百特 (BAX) 2026 年第三季法說會：上調有機成長與 EPS 財測指引

百特醫療 (Baxter International) (NYSE: BAX) 公布第三季執行力更加強勁，並調升 2026 全年有機銷售成長與調整後 EPS 展望。各業務成長廣泛，自由現金流與減債也有助於達成公司年底的槓桿目標。

重點摘要

• 第三季銷售額約為 30 億美元，以呈報及有機基準計算均成長 5%，各部門以及美國與國際市場皆實現成長。
• 調整後稀釋每股盈餘 (EPS) 為 0.58 美元，年減 16%，主因去年同期包含單筆一次性租稅權益。
• 本季自由現金流達 4.48 億美元，今年以來累計達 7.05 億美元。百特持續以年底淨槓桿比率約 3 倍為目標。
• 管理層將 2026 年有機銷售成長展望從 2%-3% 調升至 3%-4%，並將調整後 EPS 展望從 1.95-2.15 美元收窄至 2.05-2.15 美元。
• 先進手術 (Advanced Surgery) 銷售額成長 12%，藥品調配業務成長 9%。注射劑 (Injectables) 銷售額下降 3%，主因價格通縮與製造端挑戰。
• 百特將停止其 Round Lake 工廠的頭孢菌素 (cephalosporin) 生產。預計這些產品在 2026 年將貢獻約 5,000 萬美元的銷售額與 3,000 萬美元的營業利益。

核心財務數據

百特完成了一項 6 億美元的現金買回要約，償還了 8.64 億美元的債務。該交易產生約 2.53 億美元的稅前債務清償利益，此利益已排除在非 GAAP 盈餘之外。

業務與營運表現

醫療產品與療法 (Medical Products & Therapies) 營收為 21 億美元，有機成長 6%。輸液療法與平台 (Infusion Therapies and Platforms) 產生 18 億美元銷售額，成長 4%，主要由 Spectrum IQ、數位解決方案、輸液套、藥品調配與靜脈點滴液 (IV Solutions) 所支撐。

藥品調配業務因需求持續強勁（包括國際市場）而成長 9%。注射劑下滑 3%，反映價格通縮、Round Lake 工廠製造挑戰以及涉及合約製造商的供應受限。管理層表示，第三方供應問題在該季度有所改善，未來影響預計會較為有限。

先進手術營收成長 12% 至 3.42 億美元。百特歸因於止血劑與密封劑的需求、商業執行力、穩定的手術量以及競爭對手的供應挑戰。管理層警告，未來的基期比較將變得更加艱難。

醫療產品與療法調整後營業利益率上升 10 個基點至 20.9%。較高的出貨量與成本抵減措施抵銷了價格貢獻疲軟及不利銷售組合的影響。

醫療系統與技術 (Healthcare Systems & Technologies) 銷售額有機成長 4% 至 8.06 億美元。照護與照護聯網解決方案 (Care and Connectivity Solutions) 成長 5% 至 4.98 億美元，受到全球手術解決方案 (Global Surgical Solutions)、病人支援系統 (Patient Support Systems)、美國積壓訂單執行及國際需求的支援。百特表示尚未觀察到美國醫院資本支出的變化，同時將繼續監控通膨與利率壓力。

第一線照護 (Front Line Care) 銷售額成長 3% 至 3.08 億美元，主因 Connex 360 的需求支撐了聯網監測的成長。計畫中的全球產品退出抵銷了部分表現。該部門調整後營業利益率改善 140 個基點至 17.2%。

百特 GPS (Baxter GPS) 仍是公司營運轉型的核心。今年以來公司已完成 700 多項持續改善計畫，超過 200 項正在進行中，並規劃了約 350 項新專案。

管理層展望

管理層預期 2026 年醫療產品與療法的有機銷售額將以中低個位數成長。醫療系統與技術的有機銷售成長預計仍為低個位數。

呈報成長展望包含來自 Vantive MSA 收入減少約 2,500 萬美元的逆風，相當於約 30 個基點。百特預期第四季的有機成長與營業利益率規模將與第三季相當。

公司將於 2 月發布第四季財報時提供全面的 2027 年展望。

風險與觀察重點

在對 Round Lake 特殊注射劑工廠進行檢查後，百特收到了 FDA 的警告信。公司表示已實施矯正與預防措施，並正在與 FDA 合作。終止頭孢菌素生產旨在降低複雜性，並提高非頭孢菌素產品的供應彈性。

退出頭孢菌素業務將在 2027 年形成淨逆風，不過管理層預計庫存、替代產品與其他措施將減輕部分影響。百特將於 10 月底結束生產，但會繼續為合約客戶提供支援至 2027 年。

2027 年的其他不確定因素包括薪資、電子組件與材料成本上漲；關稅及等待中的 232 條款明確化；第一線照護產品的計畫退出；以及 Vantive 過渡服務於 2027 年 1 月底到期。TSA 結束的影響將取決於百特能多快消除滯留成本。

