Prepared remarks
Good morning, ladies and gentlemen, and welcome to Baxter International's Second Quarter 2026 Earnings Conference Call. As a reminder, this call is being recorded by Baxter and is copyrighted material. It cannot be recorded or rebroadcast without Baxter's permission. If you have any objections, please disconnect at this time. I would now like to turn the call over to Mr. Kevin Moran, Vice President, Investor Relations at Baxter International. Mr. Moran, you may begin.
Good morning, and welcome. Today, we'll discuss Baxter's second quarter results, along with our updated financial outlook for the full year 2026. This morning, a press release was issued with our preliminary earnings results and updated outlook. The press release and investor presentation are available on the Investors section of the Baxter website. Joining me today are Andrew Hider, President and Chief Executive Officer; and Anita Zielinski, Interim Chief Financial Officer, Chief Accounting Officer and Controller. During the call, we will be making forward-looking statements, including comments regarding our updated financial outlook for the full year 2026 and the anticipated drivers of the third quarter and second half 2026 performance. The anticipated impact of various regulatory and operational matters, including ones related to our infusion pump platform and ongoing supply chain challenges and commentary regarding the global macroeconomic environment, including tariff impacts and the broader inflationary pressures. Forward-looking statements involve risks and uncertainties, which could cause our actual results to differ materially from our current expectations. Please refer to today's press release, the forward-looking statement slide at the beginning of our investor presentation and our SEC filings for more detail. In addition, please note 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'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 organic growth, which excludes the impact of foreign exchange, MSA revenues from Vantive and the impacts associated with business acquisitions or divestitures. Unless otherwise noted, all financial results on today's call reflect continuing operations and exclude Baxter's former Kidney Care business, which is reported as discontinued operations. Finally, Andrew, Anita and I will take questions following the prepared remarks, and we kindly ask that you limit yourself to one question and one brief follow-up so that we can give as many people in the queue an opportunity. With that, I'd like to turn the call over to Andrew.
Thank you, Kevin, and good morning, everyone. I am encouraged by our second quarter financial results that came in ahead of expectations, demonstrating continued steady progress on our strategic priorities and improved execution across the business. In the quarter, broad-based operating performance drove organic revenue growth of 5%. Additionally, results reflect a tariff refund that was not contemplated in our original guidance and free cash flow generation was again positive, which reflects our focus on strengthening financial flexibility. We are now in a stronger position to deliver on the financial goals we set at the start of the year. I am pleased with the progress we are making, but I'm far from satisfied. We are still early in our turnaround and have more work ahead of us. We are laser-focused on executing in the second half of the year as well as driving improved performance and long-term shareholder value creation. With that, let me provide some highlights of our performance in the quarter. Second quarter global sales totaled approximately $3 billion, representing an increase of 5% on both a reported and organic basis. We saw growth across the portfolio, led by Advanced Surgery and Drug Compounding. Every segment and division contributed with sales increasing in both the U.S. and internationally. Adjusted earnings for the quarter were $0.56 per diluted share versus $0.59 in the prior year period. As expected, this reflects the known mechanical headwinds that we have previously discussed and that Anita will cover in more detail. It also includes a tariff refund of $75 million that was not assumed in our previous guidance and contributed approximately $0.11 per diluted share. Importantly, absent this benefit, margins and earnings still exceeded our expectations due to the strength of the operating performance. With respect to Novum IQ LVP, we have identified corrections to address the field actions and are in the early stages of verification testing. We continue to work closely with the regulatory authorities and support our current Novum LVP customers who continue to operate with the available mitigations while also continuing to serve the market with our broader pump portfolio. Overall, we saw steady demand across our end markets during the quarter. Growth remains strong in Advanced Surgery, and we have a healthy order book in our Care & Connectivity Solutions business. Of course, we continue to closely monitor the broader environment, including macroeconomic uncertainty and volatility in oil prices. Looking ahead, we are raising our outlook for full year organic sales growth to reflect the strong Q2 performance and our confidence in the back half of the year. We are also increasing our outlook for adjusted EPS