doing to ensure sustainability of the business as it relates to the competitive dynamic? And how are you gaining sufficient visibility to drive the forecasting process?

Yeah. So good morning, David. Let me start by just walking. Part of my standard work as a CEO is to visit customers on an ongoing basis. And I will tell you that the message is loud and clear that we are essential to not only supporting but to enabling their ability to bring a high level of patient care. We are an essential and trusted brand through that. As a reminder, we touch over 350,000,000 patients per year. All that said, we need to get better, and we are not satisfied with our current performance. And you have heard me consistently talk about not only near term, and to walk through, it starts with stabilizing the business. And I have outlined that in my prepared remarks. To get more specific, we are driving the accountability at the lowest levels in the organization. Additionally, about strengthening our balance sheet, and lastly, our focus on continuous and really enabling that such that we focus on the customer and streamline the organization to be able to execute at the pace we expect. We are early in our journey, but we are making progress. Now.

Yeah, David. And it is Joel. I will take the forecasting piece of this thing. And clearly, improving our forecasting accuracy is a major priority, and we are attacking that in a very structured way through Baxter GPS. And I certainly understand and appreciate the frustration and the volatility of our historical results. We have and will continue to be transparent about the challenges we are facing and the actions we are taking to address those challenges as well as, obviously, the assumptions underpinning the guidance. But GPS gives us a more disciplined operating rhythm, clear accountability, and a lot more continued visibility that drives our performance. So as you have heard us talk about focusing on demand planning, we also focus really around our cross-functional alignment to our commercial teams, our operational teams, our finance teams, and just building more rigorous daily and weekly operating mechanisms that really surface issues earlier and allow us to course-correct more quickly. So the goal is designed to reduce volatility, improve the predictability of our results over time, and, as Andrew likes to say, drive a really consistent sales and distribution ratios in our organization. So we know we have work to do, and we are attacking it head on.

And then maybe just as a follow-up here. Can you just remind us on where you are and the progress you are making on reducing the G&A and support costs that today are getting reimbursed by Vantiv via the TSA? And how we should think about the runoff of the TSA over the course of the year and into next year, and your retained cost? Can that be a one-for-one offset? And maybe just help us think through the nature of the operating dynamics there.

Yeah. Sure. So a couple of things there. Number one, for 2025, one of the things we have said is that we had, including cost takeout and TSA income, about a 40 basis point remaining impact on the year, and we are on track for that. And so I think that has been successful that way. We continue to make good progress on our cost takeout, and you have heard Andrew talk about streamlining the operating model. That is a continued workstream on this. We have continued to streamline our operations to meet demand. We have talked about that as well from a buying perspective. And then again, this work is done in relation to our stranded costs as well. So our TSAs do start to tail off some in 2026. Obviously, they really go into 2027. As we have said, we are committed to eliminating our stranded costs by 2027, and we remain on track to do that. So I again feel good about that progress, and, again, a lot of this work you are hearing us talk about today is targeting that goal. So hopefully that helps.

Yeah, great. Thanks for taking the questions, and good morning. Two for me. Joel, maybe just to follow up on David’s question, especially as the TSAs roll off, and I know it is early here, but do you think you will be able to grow earnings next year as the TSAs roll off where you sit today?

Just to be really quick. Next year, do you mean 2027 or 2026?

2027.

2027. We are certainly not forecasting or issuing guidance on that today. Do I anticipate growth? Yes. But as we have talked about, Robbie, the TSA typically are 24 months. Our deal was closed on 01/31/2025, so the majority, I will say, of the TSAs fall off in 2027. And, again, we do expect to continue to work through that in the year and, again, finish that off by 2027. But, again, we are not going to give guidance on growth at this point.

Great. Maybe a follow-up question. The gross margins obviously came in well below where the Street was and operating margin as well. I was hoping you could just bridge us from the fourth quarter 2025 to the 2026 guide, how much shifted from below gross cost of goods into cost of goods, and if you could also help put a finer point on first quarter so we could get a better sense of cadence through the year. Thanks.

