百特醫療 (BAX) 2004 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Baxter International first-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. (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 objection please disconnect at this time. I would now like to turn the conference over to Mr. Neville Jeharajah, Vice President of Investor Relations at Baxter International.

Good morning, everybody. Welcome to our first-quarter cash flow and earnings conference call. Joining me today are Tom Stallkamp, (indiscernible) Director of Baxter's Board of Directors; Brian Anderson, our Chief Financial Officer, Norbert Riedel, our Chief Science Officer, John Greisch, President of Baxter BioScience and Thomas Sabatino, acting general counsel. We are also very delighted to have Bob Parkinson, Baxter's new CEO and Chairman joining us for the call today. By now I'm sure you have seen a copy of our press release for the first quarter 2004. As the press release indicates comments regarding (inaudible) forward-looking statements and of course, actual results could differ materially from our current expectations. Please refer to our SEC filings for more detail. Now let me turn this over to Tom (indiscernible).

I'm very pleased to be here this morning, today representing Baxter's Board of Directors and to provide you with an update on three very important short-term priorities that we discussed on last quarter's call. These priorities were first, working closely with the management team to identify additional cost reduction initiatives in the company. Second, selecting a new chief executive officer and third managing a smooth transition until that CEO was in place.

First as you saw in the press release this morning we announced that the company has identified a number of significant cost reduction initiatives that Brian will describe in more detail in a moment. The Board is very supportive of these actions which are intended to significantly improve Baxter's profitability, our cash flow and returns going forward.

Second, I would like to take this opportunity to thank Harry Cramer (ph) for his many contributions as CFO and during this time at Baxter, especially for his commitment of ensuring a smooth and successful transition. Finally, on Monday this week we announced that Baxter's Board of Directors had selected Bob Parkinson as Baxter's new CEO and Chairman of the Board. We're fortunate today to have Bob calling in from Loyola University where he currently serves as the Dean of Loyola's school of business administration and its graduate school of business. Bob was formerly president and chief operating officer at Abbott Laboratories and held a variety of operating and management roles during his 25-year tenure.

Bob brings to Baxter a very strong operating background and a deep appreciation for customer needs globally. During his career at Abbott Bob gained in-depth experience in strategy, marketing and sales, search and development, and in general management through holding a wide variety and broad range assignments. Bob's long and distinguished career in the diversified global health-care company combined with his business acumen and keen understanding of the challenges and the opportunities in this industry make him the ideal leader to take Baxter forward. We thank Bob for freeing up some time today to make a few introductory comments as he wraps up his responsibilities at the University. So without further ado, it is my pleasure to introduce Bob Parkinson, Baxter's new CEO and Chairman of the Board.

It's great to be with everyone this morning and you know there is many of you I have had the opportunity to work with over the years so for those of you who I already know, I look forward to reconnecting and others who I've not yet met, I certainly look forward to doing so in my new role at Baxter. As I'm not yet officially on board until this coming Monday I thought it's probably a little bit premature for me to address detailed questions or provide long-term strategic visions this morning. It's not I don't have a lot of thoughts on that account but I probably owe it to my new management team and also to myself to get their perspectives first when we get together early next week.

But I thought that given the timing of the announcement of my appointment earlier in the week and this morning's conference call I wanted to join you briefly, first of all, to say hello, but also to offer a few perspectives. First of all, I have to tell you I couldn't be more excited about moving into the role of Baxter's new Chairman and CEO. As most of you know and as Tom mentioned, I spent virtually my entire career in the health-care industry. As we all know it's an industry that offers great growth potential for Baxter in the years ahead.

The demographic trends and developed markets increase spending levels in developing countries are certainly driving increased demand for health-care products and services. Outside of the pure pharmaceutical companies Baxter International is really one of only a handful of diversified health-care companies that has a strong global presence. A brand if you will that is well-recognized around the world. As you know Baxter is the market leader in most of the areas in which it competes, each of its core businesses offering a platform for future expansion with new products and new businesses.

As a competitor to Baxter early in my career I developed a tremendous respect for the Baxter name and what it represented; quality products, quality people and certainly a strong customer focus. And this has led to long-standing customer and patient relationships that are built on years of trust and understanding. Simply stated, there's a significant embedded value in this Company on a global basis that I think can be leveraged for future growth. At the same time and as you all know, I have to be realistic and I think I do have a realistic understanding of the array of challenges and there are a number that we currently face. And that this management team I will tell you is committed to address.

I very much look forward to the tremendous responsibility of building upon Baxter's rich history and to work with the management team to advance Baxter's leadership position for the benefit of the million of patients who rely upon our lifesaving products. I look forward to your support as we execute our plans in the months ahead, but first I recognize that we first have to earn your trust and confidence which I believe that we will. At this point, I'm going to sign off and I am going to turn the call over to Brian who is now going to provide you with details on our first-quarter financial performance, update on the restructuring initiatives and expectations for the full year. Thanks so much, Brian.