to reflect the tariff refund. We continue to expect margins to expand in the second half of the year, driven by higher volumes, consistent with typical seasonality, benefits from our cost structure actions, and the roll-through of higher cost inventory. Shifting now to our turnaround efforts. We continue to show progress on our three strategic priorities. The first of those priorities is stabilizing the business, particularly in areas that require increased focus. For example, we continue to focus on improving supply reliability across portions of our pharmaceutical portfolio, recognizing that challenges remain, including with certain products supplied by a contract manufacturer. Additionally, we had strong execution against customer demand in Care & Connectivity Solutions. Overall, we are seeing encouraging progress and are focused on building greater consistency across the portfolio. As part of our efforts to stabilize and improve performance, earlier this year, we brought together our Pharmaceuticals and Infusion Therapies & Technologies businesses under a single leader. Our new reporting structure reflects that change with the combined business now reported as Infusion Therapies & Platforms, or ITP, within the Medical Products & Therapy segment. We believe the combination will support stronger coordination, execution and innovation across businesses that share common customers, capabilities and workflows in the pharmacy space. Moving on to our second strategic priority, which is strengthening the balance sheet. During the quarter, we again saw positive free cash flow generation, bringing our year-to-date total to $257 million. This is another positive step forward and reflects our continued focus on improving working capital and strengthening cash flow generation across the organization. There is still significant work ahead. The strides we have made in the first half give us increased confidence in our ability to achieve our net leverage target of approximately 3x by the end of the year. Achieving a stronger and more flexible balance sheet unlocks more optionality to drive shareholder value, including strategic tuck-in M&A that enhances our customer offerings and growth profile as well as the option to return capital through share repurchases. Turning to our third priority, driving continuous improvement. Now in its third quarter since deployment, the Baxter Growth & Performance System, or Baxter GPS has taken hold in the company culture and is becoming increasingly embedded in how each division operates. Through the first half of the year, we have completed over 400 continuous improvement events held across Baxter. We have nearly 200 in flight and another 400 planned in the pipeline. While no single event will define our future, small improvements over time should lead to big improvements. Cross-functional teams are using Baxter GPS tools to identify execution risks earlier and implement mitigating actions sooner. Continuous improvement activity is supporting working capital, commercial, manufacturing and R&D priorities with early examples of improved efficiency and simplification across the business. We are also making focused investments in innovation to drive growth across the portfolio. We recently launched PeerVue, a differentiated digital benchmarking application that enables hospitals to compare infusion data and drive infusion therapy best practices. This is strategically important for the ITP business because it enhances our digital road map for our infusion systems platform by including PeerVue and our IQX platform as a core digital capability, further differentiating our infusion offering versus competitors. In Front Line Care, we recently launched a limited market release of Vest APX Acute Care, an airway clearance device featuring a smaller and lighter platform, updated interface and improved patient comfort. Early customer response has been positive with full market release planned towards the end of Q3. Additionally, adoption continues to build for the Connex 360 connected patient monitoring platform with strong order growth throughout Q2 and a growing sales funnel. In Care & Connectivity Solutions, early momentum for Dynamo, our smart hospital stretcher continues with a strong commercial funnel and positive customer feedback. Additionally, we recently launched Dynamo in Canada, our first international expansion of the stretcher. And beyond product development, innovation is being advanced broadly across the company as we continue to prioritize using AI internally to work smarter, move faster and operate more efficiently. I am encouraged by the early progress we have made and even more excited about the future of Baxter. My visits with stakeholders around the world, engagement with our team and conversations with our customers have validated the opportunity I saw when I decided to join the company. Baxter sits on a foundation of good businesses with leading positions and time-trusted brands with clear opportunities for more rigorous execution to unlock our full potential and deliver consistent and sustainable earnings growth and long-term value for our shareholders. I will now turn the call over to Anita to provide more detail on our second quarter results, including segment level performance as well as our 2026 guidance. Anita, over to you.
