Title

Presentation

Baxter International Inc. beats earnings expectations. Reported EPS is $0.55, expectations were $0.48.

Operator: Good morning, ladies and gentlemen, and welcome to Baxter International’s First Quarter 2025 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 Ms. Clare Trachtman, Senior Vice President, Chief Investor Relations Officer at Baxter International. Ms. Trachtman, you may begin.

Clare Trachtman: Good morning, and welcome to our first quarter 2025 earnings conference call. Joining me today are Brent Shafer, Baxter’s Chair and Interim Chief Executive Officer; Joel Grade, Baxter’s Executive Vice President and Chief Financial Officer; and Heather Knight, Baxter’s Chief Operating Officer. On the call this morning, we will be discussing Baxter’s first quarter 2025 results, along with our financial outlook for the second quarter and full year 2025. With that, let me start our prepared remarks by reminding everyone that this presentation, including comments regarding our financial outlook for the second quarter and full year 2025, the anticipated impact of our strategic actions, the potential impact of various regulatory and operational matters and the global macroeconomic environment, including new and proposed tariffs on our results of operations contain forward-looking statements that involve risks and uncertainties.

And, of course, our actual results could differ materially from our current expectations. Please refer to today’s press release and our SEC filings for more detail concerning factors that could cause actual results to differ materially. In addition, on today’s call, non-GAAP financial measures will be used to help investors understand Baxter’s ongoing business performance. A reconciliation of certain non-GAAP financial measures being discussed today to the comparable GAAP financial measures is included in the accompanying investor presentation and available in our earnings release issued this morning, both of which are available on our website. As a reminder, continuing operations excludes Baxter’s Kidney Care business, which is now reported as discontinued operations.

Now, I’d like to turn the call over to Brent. Brent?

Brent Shafer: Thank you, Clare, and good morning, everyone. Thank you for joining us. Our results the first quarter reflect the building momentum of our strategic transformation journey and the hard work of our Baxter colleagues globally. As you saw in this morning’s press release, our first quarter performance for continuing operations exceeded our previously issued guidance on both the top and bottom line. We’re leveraging our verticalized operating model to create a more agile, focused product portfolio and advanced innovation to improve execution drive profitable growth. First quarter sales from continuing operations grew 5% on a reported and operational basis. As reminder, continuing operations exclude the impact of our Kidney Care business, which was acquired by Carlyle on January 31, 2025.

Sales rose in all three of Baxter’s continuing segments with performance in Medical Products & Therapies and healthcare systems and technologies coming in ahead of expectations. Heather and Joel will share more on individual segment results later in the call. On the bottom line, adjusted earnings per share from continuing operations were $0.55. These results were fueled by top line performance, our continued emphasis on driving operational efficiency and a benefit from lower non-operational expenses. We’re pleased with our strong Q1 performance and confident in our strategic trajectory. At the same time, we’re cognizant of the volatility that is present in the global macro environment and the resulting uncertainty that has been created in the marketplace.

We, like others, are keenly focused on evaluating and working to address the impact of newly enacted global tariffs and future potential tariffs as well as a range of other interrelated factors. As you’re all aware, this remains an evolving and fluid situation. Joel will walk you through our key assumptions as they relate to our financial outlook for the remainder of this year and also how we plan to mitigate a portion of these impacts. To be clear, we remain positive about our opportunities to accelerate sales growth and expand margins. We continue to build on the strength of our operating model and the reinvigorated profile. And as always, we benefit from our durable portfolio of medically essential products, which has served as the underlying foundation of our strength for decades.

Finally, I want to address the topic that I’m certain is on your mind, which is the identification of Baxter’s next permanent CEO. While I’m not able to provide a detailed update, I can confirm that the search process is active and well underway, with the Board being assisted by a leading search firm in these efforts. As I shared previously, the Board is moving expeditiously but also deliberately to make sure we identify the right candidate to make the most of this opportunity to harness the potential our employees have helped create. We will, of course, keep our stakeholders updated on new developments as we are able to share them. In closing, I want to recognize our global team for their dedication to our mission and outstanding contributions to Q1 performance.

And with that, I’ll turn it over to Heather for a closer look at performance by segment.

Heather Knight: Thanks, Brent, and welcome, everyone. I’m pleased to be here with you this morning to discuss our first quarter results. I’m going to walk through our sales performance in the quarter, and then we’ll hand it over to Joel to walk through performance across the rest of the P&L, along with our financial outlook for the second quarter and full year 2025. Before I begin the sales discussion, I want to provide a reminder that results discussed on today’s call will reference operational growth, which as stated last quarter when providing guidance excludes the impact of foreign exchange, MSA revenues from Vantive and the planned exit of IV solutions from China. As Brent referenced and as you’ve seen from our release, all 3 Baxter segments delivered year-over-year growth for the quarter at both reported and operational rates, helping fuel company-wide top line outperformance.

First quarter 2025 global sales from continuing operations totaled $2.3 billion and increased 5% on both a reported basis and operational basis. This compared favorably to our previous guidance, which called for sales to increase 3% to 4% on a reported basis and approximately 4% on an operational basis. Outperformance in the quarter was led by our HST segment with particular strength in our care and Connectivity Solutions division, along with better-than-expected sales in MPT. Now, I’ll walk through our results by reportable segments. Again, commentary regarding sales growth will reflect growth on an operational basis at constant currency rates. Sales in our Medical Products & Therapies, or MPT segment were $1.3 billion, increasing 6% in the quarter and came in ahead of expectations.