Thanks, Bob, and a sincere welcome to the Baxter team. Before reviewing our financial results for the quarter and the outlook for the full year, let me first say that I'm very pleased with the results of the restructuring that announced last July. We are on track to achieve the benefits that I described in last quarter's call and those were 15 cents a share which is included in the overall guidance for 2004. However, given the sales and growth margin profile of our overall business we are taking further aggressive action to reduce our cost structure, as Tom (indiscernible) has indicated in his opening comments.

I would like to take a few minutes at the outset of the call to summarize the costs and expected benefits of these additional restructuring actions which we will begin implementing this quarter. Based on a very comprehensive review of our cost structure we are initiating a number of actions to further consolidate, streamline and leverage our global administrative infrastructure. Additionally, we will also reduce our fractionation throughput in our plasma business. Specifically as a result of these actions we will reduce our global workforce by approximately 3500 to 4000 positions, about half of these positions are in the United States and the rest are of course outside the United States. Approximately 75 percent of the savings related to this restructuring action will be within general and administrative expenses.

In addition we will close several plasma centers and reduce our fractionation throughput from the current level of 3 million liters to 2.6 million liters. Including the actions we announced in July of last year we will now have reduced total fractionation throughput by approximately 30 percent from 2002 levels. These actions will continue to improve cash flow and returns in the plasma business.

Now let me summarize the cost and expected benefits of this restructuring. In Q2 we expect to take an after-tax charge in the range of 350 million to 400 million or 55 to 65 cents a share. About two-thirds of the charge will be cash, primarily as severance payments and the remaining one-third will be for non-cash write-offs of fixed assets. Because these actions require a number of profit and consolidation activities I expect savings in the second half of this year to be relatively modest, approximately 5 cents a share. However, in 2005 I expect significant acceleration in the savings to approximately 20 to 25 cents per share.

When fully implemented by the end of 2005, these actions will generate annual savings of 30 to 35 cents per share for 2006 and beyond. As I said on our last call we will continue to review our overall business portfolio and global manufacturing network in the months ahead. Now let's review our financial performance for the first quarter. In summary our results were in line with our expectations and the guidance we provided on the last call.

Sales growth was 11 percent due to the favorable impact from foreign currency, organic sales growth excluding currency was 4 percent in line with our guidance of 3 to 5 percent, and earnings per share was 31 cents in line with our guidance of a range of 28 to 31 cents. Cash flow from continuing operations in the quarter was an outflow of 54 million. And (indiscernible) why we continue to make progress on lowering our expense base, clearly we still have a lot of work to do to improve our balance sheet.

Now I'd like to review Q1 sales performance for the total Company as well as the Medication Delivery and Renal businesses; I will then ask John Greisch to provide an update on the Bioscience business. Sales in the first quarter for the total company were 2.209 billion an increase of 11 percent over the prior year. Our sales growth in the first quarter was higher than the guidance of 5 to 7 percent that we provided earlier this year due to a larger benefit from foreign currency which benefited sales growth by 7 percentage points. As I said earlier, organic sales growth was 4 percent and in line with the 3 to 5 percent guidance range.

U.S. sales growth was 7 percent and international sales growth was 14 percent. And international sales growth excluding the impact of currency was 2 percent. Sales within our Medication Delivery segment were 929 million in Q1 and increased by 9 percent. Foreign currency benefited Medication Delivery's total sales in Q1 by 5 percentage points and therefore organic sales growth was 4 percent in the quarter. U.S. sales for Medication Delivery increased 3 percent and international sales increased 20 percent. Excluding the impact of foreign currency international sales growth was 6 percent.

I.V. Therapy sales growth was 14 percent and drug delivery sales growth was 8 percent. Sales growth for both anesthesia and infusion systems were 5 percent each. In Renal, sales in the first quarter were 470 million in the quarter and increased 16 percent primarily driven by the impact of foreign currency and frankly easier comparisons to the prior year were sales growth was only 2 percent. Foreign currency benefited total Renal sales by 8 percentage points in the quarter therefore Q1 organic sales growth was 8 percent. U.S. sales for Renal increased by 4 percent and international sales increased 19 percent and excluding the impact of currency international sales growth was 9 percent. PD Therapy sales growth was 15 percent and HD Therapy sales growth was 17 percent.

Now I will turn it over to John who will give you a full update on the Bioscience business.

Good morning everybody. First let me provide you with a brief update on our sales performance for the first quarter before sharing with you an update on our Advate launch, key milestones for 2004 and our future outlook. First-quarter sales for total Bioscience were 810 million an increase of 9 percent. Foreign currency benefited sales by 7 percentage points, therefore organic sales growth for the quarter was 2 percentage points. U.S. sales for Bioscience increased 13 percent and international sales increased 6 percent. Excluding the impact of foreign currency international sales declined 7 percent for the quarter primarily due to lower vaccine sales as we expected. Including the benefit of foreign currency recombinant sales for the quarter were 292 million an increase of 19 percent. This included the benefit of Advate sales which totaled $27 million.

