百特醫療 (BAX) 2003 Q4 法說會逐字稿

Good morning ladies and gentlemen and welcome to Baxter International fourth quarter cash flow and earnings conference call. Your lines will remain in a listen-only mode until the question-and-answer segment of today's call. At that time, (OPERATOR INSTRUCTIONS) 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 Neville Jeharajah, Vice President, Investor Relations at Baxter International. Mr. Jeharajah you may begin.

Thanks. Good morning everybody and welcome to our fourth quarter cash flow and earnings conference call. Joining me today are Harry Kraemer, Chairman and CEO of Baxter International; Tom Stallkamp, the Lead Director of Baxter's Board of Directors; Brian Anderson, our Chief Financial Officer, Neville Jeharajah, Chief Scientific Officer; and John Greish, the new President Of Baxter BioScience.

Right now I am sure you have seen a copy of our press release for Q4. As the press release indicates, comments regarding those could contain forward-looking and could cause actual results to differ materially from our current expectations. Please refer to our SEC filings for more details. Now I would like to turn it over to Harry Kraemer.

Thanks a lot, Neville. Good morning everyone. Let me first say that given the challenges we faced during 2003, and our resulting financial performance, we definitely recognize the need for fundamental change going forward. Despite the efforts by Baxter team members around the world, we know that we have disappointed our shareholders. Clearly, the last 12 to 18 months have been extremely challenging with the competitive environment and pricing pressures, especially within the Plasma Proteins market.

Our 2003 financial results were impacted by lower sales growth, a changing sales mix, gross margin pressure, and increase spending in SG&A. As I stated Monday, given the challenges the Company has faced, I truly believe the right thing will be to for me to do at this time is to step own as CEO of Baxter. I will honestly do everything I can to assist the Company as well as the Board of Directors with the transition to a new CEO. I have agreed to remain in my role until my successor is named.

I continue to have tremendous faith and confidence in Baxter's business, the management team, and Baxter's 55,000 team members around the world. I am extremely proud of what we have accomplished over the past twenty years. I feel truly blessed to have had the opportunity to be part of the Baxter team. Our shared values, and respect for each team member, I believe is very unique in today's business environment.

I also very much appreciate the opportunity to have worked very closely with many of you over the years. However, now it's time to move on. To offer further perspective on our business going forward, I would like to introduce Tom Stallkamp, the Lead Director of Baxter's Board of Directors.

Thank you. And good morning. First on behalf of the entire Baxter Board of Directors, I would like to thank you Harry for your many contributions during your tenure at Baxter and in particular for your services as CEO over the last five years. Harry has worked hard and made a long and distinguished career and we appreciate that work, the dedication and the integrity that is demonstrated in continuing to enhance Baxter's market leadership and our growth. We thank Harry for his commitment to help us to ensure a smooth and successful transition.

Let me describe the transition in more detail. The governance committee of the Board is leading the search which will evaluate and identify qualified candidates. The committee has hired Heidrick & Struggles to consist in that search. We plan to complete this process as quickly and thoroughly as possible.

We understand the issues facing us and are committed to meeting them decisively. The Board and management team together are committed to establishing a strong foundation for Baxter's future success based on predictable and sustainable performance.

We're going to continue our internal restructuring effort that began in July 2003. While we are in track to see the benefits that we expected from those actions, we're taking further initiatives to aggressively reduce our cost and strengthen our core businesses. The Board and management have targeted an additional cost reduction that are expected to result in annualized benefits of 200 to $300 million when fully implemented. As these plans are finalized, the Company will provide you with more specifics.

In summary, Baxter will continue to be the global leader in providing critical therapies for people with life-threatening conditions. The Board is committed to continuing to move Baxter forward as an independent company with many market leading positions, and a strong financial base. We have the support and focus of 50,000 team members worldwide to accomplish our goal. The Board members are proud to be a part of Baxter, and we look forward to earning your review the trust and confidence.

Now, I would like to turn the call over to Brian Anderson to provide you with details regarding our fourth quarter and full year 2003 performance, and discuss our expectations for this year. Brian.

Thanks very much. Good morning everyone. While you can find the details regarding the fourth quarter and are full year financial results in the press release, and on our Website, I would like to first give you a high-level summary before getting into the details.

First, our Q4 sales growth and earnings trend was an improvement over the last three quarters. However, as you know, Q4 should fell short of our original expectations for the quarter. Q4 sales growth was 12 percent, which was higher than our guidance of 8 to 10 percent, primarily due to a larger benefit from currency, primarily the euro which benefited us by six percentage points.

Earnings per diluted share of 62 cents were in line with the revised guidance we provided in December. And this guidance revision was primarily due to our product and geographic mix resulting in the unfavorable impact to EPS of about four cents due to strengthening euro; and I will get into that in a little more detail later. And lower than expected gains from asset sales which impacted EPS natively by six cents. Together these items had a combined impact on EPS in the fourth quarter of approximately 10 cents.

Our cash flow was very strong for the full year of 1.4 billion, significantly ahead of our expectations even after contributing $87 million to our pension trust.

Now, as I go through the financial results for the full year 2003 in more detail, I will occasionally refer to several attachments that we have included with the press release. These additional supplemental schedules include an analysis of SG&A for the fourth quarter and full year, condensed balance sheets, our sales and growth by business segments for the fourth quarter and full year, quarterly sales and growth of Baxter's product lines for the fourth quarter and full year, and annual U.S. and international sales for Baxter's product lines.