Within MPT, first quarter sales from our Infusion Therapies & Technologies division totaled $994 million and increased 6%. Sales in the quarter benefited from double-digit growth for our U.S. infusion systems portfolio as the rollout of our Novum IQ pump platform continues. Nutrition sales in the quarter advanced mid-single digits globally, reflecting strong growth in the U.S. due to the continued progress we are experiencing and alternate sites for this business as well as improved supply for certain products that resulted in the clearance of back orders. We also realized low single-digit growth for IV solutions. As we noted on the first quarter call, thanks to the team seller recovery efforts, production at our North Cove IV solutions facility is back to pre-hurricane levels following the impact of Hurricane Helene.

We are now focused on replenishing inventory and making continued progress on allocations for our customers. We expect to be off virtually all product allocations this month. IV Solutions sales in the quarter reflected continued conservation of fluids at hospitals across the U.S. while the network fully recovers. Our current outlook reflects our expectation that hospitals will continue to conserve fluids in the near term but the utilization levels will improve, particularly as our allocations are removed and U.S. supply returns to normal levels. During the first quarter, we did see some distributors begin to rebuild their inventory levels, which helped to offset the impact from the conservation efforts. Our original expectation was that these rebuilds would likely occur more in the second quarter.

Sales in Advanced Surgery totaled $268 million and grew 4% globally. Results in the quarter reflected solid growth outside the U.S. due to increased demand for our hemostat sealants and the timing of sales to distributors. Sales in the U.S. reflected 1 less billing day as compared to the prior year period. In addition, the prior year period reflected the benefit of a backorder clearance for one of our hemostat products. In Healthcare Systems and Technologies, or HST, sales in the quarter were above expectations and totaled $704 million, increasing 6%. Within the HST segment, sales in quarter for our Care and Connectivity Solutions, or CCS, division were $427 million, advancing 7% globally. Performance in the in the quarter was driven by 14% growth in the U.S. for CCS due to continued momentum in our Patient Support Systems or PSS business, which once again delivered strong growth and reflected a benefit from competitive wins in both our Med-Surg and ICU product lines as well as upgrades for existing customers.

Total U.S. capital orders for CCS rose 20% in the quarter, creating a healthy backlog to support future growth for this division. To date, we have not seen a slowdown in U.S. capital hospital spending, but in light of the macroeconomic uncertainty, we are closely monitoring the situation. Our focus remains on highlighting the benefits of our broad portfolio and the enhanced digital capabilities we have added to improve workflow efficiency. Performance for this division was partially offset by weaker sales outside the U.S. Importantly, we did see capital orders pick up internationally, and these are anticipated to contribute growth over the course of the year. Front Line Care sales in the quarter were $277 million and increased 5%. Performance in the quarter reflected a favorable comparison as well as continued signs of stabilization of the primary care market in the U.S. Moving to our Pharmaceuticals segment.

Sales in the quarter totaled $581 million, increasing 3%. First quarter sales within injectables and anesthesia of $335 million grew 4%. Performance in the quarter reflected mid-single-digit growth in our specialty injectables portfolio driven by strong international growth, reflecting government order and increased demand. This performance was partially offset by lower sales of anesthesia in the quarter. Our expectation is that the anesthesia business will begin to stabilize and the rate of decline for this business will start to slow. Drug compounding grew 2% and reflected a difficult comparison to the prior year period. And in other sales which represent sales not allocated to a segment and primarily includes sales of products and services provided directly through certain manufacturing facilities were $15 million in the quarter.

During the quarter, MSA revenue from Vantive totaled $63 million. These sales are not reflected in our operational growth but are included in our reported growth for the quarter. Before turning it over to Joel, I want to take a step back. Looking holistically, our strength across the segment reflects both the power and the trajectory of our newly defined enterprise. Our confidence in our future potential remains high, and we are committed to executing on our strategic objectives even amid a more dynamic global macroeconomic environment. I’m confident we’ll navigate this uncertainty just as we always do with the support of our 38,000 colleagues across the globe and with our mission to save and sustain lives, helping define our path forward. Now I’ll pass it over Joel, who will discuss performance down the rest of the P&L, along with our updated financial outlook.

Joel?

Joel Grade: Thanks, Heather, and good morning, everyone. As my colleague mentioned, we are pleased with our first quarter results, which came in ahead of our expectations on both the top and bottom lines. Before I begin, I want to highlight a point that both Brent and Heather referenced. As you’re all aware, we now face more dynamic global macroeconomic environment, which has created a level of uncertainty for everyone, including our customers. We remain squarely focused on addressing the needs of our customers through our broad portfolio of medically essential products and evaluating opportunities to better optimize our supply chain network in light of new tariffs with some activities already underway. Importantly, we remain committed to accelerating our investments in innovation, focused on bringing products to the marketplace that solve the problems that our customers face and help redefine healthcare delivery.

Importantly, we will not compromise on our efforts to thoughtfully accelerate innovation in targeted areas of the business as this is critical to support our future growth aspirations. Starting with the bottom line. First quarter adjusted earnings per share from continuing operations were $0.55 per share and came in ahead of our prior guidance of $0.47 to $0.50 per share, driven by the favorable top line results, lower-than-expected SG&A expenses and a benefit from TSA income and other reimbursements. In addition, our tax rate and other non-operational items came in favorable to our expectations, which more than offset a negative impact from foreign exchange. Before we’re specifically addressing the rest of P&L results, I want to make some comments regarding our continuing operations reporting.