Thanks, Andrew, and good morning, everyone. I'm happy to be joining the call this morning to cover the details of Baxter's second quarter financial performance as well as commentary on our updated outlook for the remainder of 2026. Second quarter 2026 global sales totaled approximately $3 billion and increased 5% on both a reported and organic basis. On the bottom line, adjusted earnings were $0.56 per share, a decrease of 5%. This decline reflects two known and expected headwinds that we have talked about previously. First, the roll-through of higher cost inventory produced at the end of 2025; and second, an unfavorable comparison to the prior year period, which benefited from a change in estimate that resulted in a reclassification between SG&A and cost of sales. These two headwinds were partially offset by a $0.11 per diluted share benefit related to an IEEPA tariff refund. Now I'll walk through our results by reportable segment. Commentary regarding sales growth will be on an organic basis. As a reminder, beginning with our reporting this quarter, our Pharmaceuticals business has been consolidated into the former Infusion Therapies & Technologies or ITT division within our Medical Products & Therapies segment. The combined division is now named Infusion Therapies & Platforms or ITP. In addition, certain sales previously reported within Other, primarily related to products and services provided through manufacturing facilities aligned with ITP are now included within the division. Sales in our Medical Products & Therapy segment, or MPT, were $2.1 billion and increased 5% in the quarter. Within MPT, sales of our new Infusion Therapies & Platforms division totaled $1.7 billion and increased 4%. Growth was driven by drug compounding and IV Solutions. This growth was partially offset by lower sales within Infusion Systems and Injectables. Within IV Solutions, performance reflects growth off the new lower baseline of demand following clinical practice changes in the market. In Infusion Systems, results in the quarter reflect the net impact of lower sales due to the ongoing shipment and installation hold of the Novum IQ LVP, customer returns and transitions to Spectrum. Importantly, demand for Spectrum IQ remains steady. Consistent with the first quarter, we did not see a material impact from Novum LVP-related returns in the second quarter. Performance in the quarter also reflects continued strong demand for our Drug Compounding Services, which grew double digits. This strength was partially offset by lower injectable sales due to supply constraints and continued softness in certain premixed products. Sales in Advanced Surgery totaled $331 million and grew 12%. Results reflect continued strong demand and increased volumes from our global portfolio of hemostats and sealants, strong commercial execution across regions and steady procedure volumes. MPT's adjusted operating margin totaled 19.3% for the quarter, decreasing 350 basis points. Results reflect higher manufacturing costs, including lower absorption and the unfavorable impact from the Section 122 tariffs. Performance also reflects the unfavorable prior year cost timing comparison as well as a lower contribution from pricing. These were partially offset by the benefit related to the IEEPA tariff refund as well as increased sales volumes. In our Healthcare Systems & Technologies segment, or HST, sales totaled $801 million and increased 4% in the quarter. Within HST, sales of our Care & Connectivity Solutions, or CCS division were $502 million and grew 5%. Within CCS, performance was driven by strong patient support systems volumes globally, including execution against the U.S. backlog and growth across international markets. To date, in the U.S., we have not observed any change in hospital capital spending, and our order book continues to reflect solid demand. However, given broader macroeconomic uncertainty, we continue to closely monitor the environment. Front Line Care sales were $299 million and grew 2%. Performance in the quarter reflects continued momentum from Connex 360 and the timing of large customer deals relative to the first quarter. Partially offsetting these benefits were planned global product exits in the portfolio. HST adjusted operating margin totaled 20.3% for the quarter, flat compared to the prior year period. Results benefited from the tariff refund as well as increased sales volumes. These benefits were offset by the previously discussed unfavorable year-over-year comparison related to cost timing. Finally, other sales, which now solely represent MSA revenue from Vantive totaled $83 million. As a reminder, these sales are included in our reported growth, but they are not reflected in our organic growth. Now moving through the rest of the second quarter P&L. Adjusted gross margins were 38.6%, a decrease of 210 basis points driven by the previously discussed headwinds in cost of goods sold. These impacts were partially offset by the tariff refund benefit. Adjusted SG&A totaled $648 million or 21.9% of sales, a decrease of 80 basis points. This reflects the benefits from previously implemented cost actions. Adjusted R&D spending totaled $125 million or 4.2% of sales. TSA income and other reimbursements totaled $52 million in the quarter, which came in favorable versus expectations. This favorability was offset by higher TSA-related expenses and therefore, did not have a material net