Antibody therapy sales were $80 million in the quarter an increase of 19 percent primarily driven by unit volume increases and improved pricing in North America. Finally, total plasma sales excluding antibody therapy sales were 238 million an increase of 4 percent. Just a couple comments on Advate, as I previously mentioned our first-quarter recombinant sales in total increased 19 percent, including Advate sales of $27 million. While the launch of Advate has gone well in many regards, its gaining acceptance by patients and physicians and has captured approximately 10 percent of the U.S. market in just seven months, we are currently implementing actions to accelerate Advate sales over the course of 2004. These actions include launching Advate during March in Europe at a smaller price premium to existing recombinant Factor VIII products and evaluating other actions including reducing the price premium in the U.S. in order to make Advate more accessible for all patients.

Given the anticipated results of our actions the level of Advate sales in Q1 and the anticipated timing of reimbursement accruals for certain countries in Europe, we now expect Advate sales for the full year 2004 to be between 200 and $300 million. I'm confident in achieving this goal for the following reasons. First of all patient ramp up of Advate in the U.S. has exceeded the historical experience of other recombinant Factor VIII therapies including recombinate. Secondly, both clinical and post launch data confirm Advate's efficacy and safety. As you all know, Advate is the first and only recombinant Factor VIII product available in the market made without any added human or animal derived proteins, thereby eliminating the risk of infections caused by viruses that could be carried in these proteins.

Thirdly, we have more than one full year of the successful manufacturing experience at our Neuchattel, Switzerland facility. Therefore, we've increased the confidence of patients and physicians that we can consistently supply Advate to all patients which is an important issue given the historical product shortages that have impacted the hemophilia community. Finally, as you know in the first quarter we received approval for Advate in Europe and began shipping product to several countries including the UK, Germany and the Netherlands. We expect to launch Advate in additional countries throughout 2004 as reimbursement is finalized.

As the result of the lower penetration of recombinant products in Europe relative to the U.S. market the excellent efficacy and safety performance of Advate and our manufacturing reliability, we expect Advate conversion in Europe to accelerate at a faster pace than in the U.S. Now let me comment on some of our key product milestones for the quarter.

Firstly, a brief update on three key products and milestones including Advate in Japan and Canada, our liquid IGIV product and our influenza vaccine. With respect to Advate in Japan and Canada we are very excited about filing Advate for approval in Japan in the second half of this year. In addition we plan to launch Advate in Canada in 2005. Each of these markets represents an opportunity of approximately $100 million.

Next gen IGIV we will expect to file for U.S. and European approval in the second half of this year for our next generation liquid IGIV product. And lastly many of you have asked us about the progress we are making with our influenza vaccine in the U.S. and in Europe. We are in the process of scaling (ph) up our new facility in the Czech Republic and are currently implementing equipment modifications which are expected to delay production by approximately four months. We expect to complete these modifications over the next several months given the seasonal nature of flu vaccinations, we now expect to begin Phase III clinical trials in the U.S. in 2005 and anticipate approval of the vaccine in Europe in 2006.

In summary, we achieved our overall expectations for the first quarter driven by recombinant sales growth of 19 percent, even though we expected the initial conversion rate for Advate to be faster. With the changes we will make to ensure that Advate is available to all patients at a competitive price, and to enable them to take advantage of the safety benefits of the product I expect to see an accelerating rate of conversion throughout the remainder of 2004. With current expectations for Advate sales of between 200 and $300 million for the full year 2004 and our recombinant business growing in the low double digits, I now expect Bioscience organic sales growth for 2004 to be approximately 3 percent, which is slightly lower than our original guidance of 4 to 6 percent. Now let me turn it over to Brian.

Thanks, John. I will continue with a brief discussion of the rest of the P&L performance as well as our cash flows before summarizing guidance for Q2 and the full year. First as it relates to gross margins, the gross margin rate in the first quarter was 40.5 percent compared to 44.1 percent in last year's first quarter. Much of this decline was expected and was primarily due to the impact of foreign exchange, as well as lower vaccine sales and the decline in plasma margins year-over-year.

SG&A totaled 464 million in the quarter and increased 12 percent and the SG&A ratio in this year's first quarter was 21 percent compared to 20.7 percent in last year's first-quarter. Bottom line as I stated last quarter, our management team is committed to taking very aggressive actions to significantly reduce the Company's expense base toward the restructuring initiatives that I started the call as describing.

R&D in the quarter was 136 million and essentially flat to the first quarter of last year. And while we have increased spending on specific selective programs that spending increase was offset by reductions based on the benefits from the July 2003 restructuring. The operating margin in this year's first quarter was 13.3 percent compared to 16.6 percent in the first quarter of last year primarily as a result of the lower gross margin base.

Interest and sundry was comparable to the prior year and the effective tax rate in this year's first quarter was 25 percent, up slightly from the 24.1 percent tax rate last year. And finally as I mentioned earlier diluted EPS for the quarter was around 31 cents and in line with our guidance of 28 to 31 cents.