As a reminder, prior to the close of the Vantive deal, corporate costs that had previously been allocated in the Kidney Care segment that would not convey with the Kidney Care business in the sale were reported in unallocated corporate costs. Post close, these costs are now allocated to each of our segments, along with income from our transition services agreements, or TSAs, as well as cost containment initiatives the company is in the process of undertaking. Our goal remains to fully offset the impact of these stranded costs and loss of TSA income by the end of 2027. In addition, during the quarter, we reclassified certain functional expenses to cost of goods sold from SG&A following the completion of sale of our Kidney Care business. These functional costs were previously recorded in SG&A and support manufacturing and are now classified as indirect costs, subject to inventory capitalization and recorded in cost of sales when sold.

First quarter adjusted gross margin from continuing operations was 41.8%, a decrease of 160 basis points compared to the prior year. The year-over-year decline reflected the impact of MSA revenues from Vantive and higher expenses related to planning and fulfillment. First quarter adjusted SG&A from continuing operations totaled $608 million or 23.2% as a percentage of sales, a decrease 310 basis points from the prior year period. This year-over-year decrease reflects the benefit from the reclassification of functional costs, along with lower stock compensation expenses in the quarter and continued disciplined expense management. Adjusted R&D spending from continuing operations in the quarter totaled $138 million and represented 5.3% as a percentage of sales, an increase of 50 basis points compared to the prior year period and reflects our continued investments in advancing new products across the portfolio and bringing innovation to patients across our segments.

TSA income and other reimbursements totaled $40 million in the quarter. This came in higher than expected and reflected increased levels of support currently required by Vantive. The associated expenses are reflected in other lines of P&L. These factors resulted in an adjusted operating margin of 14.9% on a continuing operational basis, improving 260 basis points compared to the prior year period. This performance reflects continued focus on operational execution as well as the benefit of TSA income and other reimbursements from Vantive. Taking a look at adjusted operating margin by each reportable segment. MPT’s adjusted operating margin for the quarter was 19.3%, increasing 80 basis points over the prior year period and reflecting positive pricing in the quarter, partially offset by elevated costs as we continue to improve volumes at North Cove and experience higher planning and fulfillment costs.

TSA income contributed to positive performance in the quarter. HST first quarter adjusted operating margins of 13.2%, a 320 basis point improvement from the prior year, driven primarily by improved top line performance. TSA income also contributed to performance and helped to offset increased corporate allocation expenses. Pharmaceuticals adjusted operating margins were 10.8% for the quarter, decreasing 270 basis points compared to the prior year. These results reflect certain onetime expenses realized in the quarter and an increase in corporate allocations. These expenses were partially offset by TSA income. Net interest expense from continuing operations totaled $64 million in the quarter, a decrease of $14 million versus the prior year period, reflecting lower interest expense following the paydown of existing debt with proceeds from the sale of Vantive.

Adjusted other non-operating income totaled $17 million in the quarter compared to income of $9 million in the prior year period, primarily reflecting lower losses from foreign exchange balance sheet accounts. The continuing operations adjusted tax rate for the quarter was 17.4%, benefiting from the strategic use of select tax attributes as we optimize our global structure following the sale of Kidney Care. And as previously mentioned, adjusted earnings from continuing operations were $0.55 per share for the quarter and increased 53% versus the prior year. Contribution to earnings included improved commercial performance positive pricing, the receipt of TSA income and other reimbursements as well as the benefit of lower expenses from non-operational items, including interest and tax.

Let me conclude my remarks by discussing our outlook for the full year 2025 and the second quarter of 2025, including some key assumptions underpinning the guidance. For full year 2025, Baxter expects total sales growth of 7% to 8% on a reported basis. This guidance reflects current foreign exchange rates, which are expected to minimally impact growth on the top line. This is an increase relative to our prior guidance which had assumed that foreign exchange would negatively impact sales by approximately 200 basis points. In addition, our reported sales guidance includes the contribution of approximately $310 million of anticipated MSA revenues from Vantive, down slightly our original expectations of $345 million. Operationally, Baxter continues to expect sales growth of 4% to 5%.

As a reminder, this guidance excludes the impact of foreign exchange, MSA revenues and the planned exit of IV solutions in China. The negative impact from exiting the IV/solutions business in China continues to be approximately 50 basis points to growth. Operational sales guidance for the full year by reportable segment is as follows: For MPT, we continue to expect sales to increase approximately 5%, driven by strength in our Infusion Systems business positive pricing and other underlying business momentum. As mentioned earlier, we do expect IV solutions growth to improve as we remove allocations in some of the compensation efforts. This guidance excludes the impact of exiting the IV solutions market in China, which is estimated to impact sales growth by 100 basis points.

We continue to continue to expect sales in our HST segment to increase approximately 3%. While we are very pleased with the building momentum and healthy backlog we have built in HST, we will continue to closely monitor the capital environment for any changes to hospital spending expectations. We continue to expect pharmaceuticals to increase approximately 5% to 6%. Before turning to our outlook for other P&L line items, I want to provide some thoughts regarding our assumptions around tariffs. Our updated guidance now includes the estimated impact from tariffs based on the current proposals enacted and assumes a reversion back to original proposed tariff rates following 90-day suspension. In addition, our guidance does take into account that we are able to mitigate a portion of these impacts.