impact to earnings. Altogether, these factors resulted in an adjusted operating margin of 14.2%, a decrease of 90 basis points. The year-over-year change reflects the same underlying factors discussed earlier, including higher manufacturing costs and the unfavorable prior year comparison, partially offset by the benefit from the tariff refund. Net interest expense and other expense totaled $59 million in the quarter. The adjusted tax rate for the quarter was 19.9%, driven primarily by the mix of earnings across jurisdictions. In total, adjusted earnings were $0.56 per share for the quarter. Before turning to our 2026 outlook, I want to comment on cash flow and liquidity. Second quarter free cash flow was $181 million, improving sequentially from the first quarter and reflecting continued progress in cash generation. This progress was driven by improved operational performance and focused execution across targeted areas of working capital. We remain focused on strengthening cash flow generation and improving the balance sheet. Reducing leverage remains our top near-term capital allocation priority, and we continue to target approximately 3x net leverage by year-end. Now turning to our updated outlook for the full year 2026. For the full year, we now expect total sales growth to be 3% to 4% 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 million from MSA revenues from Vantive, representing approximately 30 basis points of impact on reported growth. Excluding the impact of foreign exchange and MSA revenues, we now expect organic sales growth of 2% to 3% for 2026. This reflects the stronger performance year-to-date and our expectation for continued growth in the second half. As it relates to the segments, in MPT, we now expect full year organic sales to grow low single digits. This reflects stronger year-to-date performance, including in Drug Compounding. As a reminder, the year-over-year comparison in Infusion Systems improves in the second half as we lap the shipment and installation hold of Novum LVP. Our outlook continues to incorporate potential customer uncertainty surrounding the Novum ship and installation hold. In HST, we continue to expect full year organic sales to grow low single digits, supported by anticipated contributions from both the CCS and Front Line Care divisions. Turning to our outlook for other P&L line items and key assumptions beginning with tariffs. We continue to expect approximately $40 million of impact net of mitigating actions in the second half of the year. TSA income and other reimbursements is now expected to range between $155 million to $165 million. Higher TSA income is expected to be offset by higher TSA-related expenses and therefore, not expected to have a material net impact to earnings. We continue to expect full year adjusted operating margin to range between 13% to 14%. We now expect our nonoperating expenses, which include net interest expense and other income and expense to total between $260 million to $280 million. We continue to anticipate our full year tax rate to range between 18.5% and 19.5%. We continue to expect our diluted share count to average approximately 518 million shares for the year. Given the tariff refund in the quarter, we are raising our full year adjusted earnings from $1.85 to $2.05 per diluted share to $1.95 to $2.15 per share. While we are not providing quarterly guidance, I will offer some additional color on how we expect performance to progress over the remainder of the year. Overall, we are reiterating the framework we have consistently laid out for 2026. Known mechanical headwinds in the first half, followed by expected improvement in the second half. The drivers of this improvement remain consistent with what we laid out last quarter. First, we continue to expect higher volumes and the associated operating leverage in the second half of the year relative to the first half. This is consistent with our historic seasonality and aligns with our updated outlook for sales. Second, we continue to expect to see the benefits from the cost structure actions taken earlier this year. As I noted in the quarter, we have already begun to realize these. And third, as previously referenced, the higher cost inventory produced at the end of 2025 has now rolled through our P&L. With respect to free cash flow, our performance through the first half represents meaningful progress and supports our expectation for improved free cash flow generation in 2026 relative to 2025. In closing, I'm also encouraged by both our second quarter results as well as the continued traction we are seeing across the organization from Baxter GPS. With that, we can now open up the call for Q&A.
Questions and answers
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. Your first question from the line of Robert Marcus of JPMorgan.
Congrats on the nice 2Q. I will ask both my questions upfront here. Clearly, a better-than-expected result on the top and bottom line in second quarter. I'd love if you could speak to some of the drivers of the acceleration on the top line and the confidence in the guidance raise. Same question on the bottom line, but it does appear like there were a number of one-time items in 2Q, and you did raise the EPS guide less than the 2Q beat, implying perhaps softer second half underlying EPS. And then on 2027, given the one-time items, do you still feel confident you'll be able to grow EPS next year?