For the total Company, sales was 2.537 billion for growth in the fourth quarter with growth of 12 percent. The growth in the quarter includes three percentage points of benefit from the ESI Lederle acquisition and six percentage points of benefit from foreign currency.

Organic sales growth in the fourth quarter was three percent. U.S. sales growth was 12 percent and international sales growth was 13 percent. International sales growth without the benefit of currency was one percent.

Now, looking at each of the major business segments starting with Medication Delivery, sales for Medication Delivery totaled 1.102 billion in the fourth quarter and increased 14 percent with very solid growth across the multiple business units within the Medication Delivery business.

Our Q4 organic sales growth was three percent, that is excluding the currency benefit as well as the ESI acquisition. IV Therapies sales growth was 11 percent; Drug Delivery sales growth was 16 percent in the quarter, driven by the continued success of several new product launches; anesthesia sales growth was 30 percent, which was entirely driven by the very strong sales of ESI Lederle. And infusion system sales growth was 11 percent due to incremental hardware sales.

Full year Medication Delivery sales growth was 16 percent in line with our expectation of 12 to 16 percent growth. Organic sales growth for Medication Delivery for the full year was 5 percent.

Within the renal business, sales were 497 million in the fourth quarter, and increased 9 percent primarily driven by the impact of foreign currency. Organic sales growth in renal was nine percent. PD Therapy sales growth was 10 percent and HD sales growth was 8 percent. Full year renal sales growth was 6 percent, ahead of our expectations of 2 to 5 percent due to the favorable impact of currency.

In BioScience, sales in the fourth quarter was 938 million, an increase of 11 percent and an improvement over the last three quarters. Our Q4 organic sales growth was 5 percent.

Recombinant sales were 337 million and increased 27 percent in the quarter including the benefit of ADVATE sales which totaled 34 million in the quarter and 45 million for the full year.

We have seen conversion to ADVATE across all age groups and approximately 60 percent of current sales are from adult patients.

Antibody Therapy sales increased sequentially to 96 million in the fourth quarter from 77 million in the third quarter and U.S. pricing continues to remain stable.

Q4 antibody therapy sales increased 12 percent year-over-year given our increased focus on the homecare market, and the success of the dedicated sales force that we put in place early in 2003.

Full year BioScience sales growth was 6 percent compared to our expectation of 5 to 10 percent.

The gross margin rate for the total Company in the fourth quarter was 44.9 percent compared to 43.8 percent in the third quarter of this year of 2003, and 46.8 percent in Q4 of last year. While gross margins improved in the fourth quarter compared to Q3, this was below our expectation.

As I stated earlier, product and geographic mix definitely impacted our gross margin. This was the results of lower than expected sales and profitability in Europe, certainly one of our major markets, and the higher level of European manufactured products sold in the U.S. in an environment where the euro strengthened significantly most notably in the fourth quarter. This impact was beyond what we had hedged and will also impact our gross margins in the first quarter of this year.

SG&A. In the press release there is a separate schedule with an analysis of SG&A that might be helpful. As we stated last quarter, we did expect SG&A in the fourth quarter to be higher than Q3. SG&A spending totaled 481 million in Q4 and increased 17 percent over the prior year. This growth reflects the impact of over $40 million and onetime benefits in Q4 of last year created to the change in vacation policy and the reversal of litigation reserves as well as the impact of the strengthening euro which occurred primarily over the last few months of the year.

The SG&A ratio in Q4 came down from 19 percent compared to 19.7 percent in Q3, primarily due to the higher volume of sales of the fourth quarter. While total restructuring benefits for the year were 5 cents, the impact in Q4 was 4 cents and about half of that was the benefit to SG&A.

The bottom line is that despite the restructuring activity that we announced last July, our SG&A costs are still too high. Especially when compared to our overall level of sales growth and the gross margin profile of the total Company. As a result, as Tom just mentioned, our management team is working very closely with the Board to take the necessary action to significantly reduce Company's expense based going forward.

Research and development spending in the quarter was 141 million, pretty close to the 137 million in Q3. The operating margin was 20.4 percent in the fourth quarter compared to 17.9 percent in Q3, and 22.3 percent in Q4 of last year.

Sundry income was 4 million in the quarter and this includes 3 cents from the gain on the sale of our investment in the Acambis.

Net interest was 16 million for the quarter and 87 million for the full year and the reduction in net interest in the fourth quarter compared to Q3 was primarily the result of lower net debt levels given the strong cash flow performance and lower overall interest rates.

The tax rate was 25 percent in the fourth quarter, and EPS from continuing operations was 62 cents, which was a significant improvement over the last three quarters and in line with our revised guidance.

Turning to cash flows, last quarter conference call, I onlined our increased resources and focused on our balance sheet and cash flow performance. Specifically, I discussed our actions in receivables management, inventory management, most notably, our capacitor reduction in the plasma business, accounts payable and capital expenditures. As a result of these actions and our focus, I am very pleased with our progress and we will continue this intense focus in all of these areas.

Cash flow from operations in the fourth quarter was 756 million and resulted in full year cash flow from operations of 1.4 billion which is almost 200 million better than 2002, even after contributing 87 million to our pension trust.

DSO at the end of the fourth quarter was 53 days and declined almost twelve days compared to the third quarter, and on a year-to-date basis, receivables were an in-flow of 4 million. The actual receivable balance on the balance sheet that shows an increase of 141 million was entirely due to the impact of the strengthening euro.