In general, Baxter strives to make where we sell and buy where we make as part of our broader integrated supply chain approach. This allows us to deliver our products and solutions around the world with greater control and visibility to our operations. Currently, the majority of Baxter’s products sold in the U.S. are manufactured in the U.S. and made largely from U.S. many components. However, international procurement is part of our business operations, and as such, we are impacted from the U.S. and retaliatory tariffs that have been issued. We plan to take several actions to help minimize the impacts related to tariffs. Some of these actions will be able to be realized more near term to help mitigate the impact in 2025 and others will require more time than implemented but will help offset the impact in future years.

Some of these mitigation opportunities include: actively communicating lift and assessing our supplier base to identify risks and work to improve mitigations, which could include carrying additional inventory and identifying alternative suppliers or manufacturing locations. Identifying alternative shipping routes for suppliers and finished goods to help minimize the overall impact, assessing targeted pricing actions. And finally, continuing to work closely with our trade association partners in various countries to advocate for possible exemptions. Taking all this into account, we estimate the net impact to our results from tariffs is approximately $60 million to $70 million in 2025. Additionally, based on our standard rollout period, we expect to see the majority of the tariff’s impact in the second half of the year.

I’d note that, while China represents a very small percentage of our total sales. Given the magnitude of the tariffs that have been enacted between these countries, these tariffs now account for nearly half of the total impact. At this time, our tariff assumptions do not reflect any potential tariffs related to pharmaceutical products. One other item I’d like to highlight is that while current foreign exchange rates are expected to benefit top line relative to prior guidance, they do negatively impact our adjusted operating margins and adjusted earnings per share, which is driven by our current infrastructure footprint that remains post the sale of Vantive. We have plans over time to optimize our global footprint. Inclusive of these factors and underlying business performance, we now expect full year adjusted operating margin from continuing operations between 16% to 16.5%.

TSA income and other reimbursements are now expected to range between $140 million to $150 million. This increase reflects incremental services provided to Vantive with the related expenses reflected in the other lines of the P&L. We expect our non-operating expenses, which include net interest expense and other income and expense to total between $220 million to $240 million. On a continuing operations basis, we anticipate a full year tax rate of approximately 19% to 19.5%. We expect our diluted share count to average approximately 515 million shares for the year, which does not contemplate any share repurchases. Based on all these factors, we are increasing the low end of our prior guidance range and now anticipate full year adjusted earnings on a continuing operations basis of $2.47 to $2.55 per diluted share.

Specific to the second quarter of 2025, we expect continuing operations sales growth of approximately 4% to 5% on a reported basis and 1% to 2% on an operational basis. For the second quarter, foreign exchange is expected to positively impact the top line by approximately 50 basis points, and MSA revenues are expected to total approximately $80 million. The China IV Solutions exit is expected to impact top line growth by approximately 70 basis points in the second quarter. On a continuing operations basis, we expect adjusted earnings per share of $0.59 to $0.63. With that, we can now open up the call for Q&A.

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] I would like to remind participants that this call is being recorded, and a digital replay will be available on the Baxter International website for 60 days at www.baxter.com. Our first question comes from Joanne Wuensch of Citi. Your question, please.

Joanne Wuensch: It’s Joanne Wuensch and very nice quarter and start to the year. I have to ask the obligatory tariff question, specifically what you are pulling back on or managing to offset some of the headwinds? And how should we think about 2026? Should we just annualize your run rate that you gave for ’25? And then I’ll give you my second question upfront. The HST business, I think this was your strongest quarter since 2023. How should we think about that recovery and the sustainability? Thank you.

Joel Grade: Thanks, Joanne. It’s Joel. I’ll take the first part, and I’ll pass it over to Heather for the second. So from a tariff perspective, certainly, we do have a number of mitigation activities, some of which are underway already. Others which are continuing to be developed that also from a timing perspective, again, there’s going to be some spread on that. But I group it into a couple of things, being one, from a supply chain perspective, certainly some optimization activities around negotiating with suppliers, finding potential alternative supply, whether it’s different suppliers or in other word were different places. Looking to do things, we’re optimizing freight, optimizing supply. I think about routes and whether we need to go from one country to another to another or we can go direct.

Again, there are certain things we’re looking to really do to optimize those things. We’re certainly — from a pricing standpoint, I’d say it’s very targeted. There’s some very targeted areas around that and not a broad strategy there necessarily. But then from — and then finally, just from a continuing to seek additional exemptions working with our government team and then the various countries we operate in and certainly at our industry, groups to find different ways to potentially have exemptions for other products. So those are some of the things I’d say, broadly are the things we’re focused on from a litigation perspective. And I guess what I’d say from 2026 the way I would look at that again is, I think it’s probably fair, although as I said in my comments, the mitigation impacts aren’t necessarily all in place now.

And so those things are going to phase and so the impact of the mitigation activities will be phasing as we go into next year as well. So I’ll — for the second part, no, I’ll pass that over to Heather.