If I take a step back, I'll walk this through in pieces. First, we're pleased with the quarter. This demonstrates continued steady progress on our strategic priorities and improved execution across the business. We saw broad-based operational performance improvement and all segments and divisions were growing. A couple of callouts: in MPT, we saw strength driven by double-digit growth in Drug Compounding. We also saw continued strong performance in our Advanced Surgery business. And while the baseline was lower, we saw strong performance in our IV Solutions organization. In HST, CCS benefited from strong patient support systems demand. Within our Front Line Care business, our Connex 360 product line continues to resonate well with customers, and we see improved performance in our funnel and our ability to execute. As a reminder, there was a tariff refund of about $0.11 that was not contemplated initially. Absent this, we continue to be focused on how we're going to strengthen the organization and continue to perform. As we look at 2027, the path to 2027 is through execution in 2026 and especially the second half of 2026. While pleased with the quarter, it's one quarter. Our team is focused on driving the business and continuing to execute through the remainder of the year. The nonrecurring tariff benefit won't flow through next year. We'll provide additional color on 2027 at the appropriate time. But right now, we're focused on executing in 2026.
Travis Steed of Bank of America is on the line with a question.
Congrats. Q2 was a high say-do ratio. Maybe I would start with Q2. I'm curious how big the Drug Compounding was in Q2. How much of that? Was that 20% plus? Is that something that drove more of the upside this quarter, just given the mix on gross margin was a little bit light. If there's anything you could say on Drug Compounding this quarter and how much that was of the beat?
Travis, we did call out Drug Compounding as a significant portion of the beat in the quarter. It grew double digits. When you think about our raise for the second half of the year, it reflects what we saw in the second quarter. You are correct that Drug Compounding inherently has lower margin, and so that impacts our mix.
While we're pleased with the double-digit growth, this business has favorable cash conversion and there is room for improvement on margins where we're focused. Overall, we are pleased but have work to do to get performance more in line with the overall Baxter profile.
Makes sense. I want to push a little more on the guide. Earnings beat $0.19 this quarter, tariff refund $0.11, TSA $0.04, lower interest $0.02 to $0.03, only raising by $0.10. Is this just being conservative on the second half? And then how are you thinking about the TSA income dynamic and the headwind for next year. Is that something you can offset or have to lap?
Let me start on TSA: we saw higher TSA income in the quarter than expected, but we also saw higher TSA-related expenses. At a net level, at operating income, it was not a material impact. The same applies for the full year: higher TSA income is expected but offset by higher TSA-related expenses, so it's not a big change when thinking about the drop-through to the bottom line. Andrew can address the broader confidence in the second half.
We're pleased with the performance in the quarter, but a lot of work remains and our team is focused on this. It is one quarter, and we are focused on executing for the second half of the year, preparing for 2027, and aligning the organization around performance. GPS is central to driving consistent execution across the company.
Larry Biegelsen of Wells Fargo is on the line with a question.
Congrats on the progress here. Andrew, maybe a little more of an update on Novum IQ. You talked about it early in the validation process. What are the next steps? And if you don't get Novum back on the market, how durable is Spectrum IQ as a workhorse pump?
The short answer is we're making progress. We continue to work closely with regulatory authorities and support our current Novum LVP customers using the mitigations in place. We like our total pump portfolio: Novum syringe, Spectrum LVP, and they are on the IQX platform. We also launched PeerVue to increase value for customers. We are pleased with our total offering and the value proposition it brings, and we are focused on bringing Novum LVP back when it's ready while continuing to deliver value to customers today.
That's helpful. Andrew, obviously compounding was strong. Talk about injectables and anesthesia, what's the plan to turn that around? When we had visibility on that, those were declining, I believe.
This business remained pressured due to ongoing supply constraints and continued softness in premix. We are taking specific actions to improve supply conditions on selected products. One area of focus is a contract manufacturer that remains constrained. We are working closely with them to improve operational efficiency, align around product, and maintain high quality. These issues are reflected in our full year guidance, and we are in the stages of executing steps to improve performance.
