BAXTER THIRD-QUARTER 2026 FINANCIAL RESULTS - HILL-ROM HOLDINGS INC

Explicit Guidance:

• Full-Year 2026 Total Sales Growth: Raised to 4–5% reported; driven by 1% foreign exchange tailwinds and offset by ~$25M headwind from Vantiv MSA revenues.
• Full-Year 2026 Organic Sales Growth: Raised to 3–4% (previously 2–3%).
• Segment Organic Growth (FY 2026): Medical Products & Therapy (MPT) expected to grow low-to-mid-single digits; Healthcare Systems & Technology (HST) expected to grow low-single digits.
• Full-Year 2026 Adjusted EPS: Raised to $2.05–$2.15 (previously $1.95–$2.15).
• Full-Year 2026 Adjusted Operating Margin: Maintained guidance of 13–14%.
• Full-Year 2026 Non-Operating Expenses (Net Interest & Other): Expected to total $245–$255 million (down from previous levels due to debt reduction).
• Full-Year 2026 Effective Tax Rate: Expected to range between 18.5% and 19.5%.
• Full-Year 2026 Share Count: Average diluted shares expected at ~519 million.
• 2027 Outlook: No detailed guidance provided today; comprehensive 2027 outlook including Q4 earnings expectations to be released on the Q4 2026 earnings call in February 2027.
• TSA Income & Vantiv Reimbursements (FY 2026): Expected range $165–$175 million; impacts largely offset by Vantiv-related expenses with no net earnings contribution.

Business-Segment Outlook:

• Medical Products & Therapy (MPT):
  • Infusion Systems: Growth expected to continue, driven by SpectrumIQ, digital solutions, and administration sets.
  • Drug Compounding: Strong demand expected to persist globally; growth of ~9% in Q3 indicates sustained trajectory.
  • IV Solutions: Sales expected to grow off a new, lower demand baseline following clinical practice changes; annualization of Novum shipment/install hold impacts.
  • Injectables: Discontinued production of Cephalos (SEF) products effective end of October; these products contributed ~$50M sales and $30M operating income in 2026. Continued support for contracted customers into 2027.
  • Advanced Surgery: Continued strong demand for hemostats/sealants; benefited from competitor supply challenges; expected to maintain growth but face increasingly difficult year-over-year comparisons in 2027.
• Healthcare Systems & Technology (HST):
  • Care & Connectivity Solutions (CCS): Growth expected to be supported by U.S. backlog execution and international markets; no observed changes in U.S. hospital capital spending to date.
  • Frontline Care (FLC): Continued strength in connected monitoring (Connex 360); offset by planned global product exits.
  • Margins: Adjusted operating margins expected to improve via cost actions and sales volume benefits, though mix (strong drug compounding/advanced surgery vs. lower margin injectables) and pricing impacts remain factors.

Market and Competitive Outlook:

• Competitive Landscape: Advanced surgery growth partially driven by a competitor's supply challenges; Baxter's operational performance is being leveraged to capture share.
• Demand Trends: Global markets showing broad-based growth; U.S. hospital capital spending remains steady despite potential inflation/interest rate pressures.
• Pricing: Pricing contribution to year-over-year operating income growth was lower in 2026 compared to 2025 due to the absence of outsized GPO renewal benefits; pricing dynamics remain a focus for margin management.
• Supply Chain: Improving on-time shipment metrics (+8% YoY) and quality measures (+20% YoY in Advanced Surgery); contract manufacturer challenges expected to have a more limited impact going forward.

Macro / Industry Outlook:

• Inflation: Inflationary pressures expected to step up in 2027 (slightly higher than 2026) due to inventory flow-through; primary drivers are salary inflation, electronics, and materials costs.
• Tariffs: No tariff refund benefit expected in 2027; awaiting clarity on Section 232; ongoing evaluation of onshore production opportunities to mitigate impact.
• Regulatory: FDA warning letter regarding Round Lake facility; company committed to working closely with FDA; quality systems and operations being strengthened across the network.
• TSA/Vantiv: Transition to a post-TSA environment expected by end of January 2027; management focusing on taking out stranded costs over the course of 2027.

Strategic Initiatives:

• M&A Strategy: Net leverage target of ~3x to be achieved by year-end 2026 to unlock flexibility for strategic tuck-in acquisitions and share repurchases. Criteria include strategic fit (technology/geography), market expansion, integration capability via Baxter GPS, and strong financial returns (ROIC, margins).
• Operational Restructuring: Discontinued production of Cephalos (SEF) products at Round Lake facility to simplify operations and address FDA observations; not expected to cause market shortages.
• Baxter GPS: Over 700 continuous improvement initiatives completed YTD; ~200 in-flight; ~350 planned. Focus on inventory management, cycle time reduction, and cash conversion.
• Balance Sheet: Completed $600M tender offer retiring $864M debt; target net leverage ~3x by end of 2026 to enable share repurchases and strategic investment.
• Innovation: Continued adoption of Connect360 and Dynamo Series Smart Stretcher; Novum LVP regulatory progress ongoing.

Risks and Headwinds to Outlook:

• Product Exits: Discontinuation of Cephalos products creates a ~$50M top-line headwind and ~$30M operating income headwind for 2026; potential net headwind for 2027 due to lost revenue, though some mitigation expected via inventory roll-through.
• 2027 Cost Pressures: Inflation (salaries, materials), loss of 2026 tariff refunds, and potential Section 232 impacts are expected headwinds for 2027 margins.
• Supply Chain: Ongoing supply challenges at contract manufacturers, though improved; risk of future interruptions.
• Competitive Dynamics: Advanced surgery growth faces increasingly difficult comparisons as competitor supply issues resolve and market comps normalize.
• Regulatory: Execution of quality improvements and FDA compliance at Round Lake facility remains critical to avoid further disruptions.
• FX & MSA: Reported growth subject to foreign exchange fluctuations and continued revenue drag from Vantiv MSA contracts.

Management Tone on the Future:

• Confidence: Management expresses "greater confidence" in the full-year 2026 outlook following Q3 performance; turnaround described as "gaining traction" with a "steady progress" trajectory.
• Focus: Shift in tone toward "sustaining strong cash generation," "strengthening the balance sheet," and "embedding continuous improvement."
• Future Outlook: Cautiously optimistic about 2027 but emphasizes the need for time to evaluate "moving parts" (inflation, tariffs, TSA wind-down) before providing detailed guidance in February; commitment to a "disciplined approach" for capital allocation.

Miscellaneous:

• Financial Reporting: All forward-looking statements reference non-GAAP measures unless specified; GAAP-to-non-GAAP reconciliations available in press release/presentation.
• Leadership Transition: John Rogers joined as CFO on October 1st; focus on sharpening execution and capital allocation policy in the coming months.
• Q&A Limitations: Investors limited to one question and one follow-up to maximize queue throughput.