Inventory was a use of cash in 2003 of 151 million an improvement of 118 million when compared to 2002; and in Q4, inventory actually was reduced by 85 million as a result of inventory reduction initiatives in all of the business units.

Inventory turns in the fourth quarter was 2.6 turns compared to 2.3 turns in Q3 and 2.7 turns last year.

Capital expenditures for the full year was 789 million, compared to 848 million last year. As a result of this very strong performance, net debt to capital ratio declined to 39.6 percent in Q4 from 42.7 percent in Q3 and net debt declined by approximately 500 million in the fourth quarter.

I would now like to turn to our guidance for this year. Let me start by saying that we plan on providing you with more detailed assumptions underlying our guidance. While our sales in earnings growth are lower than we would like by working with our management team and the Board, we expect to establish a strong foundation for sustainable growth, profitability and cash flow going forward.

The 2004 guidance that I am about to give does not include the impact of the accelerated cost reduction plans that Tom mentioned previously. I plan on sharing more details regarding those actions on our Q1 earnings conference call in April.

So, for 2004, for the total Company, our sales growth is expected to be in the three to five percent range for organic growth, i.e. assuming no benefit from foreign currency. Earnings per share we're targeting in the range of $1.75 to $1.85 including 10 cents of incremental benefit from the restructuring actions we announced last July.

Cash flow from operations is targeted to be approximately 1.5 billion with continued improvement in working capital, resulting in the net debt to capital ratio by the end of next year in the low 30 percent range.

For the first quarter, I expect our organic sales growth to also be in the three to five percent range which assumes no benefit from foreign currency. However, at current exchange rate, particularly the euro, we would expect to report sales growth in the 5 to 7 percent range including the benefit of foreign currency. I expect earnings per share in the first quarter to be in the 28 to 31 cent range.

Now as it relates to our EPS guidance, let me just take a few minutes to outline some of the key drivers impacting our 2004 performance.

First, our earnings per share will be impacted by approximately 5 cents negatively in 2004 due to the lost income stream in our vaccines business related to the U.S. smallpox tender.

Second, 2004 EPS will also be impacted by 8 cents due to higher expenses for pensions and retiree medical benefits as a result of changes in the assumptions for the discount rate and higher amortization of deferred pension losses.

Finally, EPS will be impacted by about 8 cents in 2004 due to increased competition in pricing for the GPO's and our recently signed Premier agreement.

Therefore, on a year-over-year basis, these three significant items impact full year EPS by 21 cents and EPS in the first quarter by 4 to 5 cents.

Now, turning to the assumptions for each of the business segments. First, with Medication Delivery. In Medication Delivery, we expect sales growth in the 4 to 6 percent range and this growth assumes that sales are impacted negatively by approximately 100 million, primarily due to increased generic competition on certain products as well as lower pricing to GPO's and Premier as results of our recently renegotiated agreement.

Specifically, by product category within Medication Delivery, we expect IV Therapies and Infusion System sales to be in the 5 percent range; Drug Delivery sales growth to be in the 10 percent range due to the introduction of several new products; and anesthesia sales growth to be in the five percent range including the pricing impact as a result of new generic competition. And other sales to be flat to declining primarily as a result of exiting less profitable distributor arrangements.

In renal, we expect sales growth in the 0 to 3 percent range, with both PD and HD growing generally in that range.

In BioScience, we expect sales growth in the 4 to 6 percent range, and this growth rate is below our historical average, primarily due to changes in the Plasma Proteins market and lower sales from vaccines due to lower smallpox sales.

By product category within BioScience, we expect recombinant sales growth to continue to be very strong with growth in the mid teens. This is a result of strong patient demand and accelerated sales of ADVATE both in the United States and in Europe.

Plasma Proteins and IGIV sales are expected to be flat compared to 2003 as a result of the reduction in our vaccination capacity and we're also assuming that IGIV pricing in the U.S. will continue to be stable throughout 2004.

Transfusion Therapies sales growth will be 5 percent, primarily driven by the continued launch and penetration of our Alex (ph) platform in the United States.

Related to gross margins, based on the issues I mentioned earlier, gross margins in 2004 will be modestly below 2003, and our operating margin ratio will be in the 17 to 18 percent range for the full year. The targeted 200 to 300 million savings or cost reductions that Tom mentioned earlier will significantly contribute to us achieving our longer-term goal of having our operating margin in the 25 percent range.

Now, Tom, Harry, John, Norbert and I will be happy to take your questions. Operator?

We will now begin the question-and-answer session. (OPERATOR INSTRUCTIONS) Rick Wise of Bear Stearns.

Maybe just to start things off, Harry, there has been a great deal of speculation as to why you made the decision now, why several days before the quarter. I'm sure it's not easy to talk about, the people topic, but if you could help us and if Tom perhaps you could reflect on some of the Board's thoughts about why the decision and the kind of leader you're looking for per Baxter going forward? We would appreciate the background perspective.

I will start and maybe Tom could add to this. Honestly, Rick, it really is not difficult to talk about. As I mentioned earlier, having been with the Company 21 years, it has just been a fantastic experience, and the reality, Rick is we have gone through some really fantastic periods and it's been great. Nonetheless, as I mentioned upfront, as you well know Rick, over the last 15 months, we have had a lot of challenges in the marketplace, we've disappointed shareholders, and you know what Rick, at the end of the day if you remember that little plaque on the top of Harry Truman's desk, the buck stops with me.