Now I will briefly summarize our cash flow performance. Our cash flow from operations in the first quarter was a net outflow of 54 million compared to an outflow of 23 million in the first quarter of last year. Working capital consumption in Q1 of this year was 363 million compared to 270 million in last year's first quarter and the increments of 100 million in 2004 is primarily due to the timing of payments especially related to income taxes. DSO at the end of the first quarter of this year was 64.7 days and declined by about a half a day compared to the first quarter of last year; receivables were an outflow of 99 million in the quarter and inventories or the use of cash in the first quarter this year of approximately 68 million. Inventory turns in the first quarter of this year was 2.3 turns and were flat compared to Q1 of last year.

We obviously continue to focus on inventory particularly given the actions we implemented in the second half of last year in the plasma business as well as the additional reductions in plasma throughput that I just discussed. Given our initiatives relating to accounts receivable, inventories and liabilities, I continue to expect working capital consumption for the full year to be very modest overall and to be significantly below last year. You will also note that capital expenditures were 89 million in the quarter, a very significant reduction compared to 174 million in capital spending in the first quarter of last year.

We ended the quarter with a net debt to capital ratio of 42.7 percent compared with 46.9 percent in last year's first quarter, and the increase in the debt to capital ratio from 39.6 percent at the end of last year was primarily due to the payment of our annual dividend in the first quarter of this year.

Let's move on to our guidance for the second quarter of this year as well as full year 2004. For the second quarter I expect organic sales growth to be in the 4 to 6 percent range excluding the benefit of foreign currency. At current rates we would expect our reported sales growth to be higher and to be in the 8 to 10 percent range. I expect EPS in Q2 to be in the range of 37 to 41 cents excluding the restructuring charge that we will take in the second quarter. Now for full year 2004 guidance let me remind you that the guidance for the full year that I'm about to provide excludes the expected Q2 restructuring charge and the anticipated benefits of approximately 5 cents a share that I discussed earlier that will be realized in the second half of 2004.

For full year I continue to expect organic sales growth of 3 to 5 percent and at current exchange rates I would expect foreign currency to benefit full year reported sales growth by about 2 to 3 percentage points. Specifically by business, I continue to expect Medication Delivery to have organic sales growth of 4 to 6 percent driven primarily by accelerated sales in our drug delivery business and the continued success of our new Premier agreement which is currently in line with our expectation.

In Renal I expect organic sales growth of 0 to 3 percent with PD and HD both growing in that range. And finally, as John just described in Bioscience we expect organic sales growth of approximately 3 percent as we accelerate Advate conversion through the rest of the year and we also expect continued stability within the plasma protein market.

Our gross margins based on the issues I mentioned earlier, I would expect full year gross margin in 2004 to be approximately 43 percent, and the operating margin ratio we expect to be in the 17 percent range for the full year. Earnings per share remains unchanged with guidance of $1.75 to $1.85, again excluding the Q2 restructuring charge and the 5 cent incremental benefit from the 2004 restructuring initiatives that we announced today.

For cash flow from operations I continue to expect to generate approximately 1.5 billion with continued improvement in working capital and capital expenditures will not exceed 650 million in 2004. With increased cash flow we expect the net debt to capital ratio to be in the 30 to 35 percent range by the end of the year.

Now I would like to open it up for questions. Operator, if you could do that, we would appreciate it.

(OPERATOR INSTRUCTIONS) Rick Wise from Bear Stearns.

Good morning and I look forward to talking with you again, Bob. A couple of questions. First can we just dive right into the Advate issues, it is a pretty sharp reduction in your guidance. Can you talk in a little more detail about the short-term actions that you are taking. Is that all about pricing? Can you give us the constant currency sales for Advate in the quarter and why should we be more confident now that you are accurately looking ahead to or projecting Advate sales when right along its happened slower and been more complicated than you expected? Thanks.

Firstly, let me comment again that the total recombinant business grew 19 percent for the quarter; Advate sales in constant currency quarter to quarter were pretty much in line with reported sales. The vast majority of our Q1 sales and all of our Q4 sales were in the U.S. In terms of our confidence level, obviously this is a new product launch so there's going to be uncertainty around the growth rate, the conversion rate and the ability to be perfectly precise in our view towards the future. However, the specific actions we are taking as I mentioned, we have launched Advate in Europe at a smaller premium relative to the U.S. market, still premiums reflect the safety benefits and the enhanced benefits of the product. And we are adjusting the price premium; we will be adjusting price premium in the U.S. once we conclude exactly what level to do so in the States.

The other key actions that we are taking is to aggressively continue to drive the features and benefit messages of the product particularly the safety benefits as I mentioned in my comments about Advate. It is the newest generation product on the market, as you know, and offers the safety benefits of being free of human and animal proteins. And as that message gets driven into the patient community and the competitive price that we are launching in Europe at and will be adjusting here in the U.S. making the product more accessible to patients, we are confident the conversion rate will increase going forward throughout 2004.