Vijay Kumar of Evercore is on the line with a question.
Congratulations on a nice sprint here. On the performance within second quarter: were there any one-timers? Was there any restocking benefit from IV fluid? I know the market went through a rebasing effort. Also any quarter-end phenomenon, talk about phasing in the quarter—anything that stands out to you?
On IV Solutions, we did not see a material restocking; it's not a significant factor in our overall IV business. This is the new baseline after clinical practice changes, and we feel good about our market position, but we continue to work to improve alignment with customers. Across the quarter, we saw broad-based strength, and I called out areas with additional increase. We have a lot of work to finish the year strong, and teams are focused on executing and using GPS as our guide.
That's helpful. One more product-related question on Connected Care. There's been concern that hospitals might be cautious on utilization and CapEx. Can you talk about your order book within Connected Care? Any signs of slowdown in customer CapEx spending?
Demand remains stable, supported by a strong U.S. capital order book and funnel visibility across patient support systems and general site solutions. We continue to support customers as they invest for the future, but we are watching the market closely. In my customer meetings, we see continued focus on investments that improve workflow and process alignment. We are also seeing early positive customer response to the Dynamo stretcher platform. Early days, but progress is encouraging. We are not immune to macro risks, so we remain vigilant.
Pito Chickering of Deutsche Bank is on the line with a question.
I'll ask the Drug Compounding question differently. Looking at the organic revenue guidance raise of 200 to 300 basis points, and the implied EPS in the back half was a bit lighter than Street despite some positives like interest. What is the margin contribution of the guidance raise you put into the guidance?
Pito, drug compounding was a large portion of Q2 performance. Year-to-date organic sales grew about 2%. Our new full year sales outlook of 2% to 3% means we expect sales to be at that growth rate or higher. Regarding EPS, the raise largely reflects the tariff refund we received in Q2, which was $0.11 and was one-time in nature; that refund was not previously included in our EPS guidance. The new EPS guidance reflects inclusion of that refund.
So you raised EPS by the tariff and increased revenues in the back half but there's no EPS flow-through from the revenue increase. Can you give the good and bad items on margins in the back half versus previous guidance, including oil and shipping costs?
From an operating margin standpoint, we've been clear about first half headwinds followed by expected improvement in the second half. The new item is the Q2 tariff refund, which is nonrecurring. If you normalize Q2 for that benefit, you should expect sequential improvement for the rest of the year driven by higher volumes in the second half, benefits from the cost structure actions—which have started to manifest—and the roll-through of the higher cost inventory produced at the end of 2025. That last item is expected to drive a Q2 to Q3 sequential improvement. Overall, the framework we laid out is consistent with our previous messaging.
On supply, we continue to closely monitor and have seen some pressure, but it's been manageable and within our guidance. On oil prices and related impacts, with the Vantive spin we've seen a lesser impact on our business; we continue to monitor and have been able to offset where needed.
Patrick Wood of UBS is on the line with a question.
I'll ask both up front. First, can you unpack a bit more on Advanced Surgery—hemostats and sealants growth has stayed stronger longer than expected. Second, I know you're not guiding on 2027, but as we contemplate 2027 and TSA income that comes out, is that still EPS neutral that year? Should we include it in our models?
On Advanced Surgery, we're pleased with the progress: strong performance from the team, solid alignment with customers, and product acceptance. The business supports our mission to improve patient care, and the team is executing well across regions. Regarding 2027, I can only reiterate that execution in 2026 is the path to 2027. There are many moving parts, and we'll provide more color on 2027 at the appropriate time, including TSA.
Joanne Wuensch of Citi is on the line with a question.
Nice revenue results. First, regarding the overall hospital environment and procedures: there's debate about how changes to the ACA are impacting procedures, and with your presence in hospitals, I suspect you have a frontline seat. What are you seeing? Second, I want to make sure I understand gross margins: the impact of tariffs in Q2 specifically, and how should we think about full year gross margins and the path to recovery?