Sure. Maybe I will start again. We have not provided specific numerical guidance, but I would certainly reiterate that I anticipate Q1 is going to be our most challenging quarter. There are a number of reasons for that, Robbie. Number one, I would call it normal seasonality. Obviously, Q4 tends to be a lot larger quarter than Q1, so our margin pass-through, again, there is some typical detriment there. Now there is also a prior year comparison, remember, at ITT, and while that is not a sequential driver, it does mess a little bit with seasonality we talked about because our comparison in Q1 year over year with the onetime distributor build in 2025 is a little bit unique. At the time we sized that, it was about 150 basis points to total company sales, so call that a $40,000,000 to $50,000,000 impact, and that will be a headwind in year-over-year growth in Q1. There is also continued uncertainty on Novum returns. One of the things we talked about in the last quarter was an uncertainty around customer behavior. That uncertainty still exists to a degree, and it really carries into this year. And so our customers are in a bit of a wait-and-see mode still, and therefore, as we referenced last quarter, there is an ongoing risk for customer responses there. With that, this is all top line, but Drug Compounding in Q4 grew 18%. Probably not necessarily sustainable from that number, so obviously expecting that to be lower in Q1. And then from a margin perspective, again, I already referenced some of the lower volume. There are also what I will call absorption headwinds. In 2025, we had some of these higher manufacturing costs, and that ended up in our inventory capitalization. That is then rolling out as we sell those products, obviously in the first half of the year really, but also certainly in Q1. And so that is something of a headwind to margins. We have not given specific guidance around the number on that. And then the other thing is we continue to expect bottle margins to remain pressured due to softness in Injectables and Anesthesia, and then really just the overall mix of the business. Finally, from an EPS perspective, Robbie, the incremental interest expense kicks in in Q1, and so that is certainly something to expect there. Hopefully, that helps with guidance there.

Hey, guys. Thank you for taking my question. Andrew, maybe my first one for you is you mentioned customers are awaiting how you resolve Novum, right? But your guidance assumes Novum ship hold remains in place for the full year. Have you communicated this to customers? What have you told customers? I understand the guidance assumption, but I am curious, are customers willing to wait for a year for Novum to resolve?

Yeah. Good morning, Vijay. Let me walk this through a little bit here. First and foremost, customers can and are continuing to use the device according to existing instructions and mitigating actions. We have continued to make progress on our Novum solution and the correction. We are staying close, and as we go through testing, as we go through really identifying the longer-term solution set, we will update. As a reminder, we have a strong pump portfolio. We have our Spectrum LVP that we utilize through this transition, and I even walked through earlier in the year we have launched Spectrum with the IQx platform, and it enables us to really not only work with our customers but to have a total pump portfolio with Spectrum being our LVP and Novum being our syringe, and Novum being a newer product set that we have launched in the recent history. And so while we are going through our Novum updates, we have a strong platform that we can bring to market. And as a reminder, we are also launching early Q2 PureVu on the IQx platform, and PureVu is designed to really support our customers and their ability to identify and work on fluid processing. So we are continuing to innovate, continuing to build on, and given our pump platform, we are in a position to support our customers through this.

Understood. And maybe my second one for you, Andrew. You mentioned the operating model change. Curious on what has changed from the prior model. How is this model better? And what is the impact to or implication of free cash flow? You mentioned P&L responsibility. Is free cash flow going to improve from fiscal 2025?

Yeah. I will take the first part, and then I will let Joel walk through a little bit around that, the cash process. Just a few weeks ago, we internally announced the new operating model, and it is designed around simplifying our organization, accelerating innovation, and improving performance. We are putting the accountability at the lower levels in the organization. Most significantly, we are delayering at the top level, removing the segment management, and embedding critical functional roles directly into the business. This allows us to further eliminate the barriers for decision making, and it is streamlining to listening to our customers and ultimately helping us improve our sales and distribution ratio and execute on a more consistent basis. This approach is really moving down that decentralizing and streamlining the organization with black-and-white accountability.