Heather Knight: Joanne, thanks for the question, and thanks for acknowledging the HST performance. We’re really pleased with the first quarter. And our teams have been working really hard with our customers. So we’re pleased overall with the beat. It was broad-based and across all of our businesses, really exceeding expectations, particularly around the building momentum that we’re seeing across the U.S. So we’ve got a healthy backlog, particularly in the PSS business, as I mentioned, strong order growth and a lot of competitive account wins. So the commercial excellence that we talked about last year and customer programs are starting to pay off as we’ve managed the supply recovery that we talked about last year. While we haven’t seen any slowdown today in the capital environment, we are monitoring the situation.

But didn’t feel even based on the momentum that it was prudent to just raise guidance in HST this year, but more maintained. But overall, I would say we’re happy with the momentum of the team and business and the leadership across the organization. So thanks for question.

Joel Grade: Yes. And actually, if I could just add one thing, Heather, to that, even in the FLC side, I think one of the things that was actually a good impact on this quarter was a balanced growth between both the CCS and Front Line Care. And I think the — we saw some stabilization, I’d say, in the primary care market. On the FLC side, we had — we also had less headwinds. In 2025 and 2024, we kind of talked about that heading into year. Our backlogs are closer to normal levels in FLC. And then obviously, we also had some favorable year-over-year comparisons that we’re up against. But just to want to add to Heather’s went there. I think, again, it really was not only the CCS part, which we’re really pleased with, but also again balanced truly across that portfolio.

Operator: David Roman of Goldman Sachs is on the line with a question. Please state your question.

David Roman: Thank you. Good morning, Heather, Joel and Clare. I wanted just to start here on the IV side. Hospitals have been pretty successful at implementing conservation programs. And we haven’t seen much of a disruption at least it seems from the outside in hospital operations or elective procedure volumes. So as you remove hospitals from allocation, can you maybe help us frame what you expect the impact to be to your business? And then also if you think hospitals will return to pre-hurricane inventory management levels? Or is there something that may have more structurally changed in how they approach managing this particular supply line? And then I have a follow-up on tariffs.

Heather Knight: Sure, David. Good morning. It’s Heather. So I’ll start. So when you think about conservation, it’s really not across all hospitals, there’s a subset of hospitals that are conserving right now. And we still assume in our outlook that there will be conservation as we exit the year the 10% to 12% range as what we are assuming when you exit the year. So that’s broadly for the U.S. There are many customers that are actually using more solution than pre-hurricane levels. So it’s definitely not a one-size-fits-all, but we are assuming the conservation continues that there’s been some adjustment in practice, and we saw some of that with Hurricane Maria as well. It sort of took about a year or so for that utilization to continue.

So we baked that into the forecast. I think it’s important to note when you think about MPT for the half, we worked really hard to make sure that we could stabilize our customers with inventory and IV. So the timing of how we manage that in the half, we recovered really quickly and we’re focused in Q1 on getting inventories back to good with our customers and with distributors. But the half when you look at it is really largely in line with our expectations. So that is driving how we’re thinking about MPT, particularly for the first half. But I would say that customers now are starting to really think about safety stock in an area like IV that is critical to healthcare and overall, very happy with the recovery out of North Cove, and I’m really proud of our teams the work that they did to make sure that we could get products to patients as quickly as possible.

So that drove some of the overachievement in the beats and MPT, but largely have baked in conservation to the forecast for the rest of the year. Thanks, David.

David Roman: Great. Thank you for that detail. I think, Joel, on the tariff side, there was a significant amount of confusion and I would say misinformation that entered the market on your tariff exposure in the past several weeks. So you — I understand that we don’t know what the pharma tariff may or may not be. But can you give us any parameters to frame how to think about that? Because if a pharma tariff is announced between now and when you report earnings again, we’re all going to try to quantify it. So maybe help us understand where the exposure is. How much do you import in finished goods from the Claris plant? I think it’s very small, but there’s obviously an API impact. Maybe just walk us through the moving parts there and the level of potential exposure.

Joel Grade: Yes. David, thanks. I mean, first of all, to answer your Claris question, that’s a very small thing. That’s not a material impact there. I guess, I’m not sure exactly what to give you there other than we’re just going to be continuing to wait and see how this develops. I mean, we’re certainly — some of the things we’re thinking through from a litigation perspective, obviously apply there as well. And so we’re trying to be very proactive and thinking about sort of the scenario planning around that. At this point, obviously, it’s still pretty up and near where that’s going to go or how that’s going to land. And what, if any, types of exemptions may be part of that. And so certainly, again, as I mentioned earlier, part of our industry conversations with governments are around the ability to have some of these type of product exemptions.

And obviously, for us, being generics versus some of the larger brands. And obviously, that is a sizable and more sizable impact for us from a margin perspective potentially. But again, nothing really to say other than we’re trying to be very proactive thinking about the scenario planning and what we would do to mitigate, but really nothing else to add at this point.

Operator: Travis Steed of BofA Securities is on line with a question. Please state your question.

Travis Steed: Hi. First, wanted to ask a margin question, both kind of short term and long term. First, on the gross margin. There was a little bit of a delta between your gross margin consensus. I assume that’s the reclassified certain functional expenses from COGS to SG&A. So I wanted to touch on that and kind of understand when you kind of think about TSA MSAs over the course of this year and next year, how to think about the margin impact? And then longer term, the path back to that kind of pre-COVID 19% operating margins for this business?