銷售組合仍是利潤率壓力的來源之一。毛利率較低的藥品調配與全球手術解決方案的強勁成長，加上注射劑銷售疲軟與價格貢獻較低，拖累了第三季的獲利能力。

分析師問答集錦

• Round Lake 重組：管理層表示，將該廠區集中於非頭孢菌素生產應能簡化營運、提高供應可靠性，並有助於解決 FDA 警告信中指出的問題。
• 2027 年利潤率：財務長 John Rogers 承認通膨、關稅、產品退出、頭孢菌素停產及 TSA 相關成本為潛在逆風。他也提到效率提升所帶來的節省累積，但在 2 月之前拒絕對淨影響進行量化。
• 資本配置與 M&A：降低槓桿仍是近期首要任務。在達到約 3 倍的淨槓桿後，百特預計將有更大彈性進行內部投資、補充性併購及潛在的股票買回。心臟監測與先進手術被指為具吸引力的領域。
• 成本結構：管理層認為有額外機會來推進流程標準化並降低複雜性，特別是在 IT 與財務領域，同時透過 Baxter GPS 建立多年的效率改善管道。
• 輸液幫浦：百特報告了 Novum LVP 的持續進展，並表示正與監管機構合作。管理層未提供新的上市時間表。
• 先進手術：成長受益於潛在的市場需求、國際執行力以及競爭對手的供應限制。管理層預計未來將面臨更嚴峻的同季比較。

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管理層陳述

Operator

Good morning, ladies and gentlemen, and welcome to Baxter International's Third Quarter 2026 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 Mr. Kevin Moran, Vice President, Investor Relations at Baxter International. Mr. Moran, you may begin.

Kevin Moran

Good morning, and welcome Today, we'll discuss Baxter's third quarter results along with our updated financial outlook for the full year 2026. This morning, a press release was issued with our preliminary earnings results and updated outlook. The press release and investor presentation are available on the Investors section of the Baxter website.

Joining me today are Andrew Hider, President and Chief Executive Officer; and John Rogers, Executive Vice President and Chief Financial Officer.

During the call, we will be making forward-looking statements, including comments regarding our updated financial outlook for the full year 2026 and the anticipated drivers of the fourth quarter. The anticipated impact of various regulatory, operational and quality matters, including ones related to our infusion pump platform and ongoing supply challenges and commentary regarding the global macroeconomic environment, including tariff impacts and the broader inflationary pressures. Forward-looking statements involve risks and uncertainties, which could cause our actual results to differ materially from our current expectations. Please refer to today's press release. The forward-looking statements slide at the beginning of our investor presentation and our SEC filings for more detail.

In addition, please note, on the call, all of our comments will be on a non-GAAP basis unless they are specifically called out as GAAP. Non-GAAP financial measures are used to help investors understand Baxter's ongoing business performance. GAAP to non-GAAP reconciliations can be found in the schedules attached to our press release and our earnings presentation.

On the call, we will reference organic growth, which excludes the impact of foreign exchange, MSA revenues from Vantive and impacts associated with business acquisitions or divestitures. Unless otherwise noted, all financial results on today's call reflect continuing operations and exclude Baxter's former Kidney Care business, which is reported as discontinued operations.

Finally, Andrew, John and I will take questions following the prepared remarks, and we kindly ask that you limit yourself to one question and one brief follow-up so that we can give as many people in the queue and opportunity.

With that, I'd like to turn the call over to Andrew.

Andrew Hider

Thank you, Kevin. And good morning, everyone. Before discussing the quarter, I want to welcome John Rogers to Baxter as our new Chief Financial Officer. John joined us on October 1 and has a strong track record of leading multiple complex organizations through transformation and performance improvement. His deep financial and operational experience aligns well with our strategic priorities, and I look forward to partnering with him as we continue to advance our turnaround.

Now I will turn to the quarter. Our third quarter performance provides further evidence that our turnaround is gaining traction. We continue to advance our strategic priorities and delivered results ahead of our expectations. As a result, we have greater confidence in the full year and are raising our outlook for both organic sales growth and adjusted earnings per share.

As I said last quarter, I am encouraged by the steady progress we are making. We have a lot of work ahead of us to rise the full potential of Baxter. We are focused on executing in the fourth quarter and finishing the year strong, while continuing to improve our CAD ratio and deliver more consistent performance. All of these efforts support our objective to create long-term shareholder value.

With that, let me turn to a few highlights from the quarter. Third quarter global sales totaled approximately $3 billion, an increase of 5% on both a reported and organic basis. We saw broad-based growth, with every division contributing and both segments growing across the U.S. and international markets. Advanced surgery, drug compounding and infusion systems were the largest contributors in the quarter. Adjusted earnings were $0.58 per diluted share. While this exceeded our expectations, it represents an expected year-over-year decline due to the discrete tax benefits recognized in the prior year. End market demand remained generally steady during the quarter, with continued strength in advanced surgery and a healthy order book in Care and Connectivity Solutions, or CCS.

We continue to closely monitor the external environment, including macroeconomic uncertainty. We are raising our full year outlook for organic sales growth to a range of 3% to 4% and from 2% to 3%. We are also raising the bottom end of our outlook for adjusted earnings per diluted share to $2.05 to $2.15 compared with our previous range of $1.95 to $2.15. Throughout the year, we have communicated a consistent framework for 2026, known mechanical headwinds and more difficult comparisons in the first half, followed by improved performance in the second half. Our third quarter results are a meaningful proof point that performance is progressing in line with that framework.

Let me now turn to the progress we are making against our 3 strategic priorities: Stabilizing the business, strengthening the balance sheet and embedding continuous improvement across Baxter. Our first priority, stabilizing the business. Across the portfolio, we are seeing more consistent execution and further indicators of improved business performance. For example, in our CCS business, an on-time shipment metric improved 8% year-over-year. Additionally, our Advanced Surgery business improved the quality measure by nearly 20% year-over-year. We also saw improvement related to the supply challenges with a contract manufacturer within injectables and expect a more limited impact going forward. We are encouraged by this progress while recognizing there is more work to do to drive greater consistency across our portfolio and manufacturing operations.