(multiple speakers) (inaudible) I meant to say recombinant (multiple speakers) can you give us some estimate of second-quarter Advate sales? Third, can you give us some sense for the price premium that you're likely to be looking at and maybe update us on your plans for Thousand Oaks? Thanks very much.

The recombinant constant currency growth for the quarter was 10 percent against the 19 percent actual recorded growth. I would rather not comment on specific pricing actions that we plan to take, but the premium that we will keep in the market for Advate will reflect the value of the product and enable us to continue to invest going forward to further enhance the therapy that we want to bring to the patient community. With respect to Thousand Oaks, I think I mentioned last quarter our Advate recombinate manufacturing will be balanced in line with product demand so as Advate demand increases we do have the option to bring Advate production to Thousand Oaks as necessary once we exhaust the capacity at Neuchattel. And that continues to be our plan.

Dan Lemaitre with Merrill Lynch.

Good morning everybody. I don't know if Bob is on, if Bob wants to answer just one question and then I have an operating question, but Bob if you're still on, just wondered how if you could walk through what kind of due diligence you kind of went through and had a chance to do? Because I think what everybody's wondering is what you are going to think of the place after you have had a chance to kick the tires, so have you already kicked the tires and can you just give us an assessment of how you think the place shapes up relative to what you had in terms of expectations coming into that process?

Dan, this is Brian. Unfortunately, Bob really just had a few minutes and he called in at the front end. I think he indicated that he was going to be signing off. (multiple speakers)

Okay, I thought he was still on. Let me just ask a couple operating questions. I guess, a little confused by your Renal guidance because it looked like you actually had some pretty decent unit dynamics in the quarter especially overseas at 9 percent X currency and yet you are still talking about flat to 3 percent organic growth. Was there something about the Q1 numbers that we shouldn't extrapolate?

I think the key thing, Dan, is Q1 of last year was very, very -- we had easy comps. We feel very good nonetheless about the start that Renal has had this year. I don't know that one quarter makes a long-term trend. I do feel -- continue to feel comfortable with the zero to 3 percent growth rate. Could it be a little stronger based on the start? Possibly.

But there is not -- you're not signaling that there were some pricing reductions that you already know about in places like Japan or something that we should calibrate into our numbers now?

No, they're off to a great start.

And then just lastly on can you walk us through the actual process you're going through on the Premier business? How much of that is a jump off, (ph) how are you faring in terms of the business that is a jump off?

We are doing extremely well, Dan, and very much in line with the expectations and the assumptions that were baked into our operating plan. So the process is just about complete, there are very few remaining customers to commit and we feel very comfortable. There is really no impact on our expectations as it relates to how Premier was modeled. So, very, very comfortable. Dave and his team have done a great job.

Thanks.

Glen Reicin with Morgan Stanley.

First for Brian. You mentioned that you're still committed to the 1.5 billion cash flow from operations this year. How do you do that with the restructuring costs or does that guidance exclude and I have a follow-up.

Similar to last year, Glenn, the restructuring costs this year, the cash component of it would be relatively modest and it will be principally severance which really just replaces payroll that we would otherwise have paid. And so, in terms of its impact on the 1.5 billion I really see it not having an impact on our ability to hit the 1.5 billion objective.

So how does the 300 million flow out in future years?

The $300 million in savings or?

No, (inaudible) I forgot the exact cash, cash component of the restructuring (inaudible).

The cash component is about two-thirds (multiple speakers) and I will give you more detail on precisely how that flows out when we actually take the charge at the end of this quarter.

This is going to be a difficult one to answer and it relates really to plasma capacity. Has someone done an analysis of total industry capacity at this point and total industry inventory levels? And have we definitely determined that a ten percent reduction or further reduction of going down to 2.6 million, I think that's the number you said in terms of units, that that in fact is enough? There's been some speculation here that much more dramatic reductions will be needed and in fact in order to get some of the inventories in line like albumin and non-recombinant Factor VIII that you physically have to give up IVIG inventory or IVIG capacity as well. So you have to further shrink your capacity and potentially give up sales in the process. Can you maybe talk to that?

Let me comment on your last statement. That is absolutely correct, what you said. And that's the whole plasma economics equation. You do give up sales of IGIV that you could otherwise make by reducing the throughput, but as you know with either declining demand or declining prices for the other fractions the profitability of the last liters in the industry or in our case relative to these 400,000 liters reduction that we are making are not attractive enough for us to continue to produce those liters. In terms of the first part of your question, yes, we have a very good view of the overall industry capacity. I'm not going to speculate on what other changes are going to be made by any of the competitors but based on our own desires to as I mentioned last quarter, manage this business for profit and cash flow and not for growth and that's as simple as the strategy is.