Brent Shafer: Sure. Thanks, Travis. So I’ll take that. A couple of things. From the margin or gross margin perspective question you had, it really comes down — so you said it’s the reclassification is a part of this. The dilution from MSA income is also a sizable part of that. And then just other things that I would say, we’re still recovering from some of some of the planning and fulfillment costs that occurred in North Cove that are also contributing to our gross margins this particular quarter. So I think those are really some of the main puts and takes as it relates to the gross margin perspective. Again, some of that, particularly the last one that I talked about, we do anticipate some of that mitigating over the course of the year.

The long-term path from TSA and MSA perspective, again, our anticipation is that from a TSA perspective, as I’ve said previously, our — we anticipate those being part of our world for certainly a good 18 to 24 months. Now again, we’re certainly planning for the phasing off of those things. We’re then we have a lot of cost containment activities that are happening today that are happening in preparation for the TSAs falling off. But certainly, the anticipation the TSAs being where they are this year. We talked about a 40 bps impact on a net basis from a streaming cost perspective. I think that’s something you should still expect here throughout the course of this year. And MSAs as well, we did talk about the fact that the MSA income is slightly less than we had anticipated, which therefore has, again, a slightly less dilutive impact from a margin perspective.

But I think the 310 million number we talked about, this will eventually phase out, but that’s something that will be being here certainly for the next couple of years. I would say the long-term path towards margin expansion really comes down to a number of different items starting with just our continued opportunity to continue to have our, again, strong growth. We’ve talked about the ideas of how we plan to invest in innovation and so new product launches are certainly an element of how over time we’ll continue to expand from a margin perspective. Pricing, certainly, we see some of that this year. Obviously, on an ongoing basis, pricing we’ll have a kind of a normal year, a little lesser impact. But then again, we do have another — some GPL renegotiation coming up in a couple of years.

So there may be some pricing impact there as well. From a product mix standpoint, and again, I’ll call it business mix perspective, is another area that we continue to see opportunities from a margin expansion, again, selling more of those areas that generate higher margins. And then finally, things like our margin improvement programs along the way that we continue to have in our supply chain. These are areas that, again, are continuous drivers of our margin expansion in addition to obviously between now and 2027, there will be full removal, if you will, of our stranded costs that are left over from kidney. And so — that’s a few of the areas of our puts and takes as it relates to margins and how we see that opportunity to expand as we go forward.

Travis Steed: Great. Thanks.

Operator: Vijay Kumar of Evercore ISI is on line with the question. Please state your question.

Vijay Kumar: Hi, guys. Thanks for taking my questions, and congrats on the nice execution here. Joel, maybe my first one for you on the guidance kind of question. If you look at second quarter, 1% to 2% for core Baxter. That’s a 350 basis point decel at the midpoint from Q1 levels. I think your comps get a little bit harder, couple of hundred basis points. So what’s driving this deceleration in the second quarter in the operating margins prior 16.5%, did that change because of tariffs?

Joel Grade: Yes. Thanks for the question. So from a revenue standpoint in Q2, it’s really a couple of things that are driving that outcome. One, as we’ve talked about some of the conservation that is happening in some of the hospital systems from an IV fluid perspective is one of the key drivers. This is one of the things we’ve talked about and we’ve got a preview that we anticipated happening for a while, and we’re seeing some of that, that’s one of the key drivers of that impact in the second quarter. I think another one part I would just say is, I guess, I’ll call it a degree of the degree of conservatism as it relates to some of the performance from an HST perspective. Obviously, as we’ve talked about, we’re pleased — with the momentum in that business, we’re pleased with the government side and some of the stabilization impact on Front Line Care.

But I guess I would just say there is an element to this that is continuing just be — have some level of conservatism in that as it relates to that business in particular. But certainly, those are some of the main drivers of the change from a Q1 to Q2 perspective. The other thing I would point out is that while that is the case, obviously, some of the overperformance in Q1 when you factor in then a little bit of the impact you discussed in Q2. Our H1 for the most part, comes in right around where we had expected. So the — so while there is a little bit of a shift in distribution between the quarters, first half of the year is something that we that we certainly we’re pretty consistent with how we had anticipated it coming in. Your second question, yes, the operating margin impact that you’re referencing was related to tariffs as well as some of FX, the impact that we talked about from a foreign exchange perspective.

Again, we — while we have some positive impact on the top line of FX, we actually do have a dilutive impact, I’ll call it, on the bottom line as it relates to foreign exchange. And this relates to some of the operations that we still have outside the U.S. I say it’s still remit from the Vantive business that we had. This is over time, plans to continue to optimize our infrastructure and our business, OUS. But that’s the other part of it that I would say is driving some of that impact as well.

Vijay Kumar: Understood. And maybe, Heather, one follow-up for you on this Novum, very strong numbers. Can you just remind us for context, like what’s been share gains over the past few quarters? Has it accelerated? And if these trends sustain, what’s the downstream implication from a consumables and IV fluid standpoint? Thank you.

Heather Knight: Yes. Hi, Vijay. I’ll tackle the first one, first question on Novum. So the backlog and pipeline Novum is strong. So yes, we have taken market share in the low single-digit range already. So there’s good momentum in the Novum franchise, not just for the launch. Novum has been in the market now less than a year, but also the innovation pipeline coming behind it. It’s pretty robust and rich. So we’re excited and our customers are excited about partnering with us around Novum. A lot of the pumps in the market have been a decade plus old. So we’re bringing new technology to the market with smarter and more sophisticated capabilities on interoperability, with digital suites that are going to follow supplement that launch. So good momentum around Novum and happy with the progress. And then your second question was about consumables? Behind that with the IV solutions?