To that end, we have made the decision to discontinue production of cephalosporin products, which are currently manufactured at our Round Lake, Illinois specialty injectable facility. Importantly, this action is not expected to create a market shortage for these products. And by repositioning the facility exclusively for non-ceph production, we will simplify and streamline our operations while supporting supply continuity of the non-ceph portfolio. An additional benefit of this action is that it helps address some of the complexities you've referenced in the recent FDA warning letter we received related to an inspection conducted at the Round Lake facility earlier this year. We have taken significant steps to strengthen quality systems and operations at the site and across our network, including implementing corrective and preventative actions and other enhancements designed to improve quality and operational performance. Product quality, patient safety and supply reliability are top priorities and we are committed to addressing the observations and working closely with the FDA throughout the process.

Our second strategic priority is strengthening the balance sheet, and we have made clear progress in the third quarter. Free cash flow was strong at $448 million in the quarter, bringing our year-to-date free cash flow to over $700 million. We also completed a successful tender offer in September, another meaningful step towards achieving our near-term net leverage objective. We remain confident in our ability to achieve a net leverage ratio of approximately 3x by year-end, sustaining strong cash generation and further strengthening the balance sheet remain near-term priorities. Over time, a stronger balance sheet will increase flexibility, including the opportunity for additional internal investment, strategic tuck-in acquisitions and share repurchases while maintaining a disciplined approach to creating shareholder value.

As a reminder, we would assess any potential acquisition using a disciplined framework focused on strategic fit, market assessment, our ability to operate and integrate the asset through Baxter GPS and expected financial returns. Our cultivation process is ongoing, and our funnel remains strong for future potential additions.

Our third strategic priority, embedding continuous improvement across Baxter. Baxter GPS is becoming increasingly integrated into how we operate, strengthening productivity, execution, discipline and accountability. Year-to-date, we have completed more than 700 continuous improvement initiatives across Baxter. These events targeted all value creators. We have more than 200 currently in flight and approximately 350 additional initiatives planned.

Let me give you a few recent examples of where our teams are applying Baxter GPS to improve both commercial execution and performance. In Front Line Care, teams improved blood pressure cuff manufacturing cycle times by more than 10%, expanding production capacity without additional capital investment. In our Advanced Surgery business, we have held events focused on strengthening inventory management and improving cash conversion. Across our global services teams, Baxter GPS is driving measurable improvements in execution and customer service. Through cross-functional collaboration, team streamlined key fulfillment processes, reducing alternative shipment back orders in certain areas of the business by more than 50%. This results in improved customer service and better inventory management.

As I've shared before, no single initiative will define our future. The value of Baxter GPS will come from the accumulation of repeatable improvements that translate into better operating and financial performance over time. Innovation is another important element of our strategy and is essential to sustaining portfolio growth and strengthening Baxter's competitive position. We are seeing continued adoption and customer interest across several recently launched products. For example, Connex 360 continues to gain traction with customers and contributed to Frontline Care's growth in the quarter. Additionally, the Dynamo Series Smart structure was recently recognized for its user-centric design by the human factors and ergonomics society. These offerings enhance our portfolio and expand our ability to deliver differentiated solutions to customers.

In summary, our third quarter results provide further evidence that Baxter is moving in the right direction. We exceeded our expectations for sales, adjusted earnings and free cash flow and increase our full year outlook. At the same time, we advanced each of our 3 strategic priorities. As we look ahead, our focus is on building greater consistency in how Baxter operates and performs. That means addressing where we need to further improve and building on what is already working. Disciplined execution will be key to driving stronger performance and sustainable value for shareholders.

I will now turn the call over to John to provide more detail on our third quarter results, including segment level performance and our updated 2026 guidance. John, over to you.

John Rogers

Thanks, Andrew, and good morning, everyone. I'm genuinely excited to join Baxter in this important stage in the company's turnaround. Over the past few weeks, I've been listening and learning through conversations with Andrew, the leadership team and colleagues across the organization. And I've been particularly impressed by Baxter's essential portfolio, its leading positions across the continuum of care and in particular, the dedication of our employees. I've also seen Baxter GPS in action and have been impressed by how deeply it is already embedded in the organization. At the same time, I do see meaningful opportunities to sharpen execution, accelerate growth, strengthen cash flow generation and consequently create long-term shareholder value. And I'm very much looking forward to working alongside Andrew and the leadership team.

With that, I'll walk through the details of Baxter's third quarter financial performance as well as commentary on our updated outlook for the remainder of 2026. Third 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 $0.58 per diluted share, a decrease of 16%. This decline reflects an expected higher effective tax rate as the prior year quarter benefited from discrete tax items.

Now I'll walk you through our results by reportable segments. Commentary regarding sales growth will be on an organic basis. Sales in our Medical Products & Therapy segment, or MPT, were $2.1 billion and increased 6% in the quarter. Within MPT, sales of our Infusion Therapies and Platforms division totaled $1.8 billion and increased 4%. Growth was driven by infusion systems, drug compounding and IV solutions. This growth was partially offset by lower sales in injectables. Growth in Infusion Systems was driven by Spectrum IQ and also included contributions from our portfolio of Digital Solutions and our administration set portfolio. Demand for our drug compounding services remained strong in the quarter and grew 9%, reflecting the value proposition we provide to customers in this space. We continue to see strong demand for these services in the international markets we serve as health systems look for scaled, quality-focused outsourced solutions. Performance in the quarter also reflects growth in IV Solutions, now off the new lower baseline level of demand following clinical practice changes in the market.