The management team has been extremely supportive, the Board has been extremely supportive, but if you don't let your ego get in the way, there really is a time when you say it really does make sense for somebody else to take the helm. It really isn't emotional.

I am so fortunate to have worked with these folks. I am really, really dedicated to make sure that we have an extremely smooth transition. When I talk about this with Tom, and he asked me if I would stay on until a new CEO was named, I told them I would be very willing to do it.

Why now Rick? Really when I take a look at our performance in '03 and where we stand and the things that me to be done, I just think it's the right time. While it would be great if there was a longer, deeper explanations, it really is as simple as that. It is not like three other hidden cards here Rick, but I'd like Tom to I think maybe to give his perspective particularly when he talks about the type of candidate they are looking for.

The Board, when Harry submitted his resignation, the Board discussed it and accepted it and we disclosed it as promptly as we could which is why we disclosed it on Monday rather than wait for today. We really believe that Harry's tenure at Baxter has helped us in growth and we think also that the time right now for a change. Harry's cooperation in this transition period is extremely valuable to the Company and to the Board and to the management.

We have, as I said, started the search for a successor. We have hired Heidrick & Struggles and they are already at work in that process. We're trying to focus on finding the most qualified, capable candidate with experience, vision and a commitment that will lead Baxter forward as a strong, independent company.

Just a follow-up to that, two-part follow-up. One, is everything on the table at Baxter? Are you looking at the Board thinking about every part of the portfolio as to whether it goes or stays? Just a more pragmatic question for Brian, can you give us your thoughts on capital spending and working capital reduction for '04? Just give us some idea about how that is going to shape up as you look at your forecasts, Brian?

Thanks, Rick. Capital spending this year will be in the 650 to $700 million range, and as we have said before, given the overall outlook for sales and sales growth, we will continue to ratchet down capital spending and you will see that this year. I would expect it to be in fact on the low end of that range. As it relates to working capital, the goal for this year is to keep working capital flat after several years of incremental working capital spending. And in fact in the back half of last year, we actually achieved almost a $200 million reduction in working capital. It was still up for the full year of 2003, but as we head into '04, with all of the great progress and focus that we're putting on this, I would expect that we will have no incremental working capital going forward.

We are seeing great progress in BioScience, where inventories came down in the latter part of last year, and certainly the actions that we took to reduce our capacity in the plasma business as I said on prior calls, will more fully be reflected in '04 as well. That will be a big driver on the overall working capital.

As it relates to the overall portfolio and profitability of our businesses, we will absolutely continue to look at all aspects of the profitability of product lines, of businesses and of geographies and we will take appropriate action to improve return and profitability going forward.

From the Board's perspective, it's important to note that we are working very closely with management on this. Brian said on this review of the businesses and we expect to reveal later in the year, probably in the middle of the year identifying the actions we have for further cost reductions, but the Board and the management are sort of linked to hand in glove on this.

Thanks again.

Dan Lemaitre from Merrill Lynch.

Just one product question and one cost structure question. First off, could you give us a sense of what your assumption is ADVATE for this year? I'm just wondering, given what appears to be the fact that you are getting some traction in sowing (ph) into the U.S. at this point is problematic from a margin perspective because of being sourced in the euro. I'm just wondering if there is any thoughts to actually change some of the manufacturing facilities at Thousand Oaks to ADVATE and if that is the case, the timing of that?

I'm going to ask John Greish to answer that question, and you're going to be hearing more from John on our BioScience business as we go forward. So John do you want to take this one?

Let me just give you some overall comments on ADVATE. As you saw the quarter was very strong for the recombinant business in total. With the growth of 27 percent which exceeded our previously communicated expectations. We continue to see patient demand growing in the U.S.; we're currently running out of about 15 percent penetration for our total recombinant business. ADVATE is already the number three brand in the U.S. market and I think it is on track to be the number two brand later this year.

From a customer perspective, we are seeing good conversion rates, we've got several leading hemophilia treatment centers where penetration is already in excess of 40 percent and all of our homecare companies are purchasing ADVATE.

For 2004, the expectation is that approximately 25 percent of our total recombinant volume will be ADVATE, following on with the continued conversion growth in the U.S. and then the European launch later this year obviously will help drive that penetration. We expect ADVATE sales in the total for the year to be approximately $300 million.

So, going forward, the demand continues to grow, and roughly those are expectations for 2004. With respect to the sourcing strategy, TO does have the capability to be converted to ADVATE and as demand grows, that is an option that we will continue to be looking at going forward.

But one thing that I would add on the effect of the euro on ADVATE margins, is it is extremely small. Two factors, one the cost component within ADVATE is much, much smaller than the other product line. And secondly, production of ADVATE has been going on for a period of time and has not been much impacted by the recent large increase in the euro. So, I don't think the euro cost impact is much greater on other products, it is extremely small on ADVATE.

One restructuring question if I may. I was a little confused by the 10-cent number for this year. Originally I thought it was going to be 15 or 20 and I am assuming that must be a net number with some things that were taken out?

Incremental Dan, so it is 15 for the full year.

Got it. The question I have is on your proposed restructuring benefits. If it costs you $337 million to get the other benefits, the benefits you are getting now on the last one, I just wondered what size charges you might be talking about and is it realistic to assume that given your present net debt capital ratios in the light that you can take those kind of charges without impairing either your targets for net debt to capital or any bank covenants?