Yeah, Vijay. And then I will take, again, the cash piece of this. Certainly, as you have heard Andrew talk about regularly and myself as well, improving our balance sheet and cash generation continues to be a top priority for the company. We do expect in 2026 that free cash flow will improve versus 2025, driven primarily by stronger working capital performance and, as well, obviously we do not expect to repeat some of the onetime hits that happened in 2025, specifically the expenses for the hurricane. From a free cash flow perspective, similar to 2025, we do expect it to be somewhat back half related. That includes a charge in Q1 related to recent operating model and cost structure actions, as well as some of the seasonality that we typically show. We also do expect, as we have talked about from a P&L standpoint, our earnings tend to be skewed towards the second half of the year due to some of the structural impacts that have been recognized and we expect to recognize in H2, again, as well as some of the impacts from the manufacturing side of our business in terms of adjusting to better volumes. We feel confident in that. Why? Because some of the impacts are driven by actions that are in flight. The structural cost work is in flight. The work around adjusting our manufacturing operations for better impact, one of the volume, is in flight. The biggest year-over-year drivers I mentioned are really around working capital, inventory management, improved receivable collection processes, and tighter control of our payables process, including commercial terms. GPS is playing a role in this as well, giving us more consistent operating rhythms, better visibility to reduce volatility, and overall strengthening our cash conversion. We do expect cash flow to continue moving in the right direction as we execute through 2026. We saw some of that already in 2025.

Thank you.

Good morning. Thanks for taking the question. Two for me. One on the gross margin, one on Pharma. Joel, could you please give us a little bit more color on the Q4 gross margin? How much of the year-over-year decline was due to tariffs, mix, reclassifications, and the onetime items you called out? And how much lower do you expect the gross margin to be in 2026 versus 2025? I assume it is more than the decline we see in the operating margin guidance. I had one follow-up.

Yes. Thanks, Larry. Appreciate the question. From a gross margin and overall operating margin standpoint, certainly, a few factors played into this. An unfavorable mix of sales, so with business mix, geographic mix, product mix, that certainly was a key element. We also had, as was referred to earlier, some higher manufacturing and supply costs for a couple different reasons. One, some of the challenges we had aligning our labor to volumes, but also some of the impacts that Andrew mentioned related to some of the challenges that we have seen in Pharma. Those factored into this as well. The nonrecurring items, I would classify that as around $40,000,000 of impact that were related to gross and operating margins in the quarter. Those are things to contemplate as part of that. I would say that is really the main driver there. Again, about $40,000,000 of that is nonrecurring.

In 2026 versus 2025? Gross margin, I did not hear that. Yeah. I know. But we have not given specific guidance on that. I would say, a little bit to the commentary I had as it relates to the Q4 to Q1, there are some of these impacts that we expect to continue into 2026. I think about it a little bit as an H1/H2 split. In other words, this is going to continue to improve over the second half of the year, but there are really two factors I would say in H1 to consider. One is mathematical, and one is more actions driving outcomes. The mathematical piece: we do have some normal seasonality in our company between H1 and H2 from a pure volume perspective. We would expect that to continue. Our cadence reflects a more challenging first half with improvement in the second half. ITT absorption headwinds: in the first half, we had higher cost inventory that we capitalized, and we saw benefits there. That is going to roll into the first half of this year, so that is essentially a headwind in 2026. Those are the mathematical pieces, as well as tariffs. Remember, we had tariffs in the first half of last year. Then, related to the actions driving outcomes: the structural cost takeout that we have talked about, the impact of that is in play. We are confident in the work that we are doing, but the outcomes are primarily going to be impacted in the second half of the year. In terms of aligning our manufacturing labor with our volumes and our production cost, again, that impact will start to show itself in the second half of the year because we are still taking the hit, if you will, from the capitalized higher-cost inventory as we sell those products in the first half of the year. That is helpful. And, Andrew, thanks for giving us the P&Ls by sector. Pharma has an operating margin of 9%. It was even lower in Q4. My guess is Compounding, which is your fastest growing business, does not make a lot of money. What are you doing to improve the margins in this business? And why does it make sense to keep a low-margin business like Compounding that seems to hurt your mix every quarter? Thanks.