Sales of Injectables declined 3%, primarily reflecting price deflation and the impact of manufacturing challenges at our Round Lake facility. As Andrew noted, we have taken significant steps to strengthen quality systems and operations. As part of these efforts, we are discontinuing production of cephalosporin products at the end of October, but we'll continue to support customers under contract into 2027. These products are expected to contribute approximately $50 million in sales and $30 million in operating income in 2026. Importantly, this action will simplify our operations and support improved performance of the facility.

During the quarter, we recorded $39 million in restructuring costs related to these actions. As a reminder, these restructuring costs are excluded from our non-GAAP earnings. Consistent with the first half of the year, we also saw an impact from supply challenges related to a contract manufacturer. Importantly, as Andrew referenced, we saw improvement within the quarter and expect a more limited impact going forward.

Sales in Advanced Surgery totaled $342 million and grew 12%. Results reflect continued strong demand and increased volumes for our global portfolio of hemostats and sealants, strong commercial execution across regions and steady procedure volumes. MPT's adjusted operating margin totaled 20.9% for the quarter, increasing 10 basis points compared to the prior year period. Results reflect increased sales volumes and benefits from previously implemented enterprise cost actions, partially offset by lower contribution from pricing and the impact of mix, including strong growth in drug compounding coupled with lower sales of injectable.

In our Healthcare Systems & Technologies segment, or HST, sales totaled $806 million and increased 4% in the quarter. Within HST, sales of our Care and Connectivity Solutions, or CCS division, were $498 million and grew 5%. Within CCS, performance was driven by contribution from both Global Surgical Solutions and Patient Support Systems, including continued execution against the U.S. backlog and strength across international markets. To date, we have not observed any change in U.S. hospital capital spending and our order book continues to reflect solid demand. Nonetheless, we continue to closely monitor the environment, including the potential impact of inflation and interest rate pressures on hospital capital investment decisions.

Sales of our Front Line Care, or FLC division, were $308 million and grew 3%. Performance in the quarter reflects continued strength in connected monitoring, driven primarily by strong demand for Connex 360. Partially offsetting this growth was the impact of planned global product exits previously discussed. HST adjusted operating margin totaled 17.2% for the quarter, increasing 140 basis points. Results reflect the benefits from previously implemented cost actions and increased sales volume, partially offset by the impact of mix.

Finally, other sales, which solely represent MSA revenue from Vantive totaled $68 million. As a reminder, these sales are included in our reported growth but are not reflected in our organic growth.

Now moving through the rest of the third quarter P&L. Adjusted gross margins were 38.3%, a decrease of 110 basis points, driven by mix of sales and a lower year-over-year contribution from pricing. Adjusted SG&A totaled $637 million or 21.4% of sales, an improvement of 80 basis points. This reflects the benefits from our implemented cost actions. Adjusted R&D spending totaled $118 million or 4% of sales. Other operating income, which includes TSA income and other Vantive-related reimbursements totaled $48 million in the quarter, in line with the prior year, albeit favorable to our expectations. The favorability was driven by Vantive related expenses and therefore did not contribute to earnings. As we look ahead to a post-TSA environment, we remain focused on reducing the impact of stranded costs and improving our cost structure.

Altogether, these factors resulted in an adjusted operating margin of 14.5%, a decrease of 40 basis points. The year-over-year change reflects the impact of mix, including strong growth in drug compounding and Global Surgical Solutions and lower sales in Injectables. Results also reflect a lower contribution for pricing, partially offset by increased sales volumes. Net interest and other expenses totaled $61 million in the quarter. The adjusted tax rate for the quarter was 18.3%, driven primarily by mix of earnings across jurisdictions. As a reminder, the prior year period benefited from the release of reserves withholding taxes and other discrete tax benefits. In total, adjusted earnings for the quarter were $0.58 per diluted share.

Before turning to our 2026 outlook, I want to comment on cash flow and liquidity. Third quarter free cash flow totaled $448 million, improving sequentially from the second quarter and bringing our year-to-date total to $705 million. This reflects improved operational performance and disciplined execution across targeted areas of working capital. Results in the quarter also benefited from the timing of certain cash receipts, including the IEEPA tariff refund recognized in the prior quarter and proceeds from a legal settlement. We continue to make progress in improving cash flow generation and strengthening our balance sheet.

During the quarter, we completed a $600 million cash tender offer, retiring $864 million of debt and further advancing our deleveraging efforts. In connection with the transaction, we recognized a pretax gain of approximately $253 million related to the earliest extinguishment of debt. As a reminder, this item is excluded from our non-GAAP earnings. Reducing leverage remains our top near-term capital allocation priority and the actions we have taken year-to-date, combining with our operating performance and cash flow generation, give us increased confidence in achieving our target of 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 4% to 5% on a reported basis. This reflects current foreign exchange rates, which is 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 FX and MSA revenues, we now expect organic sales growth of 3% to 4% for 2026. This reflects our strong year-to-date performance and our latest expectations as we close out the year.