Vijay Kumar: Yes.

Heather Knight: Yes. So similar to what I shared with David, we are seeing — we saw a steady uptick in customers rebuilding and rebalancing their inventory and consumption in the first quarter and we’re largely seeing what we expected in the half in terms of consumption and conservation. Some customers that maintained inventory and are taking advantage of the volumes in the market are using more than they used before the hurricane. Some have concerned just as a result of lacking of inventory in the market, but that is really starting to stabilize. And as I mentioned in my opening remarks, we’ll have allocations off really almost fully by this month, in the month of May, by about mid-May. So rebuilding customer confidence that they can order normally and stock their shelves normally with IV solutions sets all of the things that go along with IV therapy.

That’s been really a big part of it working — there’s just some background. Yes, working with our customers. So hopefully, that addresses the — Novum question. Well, thank you, Vijay, and thanks for acknowledging the quarter.

Operator: Robbie Marcus of JPMorgan is on the line with the question. Please state your question.

Robbie Marcus: Nice quarter. Two for me. One, I guess, 2.5, a quick clarifying. How much of stocking in fluids is moving from second quarter to first quarter? And then I guess the first real question. HST had nice performance, drove a good part of the beat in the quarter. Maybe speak to the trends you’re seeing there and how you’re feeling about the sustainability of the performance?

Heather Knight: Yes, Robbie. This is Heather. I’ll start that. So in terms of the stocking that we saw, I would say roughly about 1.5 points on the total company that we saw in terms of the distributor stocking. Again, our priority was to make sure that we could get product to customers and rebuild the network as quickly as possible so people could resume normal patient care. So having that in Q1 versus Q2 is actually a good thing. And as I said, largely in line with what we expected in the half. So about — I would think about 1.5 points in terms of the total company impact. And then HST’s performance, again, very pleased with the first quarter. As both Joel and I have mentioned, we’ve got a strong order book that we built in CCS, strong order growth.

We’ve got competitive share gains that we’ve seen primarily in CCS. Additionally, we’ve got higher-than-expected nurse call installations and really positive response so far to the launch of Voalte Linq with Scotty. So in that CCS. So there’s a lot of reasons to believe not just in the U.S. but also building momentum OUS. And then as Joel mentioned, FLC has largely stabilized. So we are seeing some really good benefits around our vital signs monitoring and recovering from some of the backlog in our cost business and strength OUS as well. So right now, there’s a lot reasons to believe, but I think like many other companies that are reporting, we’re being a little cautious on the capital environment that we’re seeing just because of some of the reimbursement challenges that our customers are facing tariff concerns.

I’m not sure how pricing is going to roll out. But internally within Baxter, we’re really pleased with where HST is. I think HST, we feel like is back. And based on a lot of the work that we’ve done around again, commercial excellence, customer programs, partnering with our customers on the things that they need and then furthering the integration of HST, I think we can sort of all acknowledge at the beginning of that integration didn’t quite go as planned, but we’ve done a lot of work over the last 12 months to really get that business back on track and delivering the growth that we expect. So we’re pretty bullish internally on HST and what that team can deliver. So thanks for that comment.

Robbie Marcus: Maybe just a quick follow-up, Joel, you put out comments for 2026. I believe it was maybe 75 to 100 basis points of operating margin expansion. You did a really impressive job offsetting the tariff impact in 2025. Does that commentary still hold for 2026? Or is it under evaluation given the tariff environment? Thanks.

Joel Grade: Yes. So thanks, Robbie. So a couple of things on that. I mean, obviously, the — we’re certainly committed to continued margin expansion. So let me just start with that. And obviously, there’s a lot to play out here yet as it relates to tariffs, just in general. As we — as I mentioned in our prepared remarks, we did put some pretty conservative assumptions in there in terms of how we anticipated that. And we’re, as I also mentioned, continuing to work through mitigation activities that again, I’ll say, our building over the course of the year. So again, like I would say, generally speaking, again, we feel good about the underlying momentum in the business. We are continuing to really strive and execute on consistent execution matching our expenses. And so in the end, like I said, we’re committed to expanding margins. I’ll just deal with that.

Robbie Marcus: Appreciate it. Thanks a lot.

Operator: Larry Biegelsen of Wells is on the line with the questions. Please state your question.

Larry Biegelsen: Good morning. Thanks for fitting me in. Congrats on a really nice quarter here. Just that most of might have been asked and answered. So just a couple of quick ones. Maybe, Brent, just any update on the timing for CEO, permanent CEO announcement. And Joel, on — just I’ll ask both upfront here. And Joel, oil prices have come down a lot. We remember when oil prices were going up, it negatively impacted Baxter. I mean how should we think about the reduction in oil prices potentially benefiting you? Thank you.

Brent Shafer: Great. This is Brent. I appreciate the question. Obviously, I don’t have a specific date. What I can tell you is the is the Board very focused and has been very diligent in their efforts to keep process moving. We’re really pleased with the search firm and their efforts as well. So although, I can’t give you an exact date, we don’t expect it to be an extended period I think it’s making good progress. Joel?