Not a problem in all. I think that whatever charges would be contemplated by the actions we are evaluating will be easily handled within the context of our bank covenants and our capital structure.

Okay. Thanks guys.

Just a couple of points in what I said again. This is John. Our expected sales this year for ADVATE will be in excess of $300 million and I commented about ADVATE approval later this year. I think everybody on the call knows that we received a positive opinion in October and expect approval here in the very near future.

Okay. Thank you John.

Glenn Reicin from Morgan Stanley.

Good morning folks. Thanks for taking my call. I would like to talk more about cash flow. I think you're at a point where people should be solely focused on that number. Can you talk a little bit about 2003? And maybe point out some of the onetime benefits you may have gotten on the cash flow line from things like factoring of receivables, or some sort of tax deferred tax benefits? Maybe if you could also relate that to '04, in that 1.5 billion, what are you assuming in terms of improvements in receivables and inventories sort of on a same-store basis without the help of factoring or any onetime benefits?

Thanks very much for the question. In 2003, Glenn, there was no incremental benefit from factoring or securitizing receivables. Zero. So, what I am really focused on is fundamentally improving the operating performance of the business and the fundamentals of aggressively managing receivables in every market around the world. So, I feel very good about the quality of the 1.4 billion in cash flow that we generated over the past year, and I think that is evident from the cash flow statement.

As we look into 2004, the continued efforts on receivables, particularly outside the U.S. will continue. There are certain countries in Europe and Latin America where we need to get much more intensely focused on our overall strategy for selling into different regions within some of these countries. And quite frankly, work very closely with the businesses to manage the level of sales growth in these areas. Couple that with the benefit of improved systems and processes that we put in place with all of our collection organizations around the world, and I would expect to see receivables or receivable days continue to improve in '04.

We entered this year at 53 days, and as I said, we took out a full 12 days between Q3 and Q4. Most of the improvement next year will come outside the U.S.

Go ahead.

Deferred taxes and tax changes will be similar to this year. Nothing really unusual there. Inventories definitely the focus in the plasma business as we complete the actions that we took last year, and I know John and his team are continuing to look very closely at collection capacity within the overall network and will flex the capacity based on anticipated demand.

Can I push you a little bit on some of the things you said there? With respect to '03, you said no metal incremental factoring, so there was some but it was just not more than last year? Is that the right way of looking at that?

Zero cash flow impact. To the extent that there are was any, it was really just replacing receivable, nothing incremental.

Secondly, it sounds like on the 2004, first 2004 it sounds like the improvements in working capital were really expected more from the receivables line than the inventory line and I am wondering should we now expect that 2005 is the big year for inventory or did I misread you on that one?

I think that is fair, but there will be improvement in inventories as well. In '05, I would expect even further improvement in inventories as the plasma benefits really work their way through the entire cycle.

Finally, what are your assumptions in terms of cash outlay to implement the various restructuring programs? Either the one previously announced or the new one that will be announced?

For the one previously announced, it will be about 100 million, but bear in mind that a lot of this is severance, and it is not incremental cash outflow relative to salaries that would otherwise have been paid.

As it relates to be pending actions that were looking at, when we get into the call on April, I will have more specifics as to the components of whatever charges are associative with those actions. IT is just really a work in process

(multiple speakers)

But is the 1.5 billion inclusive of these actions and are those cash outlays in the cash flow from operations line? Or is that below the cash flow from operations line?

It is included in the cash flow from operations.

So even with another restructuring, you're still committed to 1.5 billion?

Absolutely.

Thank you very much.

Matthew Dodds from SG Cowen.

I'm still struggling with the gross margin. In Q4, recombinant had a great quarter, better than you thought. I think that's one of your highest margin products and I know Brian you talked about mix, Europe, U.S. but is there anything on the products side that you can talk about just against one of these areas our product lines is facing negative mix comparisons like renal or Drug Delivery? I assume plasma is still doing great but is there anything else there?

No, it is primarily the reasons that I described. I think the impact that was unexpected was clearly associated with the very significant change in the euro, and the impact on our costs for those products manufactured in Europe that are sold in the United States. The overall trends for next year, where I said it was going to be relatively flat to modestly down, that really will be caused primarily by the pricing issues that I talked about within the Medication Delivery business, but Q4 was definitely euro related.

Looking at the Q1 guidance, it looks like an even lower much lower gross margin than Q1 '03. So, we should assume again a ramp in the gross margin through the year?

Yes, gross margins will improve sequentially and Q1 will definitely be our lowest quarter. Remember we anticipate ADVATE approval in the first quarter and as John said, with that launch in the first quarter, the sales for ADVATE for the full year are expected to be over 300 million. So that is going to be a very big driver for gross margins in the later quarters.

One productline follow-up. On anesthesia, you've lowered the guidance a bit for next year in terms of what the product line has been doing. It didn't do great this quarter either. Can you just say is that generic competition already hitting it or is this additional?

Let me try that. On this quarter, Propofol was a factor. What I mean by that is that for the Propofol year sales were pretty flat year-over-year. Second half it was pretty flat as well. However, in Q3 it was about 15 million higher than this year. Q4, 15 million lower based on distributed purchases. So there is nothing unusual this year with anesthesia.

Definitely next year we would expect generic replacements.

Thanks Brian. Thanks Neville.