As it relates to the segments, in MPT, we now expect full year organic sales to grow low to mid-single digits. This reflects stronger year-to-date performance across our businesses, driven by drug compounding and advanced surgery. In HST, we continue to expect full year organic sales to grow low single digits, supported by anticipated contributions from both CCS and FLC divisions.

Turning to our outlook for other P&L line items and key assumptions. TSA income and other Vantive-related reimbursements are now expected to range between $165 million to $175 million. Higher TSA income and other Vantive-related reimbursements are expected to be broadly offset by higher Vantive-related expenses and therefore, are not expected to contribute to earnings. We continue to expect full year adjusted operating margin of 13% to 14%. We now expect our nonoperating expenses, which include net interest and other expense to total between $245 million to $255 million, reflecting lower interest expense following debt reduction associated with our recent cash tender offer. We continue to anticipate our full year tax rate to range between 18.5% and 19.5%. We now expect our diluted share count to average approximately 519 million shares for the year. Given the strong performance year-to-date, we are raising the low end and narrowing our full year adjusted earnings from $1.95 to $2.15 per diluted share to $2.05 to $2.15 per diluted share.

In closing, I'm encouraged by both our third quarter results as well as the continued progress we are seeing across the organization, including the growing momentum behind Baxter GPS. As we begin to look forward to 2027, we are encouraged by our progress year-to-date and the actions we have taken to strengthen the business. We will provide a comprehensive outlook for 2027, including detailed guidance on our fourth quarter earnings call in February.

With that, we can now open up the call for Q&A.

Operator

[Operator Instructions] Your first question from the line of Travis Steed with Bank of America.

分析師問答

Travis Steed

I wanted to ask about the warning letter and the product discontinuation. I heard $50 million in revenue and $30 million in op income in '26. Maybe just help us understand more what's going on there, why the decision to discontinue the product. And does this make it harder to grow EPS in '27 versus '26 when you take into account all the puts and takes on the model. I think it's at a 2% headwind via our math on '27 on EPS.

Andrew Hider

Yes. Let me walk through this and kind of outline the decision here. Look, this reflects our ongoing evaluation of our portfolio and manufacturing operations. And by doing this process, by walking through this, we're repositioning our Round Lake eclusively for a non-cep production. And this is will simplify operations and really support greater supply resiliency. And as we look at the remaining portfolio, it enables us to continue to drive that portfolio for the future. Additional benefit is as we look at this, by reducing this complexity, it does help address some of the issues referenced in the warning letter.

So while we do see certainly some areas that the team is looking to offset with the reduction of the ceph production line. It is an area that is allowing us and enabling us to streamline our approach our process and will enable us to really reduce complexity at this specific facility.

Travis Steed

Okay. And I don't know if there was anything on '27, but I also wanted to ask about M&A because it seems like they're talking about M&A a little bit. Just curious if you could kind of outline the areas you're interested in the size of the deals you're willing to do and how you think about the ability for deals to be dilutive versus accretive to earnings?

Andrew Hider

So let me walk just a little bit. First, look, we're pleased with our free cash flow performance, and that really puts us in the ability to start this conversation. And as a reminder, we reiterated our approach to be approximately 3x by year-end, which was our target and alignment, which enables us to move to that next stage. When we look and I outlined this in my prepared remarks. But as a reminder, when we look at the criteria and our disciplined approach for M&A, it's going to be under 4 areas.

First, there's strategic rationales. So oftentimes, we're looking for technology, we're looking for geographic expansion. We're looking for areas that we can penetrate and bring the full breadth of Baxter. Number two, the specific market areas to enable our ability to drive expansion. And we're going to look at areas that we view over a long period of time are going to continue to align with the future of Baxter. Number three, how we're going to integrate and operate the asset. So what do I mean by that? We look at management teams. We look at the ability to deploy Baxter leaders in. We look at GPS enablement, and how we can support the business to outperform, to drive expansion in its market. And then lastly -- and this gets to -- really, the heart of the question is around financial return. And of course, we're going to look at things like ROIC. We're going to look at how earnings are going to perform over the period of time and margin profile and other things also like recurring revenue. And so there are many areas we look at for potential additions. I did also reference around how we view tuck-ins for this next phase. And that means that we like our position in many areas and tuck-ins could be a natural progression.

Additionally, our funnels are growing. We have a mantra ABC, always be cultivating. And our teams are cultivating key targets. And just to wrap this a little bit in a bow, we've also looked at our business and said, there's 3 major buckets. There's the invest and grow in areas we want to continue to support on growth, both organically and inorganically. For example, we like the cardiac monitoring space. We like the advanced surgery space. We like key areas across our portfolio that are going to enable us to really drive and support that longer-term growth profile. And then there's a sustain and then there's also some areas we want to fix and improve. And so this is I would say, an evolution of our approach and process. And it's back to our safe ratio. We need to get to the approximately 3x times. And once we do that, we can really start to look at the next phase in this journey.

Operator

Your next question is from the line of Larry Biegelsen of Wells Fargo.

Larry Biegelsen

Congrats on another nice quarter here, Andrew. So John, you officially joined Baxter just a few weeks ago. Where do you see the biggest opportunities at Baxter? And it sounds like you played a big role in the initiatives to improve margins, cash flow, et cetera at your prior company. You run a similar playbook here at Baxter? And lastly, just talk about your approach to guidance, and I'll leave it at that.