Joel Grade: Great. Larry, thanks for the questions. And from an oil perspective, I mean, yes, the price of oil is going down. The one thing I would remind you of is that for us, there’s a lot less variability at the company as it relates to that. Now that the kidney does has existed. That was part of the business that obviously from a delivering supply chain perspective at a higher level of consumption on that. So while there is some impact, they get at somewhat diluted pretty significantly given the fact that the — our kidney business is not as exited.

Larry Biegelsen: All right. Thanks so much.

Joel Grade: Thanks.

Operator: Pito Chickering of Deutsche Bank is on the line with a question. Please state your question.

Pito Chickering: Good morning, and thanks for fitting me in here. Looking at the updated EPS guidance, definitely a lot of moving parts here. Can you bridge the previous EPS guidance to the updated EPS guidance in terms of the good guys from operational strength in FX to bad guys and tariffs?

Joel Grade: Sure. So I mean, obviously, the top of the line stayed and obviously, we moved a little bit underneath. I would say a couple of things. One of the things we’ve talked about is, again, continued strong operational performance. The down side of it, as we talked about, was really related to some tariff impact an impact of the FX. Those are basically — the main drivers of the downside of that, it’s probably $0.15 on the EPS side that those are combined at. From there, obviously, we continue to talk about some of the strong operational performance as well as some under beneath the line, interest and taxes are obviously our interest in a little bit better than we anticipated. And the work that we did from a tax perspective to optimize some of the opportunities there is other product that’s really driving that. So that’s probably the bridge I’ve got for you.

Pito Chickering: Okay. Fair enough. Then looking at the CCS wins that you saw in the U.S. this quarter, what’s sort of really driving that? And how big is it backlog at this point? And then looking outside the U.S., you talked about softness in the quarter, and then you talked about it why it should rebound go back to growth. I guess why do you guys see the softness and why you think this should sort of return back to growth? Thanks so much.

Joel Grade: So from a CCS perspective, a couple of things I would say, again, we do have a strong backlog. I want to start with that. We’ve been talking about this now really since the latter part of last year that we’ve had a consistent strong build. In fact, our order book growth this quarter was in the 20% range. And so I think that’s really around part of what’s driving that. I think as I said in the earlier comments, there’s probably an element of conservatism in this. And as you think about the — I think Heather said earlier, we haven’t yet seen any impact from the capital purchasing standpoint. But that’s something we’re certainly closely monitoring. And I would say part of the conservatism built into this is simply around that as we monitor that situation.

And obviously, just to give ourselves a little breathing room in terms of how that business is performed. But again, we feel good about it. Maybe some conservative assumptions, but a lot of it has to do with what I just referred to.

Heather Knight: Yes, I can just add to that. I mean, Pito, we’ve really been focused on advancing and furthering our connected care agenda to in the digital enhancements that we’ve added in the CCS portfolio. And then recovery in FLC is a big one and then there’s some new product launches also coming across that business. But in light of the dynamic environment that we’re in, didn’t feel like it was prudent to really raise it at this point. But the backlog is strong. The competitive wins are strong at this point, and there’s been a lot of great commercial work done to further the HST business. So a lot of reasons to believe at this point.

Pito Chickering: Great. Thanks so much.

Joel Grade: Thank you.

Operator: Matt Miksic of Barclays is on the line with a question. Please state your question. Matt Miksic of Barclays, your line is open.

Heather Knight: We can go to the next question, and that will be our final question.

Operator: Danielle Antalffy of UBS is on the line with the question. Please go ahead with your question.

Danielle Antalffy: Hi, good morning, everyone. Thanks so much for squeezing me in and congrats on a really good start to the year. This might be jumping the gun a little bit, but it feels like now Baxter business is stabilized back on track. And I appreciate we’re awaiting a CEO announcement and all this could change. But just curious, Brent, Heather, Joel, if you guys could provide some commentary on how you’re thinking about when Baxter or maybe even just broadly the approach to organic versus inorganic investment. I know, paying down debt is a top priority. You’ve got a nice chunk of change to do that with the Kidney Care sale. So, just high-level thoughts there, again, appreciating with the new CEO announcement that could change a little bit, but I doubt it will change that much. So, thanks so much.

Joel Grade: Absolutely. Thanks for the question and the acknowledgment of the quarter. I’ll say a couple of things about that. Number one, as we’ve talked about, the opportunity now post kidney is for us to really focus and target our investments around those areas that are accelerating growth, and that includes both organic and inorganic opportunities in the sense of holding tuck-in deals. We have said that we anticipate our net debt-to-EBITDA ratio of three times by the end of this year. We — despite some of — some negative cash impact from tariffs, we still anticipate that and on target to do so. And once we — so from there, then this is the time when I think our opportunity to actually start to make those kinds of investments in inorganic opportunities is a key part of our growth strategy.

I would also say it and I know you didn’t ask this, but I’ll say it anyway, that’s also an opportunity to reinstate a buyback program where we not only taking out some of the dilution from not having bought shares back for the last couple of years, but also to have a really regular program of buying stock back. So broadly speaking, certainly, the capital allocation opportunity very much does change. Again, we are on target with our year-end goal of three times net debt to EBITDA, really looking forward to all those opportunities ahead.

Danielle Antalffy: Thank you.

Joel Grade: Thanks very much.

Heather Knight: Thanks, Danielle.

Operator: There are no further questions at this time. Ladies and gentlemen, this concludes today’s conference call with Baxter International. Thank you for participating.