Ben Andrew from William Blair.

Good morning. I just wanted to ask about this Premier contract and the pricing changes there. Can you talk about the dynamics that led to that and are there any other any GPO contracts coming up that we should be looking out for?

As we talked about during the course of last year, Ben, we have been renegotiating the contract with Premier who was obviously the largest U.S. customer and we had a seven-year deal with them that we just re-signed at the end of the year that now goes out an additional five years. With total sales exceeding 700 million U.S. dollars. So, as you folks know, benefits of having a contract like that over a long-term.

Right now, the pricing impact of that is something that we believe overtime will more than offset as a result of mix upgrades. In terms of all of the other contracts, Ben, there is no contract I can think of within mid delivery globally that would have a substantial impact of any kind going forward.

Actually less than 50 million and I believe in terms of potential renewals.

Okay. Thank you.

Lawrence Keusch with Goldman Sachs.

Good morning. I guess to Harry or whoever might be able to answer this, one of the challenges obviously with the last year was the reductions in EPS guidance, and I think a lot of that was just sort of the changes that were taking place in the plasma business and IGIV. In sort of the recombinant Factor 8 (ph) business perhaps ADVATE taking a little bit longer, etc. And what I'm really trying to understand is as we move into '04, what is really being done differently about thinking about the guidance that you are putting out there? Have you done more scenario analysis; are you sort of baking in more of the worst-case scenarios? I am just trying to understand how you are thinking about the EPS guidance perhaps differently?

I think Brian, it's appropriate for you to take that one, chief.

That is a very, very fair question and obviously one that I as well as the rest of the management team has been a lot of time thinking about and more importantly doing something about. In the remarks that I made, I outlined the significant assumptions and factors that really underlie the 2004 guidance. I along with the rest of the management team believe that the '04 guidance, especially when viewed in the context of our performance in 2003, along with the assumptions that I laid out is reasonable and achievable. Now obviously, having said that, as Tom indicated in his remarks, neither management nor the Board is satisfied with this performance and that is why we're working immediately and aggressively to implement actions to drive cost reductions in the 200 to 300 million dollar range that we described. At the end of the day, we absolutely have to deliver to expectations and that is what we will continue to focus on. That is how we will earn your trust.

Now, certainly, over the past 12 to 15 months, we have identified very significant and unprecedented changes in our business. As a result, we have made significant changes to improve our planning process. Now the scenario planning that you describe is certainly a part of that, as well as competitive analysis to absolutely improve the opportunities and risks facing each of our businesses in the markets in which we compete. We also locked in our plan later this year, and are providing guidance on this call as opposed to in prior years where we gave guidance for the upcoming year on our third quarter call. So, we didn't really lock in the plan until the year was substantially behind us. I have dedicated more resources at both the corporate level and across each of the major businesses and regions to planning and forecasting, especially and most importantly in areas around working capital management and cash flow. As Glen pointed out, we know this is definitely a cash flow and value story.

Capital expenditure analysis and prioritization of capital expenditures as we both reduce our capital spending and at the same time invest in the areas where there are very promising returns such as our Drug Delivery business. Our manufacturing team is performing a very comprehensive analysis of the longer-term capacity requirements for our business to insure that we optimize capacity over the longer term. Norbert and the R&D team are working extremely well in prioritizing the over 500 million in R&D investments with much more rigorous milestone management and portfolio performance and a much better understanding of the economics of each of the programs in the pipeline. And as a result of that effort, we have significantly reduced the number of projects within the pipeline to ensure that the high priority projects get funded for success. And in conjunction with that, both in the R&D and the CAPEX area, we will have much more rigorous project management for the folks managing and leading these projects to ensure that we do a much better job in spending in these areas.

Finally, obviously putting in place all of the action plans to drive the expense reduction up to the 2 to 300 million as we go forward. So, these are really the areas that I am personally focused on. Delivering results that are consistent with our guidance, driving cash flow performance very, very aggressively, rapidly implementing the cost reduction initiatives, and certainly taking a hard look at all aspects of the portfolio. We will absolutely fix or exit underperforming businesses or regions within businesses were there is under performance.

Great, thank you very much for that very comprehensive answer. I appreciate it. Just a couple of other very quick ones, first off in your GM assumptions for the following year are there any changes to depreciation schedules, is one question. Could you just give us the new pension assumptions including your assumed rate of return? And lastly, I have heard that you guys have actually been increasing pricing on IGIV I am just wondering if that is actually sticking?

Let me take the first two. On gross margin, the principal impact as I talked about earlier, is really all in the Medication Delivery business because of the (technical difficulty) agreement and the generic competition. In bioscience we will see some improvement as a result of ADVATE. For pensions, the only change we made to our assumptions was to lower the discount rate to six percent from 6.75 percent.

I continue to be very comfortable with our rate of return assumption for the pension assets, which is, as you know is 10 percent. This return is very consistent with the long-term returns on the pension investment portfolio, and in fact the returns for 2003 for the full year was well in excess of 20 percent which really just reinforces our belief that given the asset mix that we've got an overall 10 percent rate of return is reasonable. John?

On IGIV pricing just a couple of comments. Following the throughput reduction last year, we are clearly managing this business now for profitability and cash flow. IGIV specifically I really don't want to comment on specific pricing levels, but generally within IGIV the strategy is to optimize both geographically and within the multiple channels within geographies where we distribute the product to drive the maximum profitability for the IGIV productline in total.