Yeah. I will walk through the fundamentals of Pharma and really outline. Overall, we like the fundamentals of this business. A couple items: we have also taken this part of the organization and combined it with our ITT business. The reason being is it is synergistic with that organization, with common customers and common call points, and there is an opportunity to improve the business. We have, and we are continuing to take actions to do so. Additionally, there have been some areas that have been in our control where we have been challenged, and through GPS and through driving accountability at the lowest levels, we have taken critical actions to improve. One is around operational execution. Not to get into too much specifics, but we saw one of our facilities really hindered by the ability to drive output. We took an action team around this. They have already improved, they are continuing to improve, and we are going to see that performance improve through the first half of the year. More importantly, it is around how do we not get back into this situation, how do we build this and have this being performance. The role GPS plays in that is around identification and critical action. The second piece within our control is we had a supplier challenge. To be quite candid, it was an area that we identified. We are working through it. It is going to take us a good portion of the year to get through this, and we are identifying how we have alternatives to continue to support the product. We are continuing to ship. That said, we are looking to identify the long-term solutions. To answer your question head on, we like the fundamentals of the business. We have some work to do here, and we need to continue to align around the value creation we have for our customers.

And, Larry, two other things I would add. Number one, some of the margin challenges that you saw in Q4, as Andrew said, start to improve over the second part of the year, but we still anticipate that being an impact in Q1. Second, as it relates to the Compounding business, yes, certainly that mix impact is the margin impact as well in terms of the relative level of growth in Compounding to our Injectables and Anesthesia. One thing about that is it is our fastest cash cycle in the business, so that is a benefit from that particular business.

Alright. Thank you.

Joel, just trying still a little confused on what to put in the model for Q1 and to understand the slope of the recovery in 2026. Is revenue going to be down low single digits, down mid single digits? Are gross margins, operating margins flat, down sequentially? What percent of earnings should fall in Q1 versus the second half of the year? Just any more details on how to model Q1?

Yeah. Thanks for the question. We have not specifically given numerical guidance on the quarters. I would continue to reiterate the key elements impacting Q1. There is a volume and seasonality impact. There is continued uncertainty around our Novum customer behavior and Novum LVP returns. There are likely continued challenges from a Pharma perspective as it relates to overall margin. The headwinds from an absorption standpoint: we capitalized into our inventory costs some of the higher costs that we experienced in 2025. As we head into 2026, those are going into our cost, and as we sell those products, those are essentially selling higher priced inventory as we head into the first quarter and H1 in general. Those are the main issues driving that. On the EPS level, interest expense is kicking in. Those are the main key drivers as to why our first half, and specifically first quarter, remains particularly challenging.

Okay.

We will hopefully get more offline. Two little nitpicky questions. One, just curious if you are assuming share gains or share losses in infusion pumps this year. And OUS Care and Connectivity Solutions was up $50,000,000 sequentially. Was there anything onetime in that line item?

Yeah. I will start with the first question. We have good opportunities as we go into the year. As a reminder, Spectrum is a workhorse in the space. Not only is it a workhorse, we continue to innovate on the platform, and now that it speaks with Novum syringe, we are continuing to be confident in our ability to bring high value to the market we serve.

Can you repeat the second part of your question? I am sorry.

Yeah. International Care and Connectivity Solutions was up $50,000,000 sequentially.

$50,000,000.

I did not know if there was anything onetime in there. It looked like a big growth rate in the international business.

I would just say, in general, that business has been performing well. I do not know that there is anything onetime. In the overall CCS business, we have a strong order book. We have talked about that. We have had some competitive wins from a customer standpoint, and capital spend in general remains strong across our geographies. I do not know if there is anything unusual onetime there. That business continues to be strong, and they continue to improve outside the U.S., which was somewhat of a headwind last year.

Okay. Thank you.

Hey. Good morning, guys. Thank you so much for taking the question. Andrew, I appreciate it has not been terribly long, but I am just curious, looking at the Baxter International Inc. portfolio in its totality, how you feel about the state of the portfolio today, appreciating you are not going to be doing M&A anytime soon. But, a) where you see the most exciting opportunities with the current portfolio that might be underappreciated by investors, and b) where you think there is opportunity to ramp up the product portfolio.