Our decision is based on what we believe the industry economics will provide us going forward and what throughput level is optimal for us and right now that's at 2.6 million liters. We said last year we are going to continue to look at this because it is an ever-changing dynamic and we will continue to do this. But right now to go further would actually erode the profitability and return on investment for the plasma business today as demand or pricing changes, that picture could be different a year or two from now.

So how long, according to your current plan, how long does it take to get inventory turns to an acceptable number, and I don't know what that acceptable number is for Bioscience. I think it was certainly less than two times in the 10-K, what is the optimal number and how many months or years does it take you to get there?

Our turns have improved from about 1.25 to 1.4 since we did the restructuring last July. That is clearly not an acceptable turn for this business or any other business. Given the process time involved in this business an acceptable turn of two, or low two's is where we'd like to be. It's going to require these kind of actions to get there. We have seen more than a 10 percent improvement in our turns and in our inventory reduction since we took the action last summer and we expect to see further improvement following these actions as well.

And timetables?

I would rather not speculate on when we are going to get there. As you know the dynamic in this industry is ever-changing and we are going to continue to drive towards two as quickly as we can.

Thank you very much.

Matthew Dodds with Smith Barney.

A couple of questions for John again. On plasma the reduction, can you say where that occurred and also can you just give me a rough estimate how many centers you think you're going to close along with that?

We haven't implemented the reduction as of today, as you know we have got fractionation facilities here in the U.S. and in Europe and we will be reducing throughput in both locations. I'd rather not comment on the exact number of centers. It will be proportionate to the number of centers we closed last year in line with the throughput reduction of 400,000 liters versus 700,000 liters last year.

One question for Brian, on the CAPEX the 89 million you said earlier. it's well below the 650 target, roughly 650 million target. Is that still your target or is that total number for the year moving down as well?

The earlier guidance was 650 to 700, just given the start to the year and the focus on really continuing to prioritize CAPEX, what I said was below 650. I feel that is definitely achievable and that's what we are going to do.

Could it be below 600? Is it dropped below that kind of level?

Let's stick with below 650 for now.

Thanks Brian, thanks John.

Mike Weinstein with J.P. Morgan.

I have a few questions. Just to be clear, Bob is no longer on the call?

No, he had to, he was calling in from Loyola and they are wrapping up all of his responsibilities there. I think they have commencement activity and so on. He was gracious enough to join the call for a few minutes but Mike, I'm sure you are going to spend a lot of time with him in the upcoming weeks.

Let me just first follow-up Glen's question to John, as relative to the plasma inventory (inaudible), I concur that probably the biggest issue to try to figure out when the company comes out from under was essentially an earnings (indiscernible) until it can work through these inventory levels. Is there a point in time when you guys think you will be able to give us a timetable for when you think you will be able to work down those inventories? Obviously a big part of what is weighing on your gross margins right now is to try and sell off some of this excess product particularly into some of these overseas markets with lower margins right now. At some point I think you have to say, okay this is when we expect to have this done and at that point in time we should start to see some improvement in our biosciences gross margins. Is that something you can't do today? Is there a point at which you think you might be able to do that?

Just to clarify, I know we talked about this last quarter. The pricing for the plasma-derived Factor VIII on a global basis for us has been (technical difficulty) the last several quarters. There hasn't been any change in our global ASP for the plasma-derived Factor VIII over the last four quarters.

(multiple speakers) (inaudible) plasma (inaudible) IVIG.

Yes, the same comment applies to IGIV. Again, globally. There hasn't been erosion in our global ASPs for either of those products as a result of what you referred to as selling product cheaply in some of the developing markets. As I mentioned our inventory has come down about 10 percent since we did the last throughput reduction and we obviously expect it to continue to decline as we are collecting less plasma, both from the reductions of last year and now with further reductions.

But the comment you made about the pricing was that adjusted for currency because currency is probably, I would assume is offset the pricing declines?

No, that is in constant terms.

And then could I ask just a couple questions coming out of the 10-K which I don't think we have had the chance to ask yet. But one (indiscernible) commentary around the decline in profitability in the Renal business in 2003 which is in pre-tax margins, declined by about 250 basis points which was more than we anticipated so any additional insight into how that, why it was as bad as it was and maybe what the trend looks like in 2004? And then if you could (indiscernible) latest thoughts on the currency hedges, on the translation hedges the Company currently has on its balance sheet which at year end was just under $1 billion? Thanks.

First the operating pretax margins within Renal was in the segment reporting in the annual report, is without the benefit of currency hedges that are held at corporate. If you look across each of the business units and Renal being the most global of our businesses was about 75 percent of the sales overseas. The earnings before considering the offsetting hedges does fluctuate quite a bit. There is no significant pricing issues or anything like that within the business on an underlying basis. We feel pretty good about the trends for Renal coming into this year, and they are off to a good start as I said earlier.

As it relates to the med (ph) investment hedges, since year end we have actually extended the maturities on these contracts and over 60 percent of the contracts now have maturities that go over the next three to five years. And will continue to do that and will continue to extend maturities as the contracts come up. At the same time over a longer time period it will allow us to execute an exit strategy because clearly as we continue to reduce our net debt to capital ratio the need for having these hedges in place will be significantly less.