John Rogers

Larry. Look, in terms of what I'm going to be focused on in the coming weeks and months, I think first and foremost, coming up to speed with the business, really understanding the business. Obviously, as you said, I have a MedTech background, but this is very much a new product set for me. So I want to spend a lot of time with the business, with the management teams out there in the field, really getting up to speed and understanding what makes this business tick. I think in terms of the areas of focus or you've touched upon some of those already. One area, for example, is looking at our margin mix and some of the actions that we need to take and we are taking to drive improvement in that area. Also, I think, building on the great progress to date in driving both operational and functional efficiencies and how we continue to build a pipeline medium to long term and very sustainable efficiencies to help offset some of the inflationary pressures that we are seeing.

I think thirdly, thinking about how we go about sharpening our capital allocation policy. As the Q3 results demonstrate and Andrew just talked about, we're really starting now to generate free cash flow and the balance sheet is starting to degear very nicely. Andrew has already mentioned, of course, the opportunity for M&A, and that, of course, sits alongside other opportunities to reinvest back into our business to drive our organic growth, whether that be R&D or investment in our manufacturing sites as well, of course, as the possibility for opportunistic share buybacks. So one thing that Andrew and I will be working on over the coming weeks and months is how we hone our capital allocation policy. And of course, there will be more to come in that regard.

So those would be the sort of the key areas I suspect our focus on over the coming weeks and months.

In terms of the approach to guidance, the question you asked about, as we said on the call, we're not going to set out our guidance for 2027 today. We'll leave that to the usual timing of our Q4 earnings in February. And that said, of course, there are a number of moving parts or dynamics I'm sure you should consider. First, of course, is inflationary pressures. And we do see those stepping up in '27 to a degree due to the cap and roll that we've talked about previously. But we've actually done a great job in 2026 in offsetting those. And we have line of sight to further saving opportunities in '27. So we'll be looking to mitigate the impact of those inflationary pressures. We then have tariffs, of course. We won't get the same refund benefit in '27 that we saw in '26, and we're still, of course, awaiting clarity on Section 232. We should get that sometime in the fourth quarter. So we'll have to see the net impacts of tariffs going into 2027.

We also expect the TSA services related to Vantive to conclude by the end of January 2027. And the consequent headwind that, that delivers will depend on how quickly we can take out the stranded costs over the course of the year. Of course, some costs will be very much marginal costs, and they'll come out immediately. There'll be other costs, which are more fixed in nature, and they will take a little bit longer to come out. So we'll have to work through that detail.

We're also going to expect an impact from planned product exits, particularly in our FLC portfolio that we've mentioned previously, and we talked on the call today about the ceph products and we said that contributed $50 million of top line and $30 million of operating income in 2026. To the earlier question, I wouldn't necessarily flow all of that through. There will be some mitigating factors with how we rolled through inventory and some alternative products that we can offset there. But that will be overall a net headwind. And we've also called out the sales mix, and I talked about. That's an area that we really want to focus on as we continue to evaluate the underlying trajectory of the various businesses like drug compounding injectables.

So look, I'm 3 weeks into the role. Obviously, I understand why there's going to be a lot of focus on 2027 right now, but I'm going to need a little bit of time just to thoroughly evaluate all these different moving dynamics. And we will, of course, come back to this in much more detail when we set out our detailed guidance at our Q4 earnings call in February.

Operator

Your next question from the line of Vijay Kumar of Evercore ISI.

Vijay Kumar

John, congrats and welcome. Andrew, maybe my first one for you on is the implied guidance here for around mid-single is similar to 3Q. If that's the case, and you had 3 straight quarters of mid-single top line performance. How do you think about the sustainability up at 5%, what gets better, what gets worse for fiscal '27?

Kevin Moran

Vijay, this is Kevin. So I think it's important context to think about. All year, we've been talking about the step-up in margins in the second half of the year. relative to the first. And we've had a clear framework cycling through some of the headwinds in the first half of the year, like the higher cost inventory. That's behind us. We're seeing the benefits from the cost actions taken earlier in the year. We saw a partial impact in Q2. We saw a full quarter's impact in Q3. And then higher sales and getting some operating leverage from that. And you can see that in our Q3 results. And so hopefully, a nice proof point to that kind of framework we've been talking about all year.

As we think about Q4, our updated guidance implies a similar level of growth in Q4. So to your point, it's grown around 5% the last couple of quarters. We are expecting around that in Q4. And when you think year-over-year, similar type drivers that we called out in Q3, continued growth in our Infusion Systems portfolio, IV Solutions growing off that new lower demand baseline, HST growing, Advanced Surgery and Drug Compounding, perhaps not at the same magnitude, they have been growing really well here lately, but expect continued growth in those businesses.

So I'd say a very consistent story as we look ahead to Q4 on a top line perspective. And I would say it's the same story on operating margin as well. The implied Q4 operating margin contemplates is similar magnitude is what we saw in Q3, and don't expect any big call out sequentially Q3 to Q4, similar strength in the top line, similar mix, continued benefits from the cost actions. That should continue in Q4. And so I think the takeaway is, Q4 should be another quarter that supports this framework that we laid out at the beginning of the year as far as improved performance.

I believe the second part of your question was, how do we kind of think about that going forward? And as John referenced, we're not giving 2027 guidance here today. We'll do that in February. But in general, I would just reiterate, we're predominantly in low single-digit type markets. And in 2026, we're performing a bit higher than that. It clearly benefiting from some favorable comparisons. IV solutions, this new baseline, we're annualizing the impact of the [indiscernible] and installation hold. Again, Advanced Surgery and Drug Compounding, their comps are going to get increasingly difficult going forward. We've referenced some product exits are going to have some impact on the top line. But we will come back in February with a comprehensive view on what we expect 2027 to be. But right now, I'd say we're focused on the continued execution in Q4.