You bet. If I miss something, Danielle, certainly feel free to jump in. I will take this as you outlined. Baxter International Inc. is fundamental to the health care system. As I mentioned earlier in the call, it is a trusted partner. We have market leadership across multiple product categories. We have a resilient portfolio and deep customer relationships that really give us a competitive advantage. As we go forward, innovation will be a critical element to our success. As we look at innovation as an enabler, it is extremely important as we bring new innovation to the market, not only from listening to our customers and identifying the pain points to solution, but also staying in front of our total portfolio of product set. There is an opportunity to not only improve our performance, but GPS becomes the foundational operating system for how we really drive disciplines, not only operating rhythm but also clear accountability and clear enablement to listen to our customers, streamline our ability to bring strong capability to the market, and have real-time visibility to bring innovation to solve issues and challenges that our customers face. We like the fundamentals of where we sit, and there are certainly areas we need to continue to challenge on. There are some areas internationally that we are looking at. We do have smaller exits that we are looking at in 2026 as we look at our total portfolio. As far as areas where we are pleased with our performance, in many of our businesses, but more specifically, how we bring our solution from our Advanced Surgery business and the capability we have in that space and how customers look to Baxter International Inc. to support and have high value when they are treating and working with patients. We have many of those. MPT is areas we are looking at as well as HST and as well as Pharma. More to come. If I could characterize how we think about innovation for the future, it is a base hit discussion, not walk-off grand slam. It is about that constant drive to launch products and solutions that really enable our customers to bring a higher level of care at a more efficient pace. Last, capital allocation is a critical element. We talk as directly on capital allocation as we do around our market strategy, and I have outlined it starts with delevering our balance sheet, and we have taken critical actions around that. When we look at the other levers, reinvesting in the business, and I walked through, we are going to be at or above on our innovation reinvestment, expecting new product launches, expecting areas to drive R&D, not just sustainment. But also as we get into the future, as we delever, identifying targets that can add high value from an M&A perspective. We have a strong funnel, but we need to delever first. Hopefully, I answered your question.

Good morning, and thank you for squeezing me in. I am just curious, when you went to put guidance together for 2026, what was your philosophy of how to deliver it so you can deliver on the guidance? Thank you.

Thanks, Joanne. I will take a stab at that. I always view guidance as prudent and reflective of the best and most current information we have available. We think about these things as trying to continue to be very transparent about the challenges we are facing. This is certainly apparent in our Q4 results, but also about the actions we are taking to address those issues. We try to talk about the things that are market conditions, but also things that are in our control to deal with. All that falls in the underlying assumptions underpinning the guide. As we pull that together and think about the key factors in the year that are happening, we talked about the fact that there is a key Novum assumption that was in there. We have talked about our IV Solutions that we rebased that. We have talked about some of the challenges in our Injectables and our Anesthesia, some of the product mix impacts, the manufacturing volumes that we had to adjust to, and in 2026 there is going to be a reduced contribution from pricing, as well as the EPS impact. Joanne, I would say when we pull that all together, that is where our guidance sits. I certainly understand the frustration with some of our volatility. It matters to us a ton for our sales and distribution ratio to be in a place where we say here is what we say, then here is what we do relative to our guidance. Hopefully, that helps. Is there anything you would add to that?

I would just say, I will echo, it is a view of the market. It is our prudent view of how we operate. I just want to reiterate, GPS will become who we are and how we operate. It will allow and enable us to go very deep in the organization and drive accountability. It is part of our journey around the continuous improvement model and how we need to continue to improve our sales and distribution ratio. It is an area that we will continue to update as we go throughout the year.

In closing, we are not where we want to be, but we are confronting our challenges head on and taking deliberate steps each day to better position Baxter International Inc. for the long term. I am energized by the opportunities ahead, driven by the essential role Baxter International Inc. plays in patient care, and our mission-driven team that is committed to drive stronger and more consistent performance over a long period of time. Thank you very much. Stay safe, and goodbye for now.