Just one clarification, what is the annual cost of carrying those contracts and then I will drop back in.

Really no cost of carrying --. There is no premium or anything like that that is paid on a cash basis.

Next question, operator.

Ben Andrew with William Blair.

Brian, can you clarify for us the components of the gross margin because that was below what we were looking for? Is that, and try to break it down for us by the impact on foreign exchange and mix?

I think the biggest change, is that the currency was stronger and we had higher sales growth than you were probably modeling. But because our gross margin is hedged, the gross margin dollar gross margin doesn't change from what we had anticipated but the sales growth or the dollar sales translated because of the stronger euro was higher, the impact on the gross margin rate was about 200 basis points. That is probably the biggest single thing that would explain the difference between probably what we modeled and what we reported.

We talked last time about vaccines year-over-year impacting first-quarter margins and some of the other issues related to manufacturing in Europe where currency is extremely strong. And manufacturing in Europe and selling some of that product in markets outside of Europe. That obviously carried into the quarter and was absolutely expected.

Okay, and then on the job cut side, the total of 3500 to 4000 you say that comes out of G&A, at what point do you feel like you are starting to get too close to muscle, are you there now or are you comfortable with the level of cuts that you're making in terms of the people that you are pulling out?

We are comfortable but certainly with the actions we took last year, I'd say those were a lot easier. As we go into this activity we will start to get much more focused on fundamental profit change, more consolidation activities et cetera, which is why, as I said, the savings will ramp up in '05 and we will have a more modest benefit in 2004. But we absolutely are mindful of not going too deep. We are definitely not affecting feet on the street if you will in our sales force and critical customer facing activities. And I'm certainly across the project R&D teams there is very little impact of these actions in those areas. We are really going after overhead administrative infrastructure and trying to leverage and get those activities a lot more efficient with profit change and utilizing the technology that we put in place. Much more effectively as we go forward.

And then the plasma inventory level, is it fair to say the reason for reducing the throughput is to effectively stop building inventory and letting that slow down so that ultimately we can see prices continue to improve because we have heard the prices have also been stable for quite some time?

I think the short answer to your question is, yes, that is true.

Okay, cause everybody else in the industry is doing the same thing so ultimately we should start to stabilize the global inventory levels and prices should start going back up. (ph)

That is the objective.

Ted Huber with Wachovia Securities.

Good morning, I wanted to go back to Advate. With the lower revenue guidance in pricing, by my math it represents at least a couple cents, maybe as much as a nickel in your '04 earnings yet, Brian you are not changing the guidance. Is there something else, other upside that you are going to make this up with or should we be thinking about you being more in the low end of the range for '04 earnings?

I think that is a great question, Ted, and as I said on the last call one of the things that we paid very careful attention to before giving this guidance was running a multiple number of scenarios, which included the possibility of Advate sales ending up in the range that John described. In the context of the guidance that we gave earlier, these are scenarios that we contemplated. And also don't lose sight of the fact that the recombinant business, that franchise overall will have a pretty solid year. That's why I still feel very comfortable with the $1.75 to $1.85 range.

John, as you move into the second half of '04 and take Thousand Oaks down for the long overdue maintenance, you are going to run -- it seems that you are going to run thin on recombinate. Could we see Baxter effectively forcing conversions over to Advate and is that one of the drivers of this product line here? And then secondly, you mentioned reimbursement decisions in Europe as a driver for this business. Could we hear you telling us six months from now that the reimbursement has been delayed or coming in lower or what not and therefore missing some targets here with this new product launch?

Firstly on the first question. You are coming on long overdue maintenance. We've had no process problems in Thousand Oaks. Whether it's long overdue or not is debatable. It's a regularly scheduled maintenance shutdown in Thousand Oaks which will take place in the second half of the year. We anticipated that as we moved into this year, we will have ample recombinate supply available to satisfy the expected demand and we do not intend to force a conversion by reducing or withdrawing recombinate from the market. We will balance our supply of Advate and recombinate in line with demand from the market. And as I said earlier both by putting Advate out at a competitive premium to make it accessible to everybody and continue to drive the safety messages, the conversion will take hold as time goes on.

In terms of reimbursement, it's obviously out of our control. The countries that we expect reimbursement for subsequently in this year and the bigger ones are going to impact shorter term sales are going to be France, Italy, and Sweden primarily. The timing of those reimbursement approvals are expected and built into some of our forecast, if they change, get delayed for reasons out of our control it could impact us but at this point we don't have any control over that obviously.

John, lastly, even at this lower price point for Advate whatever that is, is it still a higher margin product than recombinate so does that help your profitability as you shift the mix towards it?

Yes.

That is it for me.

Operator, we will take two more questions.

Larry Keusch with Goldman Sachs.