Vijay Kumar

Understood. That's helpful, Kevin. And John, one quick one for you. Thanks for laying out all the moving pieces on the margins. By my math between TSA, inflation tariffs and ceph discontinuation, almost feels like it's a couple of hundred basis points margin headwinds in '27. I'm just curious on -- are we thinking about margin headwinds for '27 the right way the magnitude of impact?

John Rogers

Yes. Look, I set out in my response previously that there are clearly some margin headwinds. There are also some margin tailwinds and we've got good visibility of cost saving opportunities in the business. I've been very impressed actually with the level of detail and the rigor and the discipline that the organization is already deploying in driving efficiencies through the business. So like in any situation, there are puts and takes, and that is the case for '27. We are not going to get drawn at the moment on what the net impact of those is going to be. We'll set that out in a little bit more detail in February. But as I said, look, there are clearly puts and takes. I set out some of the headwinds, but equally, there are some tailwinds and some very good progress already made and a good pipeline developing of saving opportunities going into 2027.

Operator

Your next question from the line of Patrick Wood of UBS.

Patrick Andrew Wood

Beautiful. Welcome, John. Two quick and dirty ones upfront. The generic injectables business, obviously, there's a lot going on there in general. One of your peers also as a warning letter as some of us remember what happened in the 20s for drug shortages. And given it's such a high-margin business, general outlook there for you guys, obviously, one of your peers is going to be capacity constrained? Is there a tailwind from that? Or are you restricted? Anything around there would be amazing for question one.

And then just quickly question 2. Sorry if I missed it. You mentioned the contract manufacturer effect. Any rough sizing of that and whether that situation has been resolved going forward? So if I missed that.

Andrew Hider

Look, I'll walk through a couple of items first. But going to the non-ceph production, it really does allow us and enables us to simplify our operations. And I mentioned a little bit earlier, but it supports greater supply resiliency. And therefore, by making this decision, and these are never easy decisions. It aligns well with really the future of that site, that organization. And we do view it gives us capability by reducing that complexity to continue to drive this product for our customer base in the non-ceph space.

On the second piece of the question around the contract manufacturer, we've made good progress, and we're staying very close with this manufacturer to ensure we are front and center on this production process and capability. And so while we're not giving an overall impact, what I can say is that we've made progress, and we're going to continue to keep this front and center to ensure this is something that we can work to mitigate over time.

Operator

Your next question from the line of Joanne Wuensch of Citi.

Joanne Wuensch

Can we pause on the Advanced Surgery -- can you hear me okay?

Andrew Hider

You went out there for a second. And if you could repeat the question, that would be great.

Joanne Wuensch

I was just giving further welcome to John Part. Advanced Surgery, double-digit growth in the quarter, a nice acceleration. It doesn't appear to be an easy comp per se. What can we understand. What's driving that, the consistency of it? And anything to call out in terms of a onetime item in there to be aware of?

Andrew Hider

Yes. So look, let's start with the fundamental. We're pleased with the progress. And this team has been really focused around driving execution in our core markets. And so -- just that we piece this apart, we've continued -- so the market is growing first, and that's a positive for our business, and it's a strong growth area. But it's still in the, call it, single digits, call it, low to mid-single digits.

Number two, we've really aligned this team on how we can expand on a global scale. So we've seen some regions actually drive stronger growth on a global scale.

Number three, there's been -- this is not a small piece. There's been a competitor that's had a challenge with supply. And because of our performance on our operation, we've been able to really maximize this impact. And I would say that's where it becomes a little bit of a challenge on a year-over-year comp perspective. That said, going back to the initial, we're pleased with the progress. This team is focused on finishing the year strong, getting ready for next year. And as we think about the business into the future, certainly, it's going to be -- year-over-year is going to be a more challenging comp, but the team is ready to continue to drive this business. we just view that the single piece of the supply challenge on a competitor is going to be something we're going to stay very close to.

Operator

Your next question from the line of Robert Marcus of JPMorgan.

Unknown Analyst

This is Lilly on for Robbie. Following up on margins, I'm hoping you can talk a bit more about what you're seeing on the macro side. You called out greater inflationary pressure in 2027. So what's the latest in terms of what you're seeing on cost pressures from oil, freight, et cetera, since you last updated us on the 2Q call and what's baked into guidance in terms of pressures and your ability to offset them?

John Rogers

Yes. I'll pick that one up Lilly and maybe Kevin will add to it. Look, as we said, there are clearly inflationary pressures going into 2027. A and arguably a slight step-up that we've seen from 2026 due to the flow-through of costs from inventory. But the key ones are actually in order of impact, things like salary inflation electronics and materials costs. And then a distant third is things like utilities and energy and plastics and transportation and metals and packaging.

So there are definitely inflationary costs coming through, and they're probably slightly more pronounced than they would ordinarily be. But that said, we've done a great job in 2026 of offsetting those with efficiency savings. We've got a good pipeline of savings programs going into 2027. And I've always operated with a philosophy of whatever inflationary pressures the business facing, you have to look for an equal and opposite efficiency savings to neutralize those inflationary pressures. So that's certainly something that we will be aiming to do through 2027. But we'll set this out in a lot more detail, of course, when we give our detailed guidance in February in terms of the puts and takes. But that's the way that we're thinking about it organizationally, if that helps.