So, in '04, we will be selling our maximum capacity and optimizing the profitability of that business by shifting volumes between geographies and channels where appropriate. We do expect stable pricing in '04 for IGIV overall.

Okay. Thank you.

Mike Weinstein with J.P. Morgan.

A couple of questions. Maybe just following up that last round of comments by John. The Company priority will be on this call you talked every quarter about the U.S. plasma market and there is very rarely any discussion of what's occurring outside the U.S., which has been increasingly the focus of the Company's business because of the FS (ph) capacity the Company has had. It has had to turn the markets outside the U.S. to place product. Can you talk about some of those contracts you've signed in the last 6 to 9 months? And maybe put that in the landscape of the margins we're seeing in the company?

Just a couple of comets, Mike. As you said, the strategy for plasma is really to manage it for cash and profitability. The plasma business outside the U.S., Q4 specifically, our sales of plasma derived factor 8 sequentially were actually lower than they were in Q3, but at a higher net ASP, average selling price. So, we don't have specific contracts. We are trying to drive a therapy in certain markets around the world or funding availability is obviously more challenged than in some of the more developed markets.

The strategy generally is at the same time or driving for therapy growth, maximize the profitability and cash flow for the business overall.

What would your worldwide ASP look like on plasma factor 8 and IVIG, Q4 of '03 versus Q4 of '02?

I would rather not comment on specific pricing levels.

One of the things that should be on our Web site probably later today that I think you will find helpful is the key productline sales that we break out by quarter that right now is in the press release with just the total sales. We are going to break that out for U.S. and international for each of the productlines by segment for each of the quarters for '03 and '02. Perhaps after you look at that, if you have further questions you can give Neville or Mary Kay a call.

I think additional information would be greatly appreciated by the street. Maybe I can ask Tom a question since we are able to have him on this call which is also appreciated. Tom, could you just comment on a couple of items. First is the SEC investigation that has been ongoing at the Company which the street hasn't heard a lot of information about for obvious reasons. Can you tell us anything about that and the status of that and the Board's view of it?

Second, in the search for the CEO, it has been the observation that the company that there are a number of people within Senior Management obviously, Gary, John, Carlo and Bryant, that have financial background, and that there has been in recent years and focus on bringing financial people up through the ranks and there has been a question of should we have more product and more marketing people. Can you just give us your thoughts on that as we start to look for bringing a new CEO into the company? Thanks.

On the first one the Company is obviously cooperating completely with the SEC and the investigation is ongoing and I really can't get into the details of that because it is an investigation. But, we see that being preceded through currently in 2004.

What were looking for the CEO search, as I said we are looking for the most qualified candidate and we believe in the combination of experience and vision we're looking for a balance of financial and operating expertise that will help balance out the strengths that we have in the company already which are significant both in financial and in our manufacturing and operating area.

Were looking for a CEO that can sort of blend those together and I think you will see in the current market there are some interesting candidates.

I just want to follow-up on the SEC investigation. Can you give us any insight into the content of that investigation? And the likelihood or unlikelihood of that investigation to a more formal inquiry?

No, I think because it is still in the investigation stage, we can't really comment on specifics.

Thank you.

Glenn Novarro from Banc of America Securities.

Thanks. You've talked a lot about turning the company around through cost-cutting, but at some point, sales will have to grow, accelerate and be the driving force longer-term behind the growth. Can maybe Norbert talked about anything that is in development longer-term that he believes will jump start sales beyond 2004? Maybe Tom or Harry, can you help us with how we should be thinking about Baxter as a grower longer-term beyond '04?

Do you have any sales and EPS goals longer-term? Should we be thinking about Baxter as a 5 percent topline grower or 10 percent EBS grow longer-term? Just help us out what that kind of where you think the long-term growth characteristics of the Company are going? Thanks.

Let me start with the pipeline topic. As Brian mentioned, the effort we have had ongoing in the last two years we are really to look at the total Baxter pipeline and to review across all of the businesses how we tailor the pipeline in line with the budget we have and get to the most competitive pipeline with the most promise in the product. That has resulted in taking a significant number of projects out of the pipeline and a much enhanced focused on project management, project execution, as well as driving rigorously milestones either to a goal or no goal decision.

So, going forward we have some very exciting projects. ADVATE, influenza Next Generation IGIV, (indiscernible) and EPOMAX. We have a project in Med Delivery called Promote, and I believe they hold great promise to literally grow the business instead of doing lifecycle management and portfolio maintenance projects. A little bit unfortunate is that these projects do not make a significant contribution in 2004 or 2005. They are more targeted for launch post 2005. But nevertheless, at least with respect to ADVATE as you heard from John and also Brian, ADVATE has made a significant contribution to new sales to the total portfolio.

So, I believe that when I look across the various businesses that they have within them, still a balance of what we call lifecycle management in portfolio maintenance projects, but a much increased number of potential breakthrough projects that will have a significant differentiation, will address significant unmet medical needs and will add significantly to total Baxter sales growth as well as margin improvement over time.

Just as a follow-up to you have in that has been augmenting the pipeline via licensing deals. Are those deals on hold until there is a new management team in place? Senior management team?

Let me comment on those. I talked in the past quite a bit about a number of projects we brought in a particular recombinant and (indiscernible) which is a complement to the plasma derived (indiscernible) that we recently acquired. We talked about the erythropoietin which is a product that we believe can be differentiated and take a significant stake in the $10 billion market space. We have recently moved forward in the pipeline a product with Med Delivery of that is now in phase 1B and is actually looking very promising.