First, overall we're not seeing a change in customer behavior or the overall environment. We're monitoring it closely and I frequently meet with customers. We're also launching new products to support patient care and workflow optimization. Regarding gross margins, we haven't provided explicit gross margin guidance for the full year, but the moving pieces relevant to operating margin are also relevant to gross margin. The tariff refund in Q2 was a positive; the largest headwind in Q2 was the roll-through of higher cost inventory, which has now been cycled. If you normalize Q2 for the tariff refund, you should expect sequential improvement through the balance of the year.
To add: the tariff refund benefited Q2. The roll-through of higher cost inventory was the largest headwind and has now been cycled. Think of Q2 as a starting point, normalize for the tariff refund, and expect sequential improvement for the rest of the year driven by volumes and cost structure benefits.
Rick Wise of Stifel is on the line with a question.
Two questions. First, Front Line Care was up 2% in the quarter. Anita noted planned product exits—what was the specific impact on growth? What would it have been excluding that? When do we get past that? More broadly, how should we think about Front Line Care growth going forward? Is this a mid-single-digit grower with innovation that changes the trajectory? Second, where has the turnaround gone better, faster, bigger than you expected, and where would you have wished it to go faster? How are you evolving your focus to accelerate the faster stuff and improve the slower areas?
On Q2, Connex 360 contributed to growth year-over-year in Front Line Care. In the context of total Baxter it's a smaller contributor, but for Front Line Care it was impactful in the quarter.
Regarding planned exits, they are not material but we monitor them. Our focus is on aligning the portfolio to where we create value for customers and strong portfolio management. We aim to be market-first, launching products and sustaining solution sets to keep customers well supported. On the turnaround, I'm very pleased with how GPS has been adopted across the company. It's about 'boring in consistency and brilliant in execution.' Since deployment, we've completed over 400 continuous improvement events, have nearly 200 in flight, and another 400 planned. The flywheel starts with strategy, breaks into targeted improvements, aligns KPIs, and drives measurement at annual, quarterly, monthly, and daily cadences. I travel frequently and see the teams embracing this approach. Leadership focus is critical; we continue to build capable teams and sustain the drive to get better every day. I'm pleased with progress, but not satisfied. We are early in the journey and focused on finishing the year strong and preparing for 2027.
Matt Taylor of Jefferies is on the line with a question.
Follow-up on the operating environment: you said patient support products show stable demand and little change in CapEx. Could you be specific—are you seeing any impact from ACA or changes in Medicaid or HIX subsidies? Can you frame that risk for us? Also on 2027, previously you talked about confidence in growing top line and earnings in 2027—can we still assume that's the case or do you have more confidence now after Q2?
We are not immune to policy changes, but we have not seen a material change in customer buying behavior. We continuously assess customer behavior and external documentation. Net-net, we haven't seen a major change; we are monitoring closely. As for 2027, we are pleased with Q2 but execution in 2026 is the path to 2027. We'll provide more detail in time, but right now we remain focused on executing for the rest of 2026.
Josh Jennings of TD Cowen is on the line with a question.
Andrew, Baxter has had comp variability as we assess each business unit. Historically we've thought of the weighted average market growth rate of Baxter's portfolio around 3% to 4%. Does that hold when comps stabilize? Where do you see Baxter's portfolio—what business units are primed to gain share as you reach steady state in 2027 and beyond?
We view the overall portfolio as a low single-digit growth market. Within that, certain areas show stronger performance: Advanced Surgery is strong, and Compounding has been a strong grower. Our goal is to execute across the portfolio, improve leverage, and strengthen the balance sheet—targeting roughly 3x net leverage by year-end. That improves optionality for capital allocation, tuck-in M&A, and returning capital. Execution, GPS adoption, and team capability will determine share gains over time.
There are no further questions at this time. I will now turn the call back to Andrew for closing remarks.
Thanks, operator. We are encouraged by the progress we're making and remain focused on the work ahead. Our turnaround is gaining traction. Execution is improving. We're building momentum across the business. We believe this positions Baxter to deliver more consistent performance, sustainable growth and long-term value for shareholders. Thank you for your time. Appreciate the interest. Stay safe, and goodbye for now.
Ladies and gentlemen, this concludes today's conference call with Baxter International. Thank you for participating.