Andrew Hider

And Lilly, just to add on a little bit to this. As a reminder, our exposure to fuel oil is much less with the divestiture of our Kidney Care business. And to John's point, we've taken a very proactive approach and our teams are aligned around mitigating cost actions, driving engagement with suppliers, looking at efficiencies in the business. And so overall, again, pleased with the progress. We've got more work to do here.

Operator

Your next question from the line of Rick Wise with Stifel.

Frederick Wise

I think we cut off Lilly there. Just to start, John, you highlighted your focus on improving the cost structures. I was hoping you could expand on that comment, but also touch on the lower price contribution comment. Maybe I missed it. What was it? And how do we think about the impact of price and thus on mix going forward?

John Rogers

Let me pick up on the question on cost structures, and then I'll hand over to Kevin to comment on price. Look, I think on cost structures, as I said, there's already a tremendous amount of really good work going on in the business driving out cost, driving efficiencies right across our business from our operations and supply chain to our functions. And some really, really, really good work in the detail. And I've been incredibly impressed actually with the way that GPS is really being embedded into this business and the discipline as to how we drive efficiencies through the organizations is really coming to effect.

That said, I did highlight in my opening remarks that there remains a lot of complexity in this organization. There remains a lot of processes that are not standardized. It's not unusual, in fact, pretty much every business I've ever come into, of course, of our scale and size naturally has this embedded complexity and has perhaps not standardized processes as much as it can. So if you look at the headline level at some of our functions, for example, like IT, we've got an incredible number of applications that we run in our business. And there's definitely opportunity there to simplify and standardize.

And again, even with our finance function, if you look at our overall cost base across finance and across IT, you definitely, if you benchmark that it definitely shows opportunities to drive out more efficiencies going forward. So one of the key things I said that I'm going to be focused on is how do we continue the great work that's already underway, but build a very much sustainable pipeline of efficiency savings, not just in the next 12 months, but looking forward over the next 3 years. And I believe it's early days yet. I've been in the organization for 3 weeks, but I believe there is the opportunity to do that.

Kevin Moran

And Rick, with respect to pricing, so the commentary was when you think about operating income dollars year-over-year, there was less contribution from pricing. And it's really a prior year story. So if you recall last year, we saw the benefit from 2 of our GPO renewals. So this mostly impacted the MPT segment. And so this year, it's really kind of the absence of that outsized benefit when you think about the year-over-year. This was an expected headwind when we entered the year. We called it out last quarter, and we again saw that in Q3.

Frederick Wise

And just as a follow-up question. Infusion Systems obviously contributed to growth this quarter, injectables, as we've heard, remained a drag. But how much of the pump improvement reflects spectrum demand versus easier comps perhaps? What's going on there? And what milestones remain now before Novum LVP get to market.

Andrew Hider

Yes. And I guess I'll kind of work backwards on this. We're continuing to make good progress with Novum LVP. And we're working closely with the regulatory authorities in this process. And when there's an update, we'll certainly provide it. As far as our pump portfolio with our Spectrum LVP as well as our Novum syringe. And now it's communicating through our IQX software platform. we've continued to evolve and really align around innovation in the space with peer view as well as other areas.

We're feeling good about our offerings and our value proposition. And even earlier this week, I had a chance to sit down with a customer and walk through our pump portfolio where it sits in their ability to drive high care, how they look at efficiencies and our ability to support that. And so we're pleased with where we sit. Again, we've got opportunity for the future, and we're going to continue to focus on making progress.

Operator

Your next question from the line of Jayson Bedford of Raymond James & Associates.

Jayson Bedford

Congrats on the progress. I don't mean to put you on the spot with this question, but one of your MedTech peers announced an agreement with the administration to onshore production in exchange for tariff relief. And I'm just wondering, is this something you're looking into?

Andrew Hider

Yes. And as far as tariffs go, we continue to look at opportunities that we can I would say, maximize or minimize the impact. And we have certainly opportunities. It's one we -- and we saw this year, we saw a bit of a benefit here. we're going to continue to look at that as an opportunity. And as you know, we've got a strong footprint in the U.S., we've got strong demand in the U.S. And so no headline discussion as of now. That said, we're continuing to look at areas that we can minimize overall tariff impact on the business.

Jayson Bedford

And just maybe just as quick follow-up. Is there any way to frame the impact of the supply chain challenges in the pharma business this year? And sounds like it's getting better, but specifically, I'm wondering how much of an offset it could be relative to the discontinuation of the ceph products.

Andrew Hider

Yes. So we're not outlining that in totality. That said, you're picking up on one of the areas of focus is. Certainly, with our ceph business, and that product set going away. And it was a conscious proactive decision of discontinuing that product. there are offsets that we're looking at. One of them is the continued support of the product that we talked about with the contract manufacturer. There's also other products that we're enabling and working with customers on within that space that will support the ability for them to have the capability in their patient care sites of care. And so while we're not outlining the offsets today, we're going to continue to show that as we go into next year.

Operator

There are no further questions at this time. I will now turn the call back to Mr. Hider for closing remarks.

Andrew Hider

Thanks, operator, and thank you for your questions today. As I've shared, we are encouraged by the progress we're making. While we have more work to add, execution is improving. We are delivering against our priorities, and we're building a stronger Baxter. Thank you, and have a great day.

Operator

Ladies and gentlemen, this concludes today's conference call with Baxter International. Thank you for participating.