So there's are programs, main programs including influenza that we're focusing on our business development team continuously looks for additional product opportunities, and we will continue to add those to the pipeline as we go forward with a much stronger emphasis on optimizing the pipeline and also executing the pipeline. I think that that will continue to add value as we go forward.

So, I am not satisfied today with the overall pipeline. I believe it has become much stronger, much more competitive and much more valuable, but I cannot say that we have reached a level we're unhappy with the overall makeup of the pipeline and therefore we will look for additional product opportunity.

Let me just clarify. Nothing is on hold because we are in the process of doing the search for the CEO. Anything that was appropriate yesterday for us to do to improve the Company is appropriate today. And we are not going to sit around and wait to take the actions or execute the strategies that we are in the process of doing.

As it relates to your question about longer-term sales growth, definitely '04 is negatively impacted as I said in Medication Delivery by the 100 million or so in pricing activity. So beyond '04, I expect Medication Delivery growth rates to be more robust and as you know, there are close to $4 billion of the total $9 billion company today of the expansion that we are putting in place within the Drug Delivery business. We feel very excited about that as a significant growth driver beyond '04.

While I won't comment specifically on targets for '04 because we will give you annual guidance as we always have, we are certainly focused on improving the operating margin to that 25 percent goal but I talked about, and definitely getting better leverage and higher earnings growth relative to sales growth as we go forward. But, I think it is safe to say that we have to do both. We have to attack the cost structure, and we have to figure out ways to accelerate the growth rate within the context of what the portfolio is capable of growing.

Where necessary where we have to augment with selective acquisitions as we have always done, with the same acquisition criteria that we have talked about before, as well as licensing deals or other alliances we will do that where it is economic and where it is good for strategy.

Thanks very much.

Why don't we take two more questions?

Ed Huber with Wachovia.

Good morning. Thanks. Brian if you could reflect back on this time last year and think about the plan that you all put forward. Can you comment for us on what your confidence level is in your current '04 guidance relative to confidence levels you have had in the prior year plans? Particularly last year's?

I think you could always look at things with the benefit of hindsight. Whenever we give any guidance, I am always very comfortable with the guidance that we get. That is my job. Now, obviously, we did have very, very significant developments that affected the business last year. As is no secret. I do think that as I look at the environment for each of the businesses, and with reflecting on last year's environment, I do think there is more stability, particularly in plasma.

I think we now have ADVATE approved and launched in the U.S., and expect the launch in Europe this quarter, so the uncertainty, if you will, around timing and the benefits of the ADVATE launch are definitely less than they were last year. I think that the overall Medication Delivery and renal environments are ones where we definitely understand the marketplace dynamics, pricing, competitiveness, etc. on a very good basis. So, I am very comfortable with the guidance for '04 that I outlined earlier.

But in terms of your planning process it sounds as if you are not trying to build in a more significant contingencies into your plans for '04 than you have in the past. Your process sounds like it hasn't really changed. Is that a fair assessment?

No, it definitely has changed. As I said, we're doing a much better job with scenario planning and competitive assessment. A part of the scenario planning is really looking at the downside risks, assessing them, handicapping them, and making sure that the plans that we put in place, you know consider those risks appropriately. I do think that in that area in particular, we have made a significant improvements, both in the strategic planning process as well as how we put the operating plan together.

This is a follow-up. When you look at the mid-year restructuring that you're contemplating, will this look at both your plant structure as well as SG&A in particularly when you think about what appears to be some significant excess BioScience capacity that is out there, is that something that could be a target to bring some of that off-line or to sell that capacity?

We're absolutely looking at everything, and as I said, the manufacturing team commenced some major projects to look at the manufacturing footprint globally in all of the businesses, and depending on the decisions that come out of that, we will take appropriate actions to ensure that the capacity that we have in place is consistent with demand. Certainly, within the Drug Delivery space, there is a very exciting opportunity in contract manufacturing, and some of the assets within the BioScience business are very attractive from a contract manufacturing standpoint and will be part of the strategy going forward to optimize that capacity both for existing internal products in the pipeline as well as expanded contract manufacturing particularly in the biotech space.

Okay. Thank you.

John Calcagnini from CIBC World Markets.

Good morning all. Just a couple of quick questions. A lot of questions have been answered but on Medication Delivery, I wondered if you could comment if hospital admissions have been if you seen anything unusual with regard to hospital admissions, and just answer that question I guess first?

I think something that Dave has pointed out, definitely the flu season has helped the business quite a bit. But, in terms of overall hospital trends, nothing really unusual.

Okay. With regard to the Board, obviously I don't know how much you can say on this but has there been with regard to the three divisions, is there any change in the strategic thinking about whether or not all three businesses fit? You don't necessarily have to answer what divisions would be affected that are you -- is it a possibility we could see a divisional divesture?

As Bryant's said, we are looking at everything in the company but Baxter is a very strong company based on two things; both its manufacturing expertise and its technology and the synergies that cut across the businesses are significant. So, the Board and the management are focused on maintaining that strong foundation for the future. Other than that, I don't think we want to get into specifics of the restructuring.

Thanks. That answers -- that give some insight. Thank you.

I appreciate everybody's time and hope everybody has a good week. Thank you.

Thank you very much.

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