A couple more Advate questions if I could. Could you also talk a little bit about, you talked about Thousand Oaks. Would you just talk a little bit about how long that shutdown actually takes? And then could you also speak to where we are with Wyatt because as I recall they supply about 15 percent of the recombinate volume and I think that contract goes away in '05 and what that does in terms of your ability to supply recombinate? And then I guess the other question is I understand the challenges of predicting ramps and penetration of product such as Advate. It just seems to me that if you have to lower price to get increased usage of the product there was a mistake made somewhere along the line of assessing how important this product is to the hemophilia community. I wonder if you can speak to that?

The shutdown is about six weeks in Thousand Oaks. Could you repeat your second question? Was it relative to the Wyeth contract? Okay, as you probably know a contract with Wyeth to purchase bulk material that expires the middle of next year. We don't see any issue in terms of recombinate availability in the short to medium-term at all relative to either that contract expiring or the impact of the shutdown.

Regarding the ramp and whether a mistake was made. I'd rather not second guess what was done last year to be honest with you. We are trying to respond to the marketplace and the needs of the patient community to enable Advate to be accessible to as much of the community as possible. We been in the market for eight months and we've obviously been in Europe now for six weeks but made a decision in Europe to go in at a certain price point. What we are doing today with our actions is in response to what we think the community's needs are. As of now to get Advate into the marketplace.

Lastly if your sales are going to be lower for Advate this year recognizing that there is some price reductions here it would also appear that your volumes will be less than you were anticipating. Do we run into any situation where we have a problem with shelf life of inventory where some of that might have to be written off?

Firstly as part of our guidance production from 4 to 6 down to 3 reflects some of the impact obviously of the switch between Advate to recombinate. In terms of inventory shelf life issues we do not have a problem in that regard.

Last question, operator.

Glenn Navarro with BankAmerica Securities.

Brian, you talked a lot about expense reduction on today's call but we didn't hear much about actions being taken to accelerate sales growth other than for Advate this year. Can you highlight what in medical delivery will take the growth rate above 5 percent and what was in Renal will take the growth rate above 0 to 3? Thanks.

I may ask Norbert to make a couple comments on the pipeline in a few minutes. Within Medication Delivery we are very pleased with the drug delivery business and the opportunities within drug delivery. When you look at the growth last year and the continued performance this year, drug delivery will be a key driver for Medication Delivery. I also think that the overall success of the implementation of the new Premier agreement is going to be a great accomplishment this year and on an ongoing basis. And finally, a part of our overall modeling assumptions assumed a competitor for Prophobol (ph) in the back half of the year and if that doesn't happen we won't see as much impact on Prophobol this year which is a pretty important product within the med delivery franchise. Within Renal I think it really just comes down to continued PD penetration, especially in Japan where we have launched extra and are starting to see growth in Japan again. Europe is off to a good start and could really do better than the overall plan for Europe. We are seeing growth again in several of the major countries in Europe within Renal. And Norbert, if you want to say a few words across the board on the pipeline.

Let me just add to first of all the Renal and the Medication Delivery piece, so as Brian already mentioned Extranea in Japan and Arena (ph) in the U.S. clearly is beginning to make a contribution in particular in Japan. We haven't had a product launch for quite some time but even in the area of hemodialysis we had last year the approval of Arena, our new machine in the U.S. as well as in Europe and in addition to that we had the (indiscernible) and the central dializer so I believe that Renal has the largest number of new product approvals in many years and I believe they will make a significant contribution to the projections we have for the (inaudible).

On Med Delivery Brian already mentioned our global (indiscernible) medical delivery business, the track record they have in securing partnerships with large pharma and biopharmaceutical companies is making a very strong contribution to that being one of our best and fastest-growing businesses. But even in our pump business, we have had a recent launch with our new pain Medication Delivery pump, the PCA pump (indiscernible) and for what it's worth that actually just received an award a medical design excellence award, for its innovation as well its (indiscernible) benefits in cost effectiveness in delivering healthcare. I believe those are strong contributors going forward.

I think we have had in addition to the very strong focus that we have here on Advate, by the number of product launches that I just reviewed briefly and driving the business overall. The achievement of key milestones of our top projects is at a record high. Our Q1 milestone achievement as an example is about 80 percent, that is definitely as good as the industry can be in delivering pipeline milestones going forward. And I think that across the board we have exciting projects in the pipeline that will over the next year, or two and five years launch into the market place and will also continue to strengthen the pipeline to make sure that it continues at a high pace.

So are you guys saying that with all the new product flow in Medication Delivery and Renal that as we look out to 2005 we can see the organic growth rate ticking up or is it too early to call right now?

I would prefer to really stick with giving guidance for '05 after we've got '04 under our belt. We will do that when we get on the call for guidance next year in January. Obviously throughout the course of our planning process we do a very thorough assessment of the R&D pipeline and the portfolio et cetera, and all of that factors into expectations around growth for next year.

Okay, great. Thanks guys.

Thank you everybody and enjoy the rest of the week.

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