百特醫療 (BAX) 2004 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Baxter International's second-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 Ms. Mary Kay Ladone of Baxter's Investor Relations Department.

Thank you. Good morning, everyone, and welcome to our Q2 2004 earnings conference call. Joining me today are Bob Parkinson, CEO and Chairman of Baxter International; John Greisch, Chief Financial Officer; Dave Drohan, Senior Vice President and President, Medication Delivery; and Norbert Riedel, Chief Scientific Officer.

Before we get started, let me remind you that this presentation, including comments regarding our financial outlook, contains forward-looking statements that involve risks and uncertainties, and of course our actual results could differ materially from our current expectations. Please refer to today's press release and our SEC filings for more details concerning the factors that could cause actual results to differ materially.

In addition, in today's call, non-GAAP financial measures will be used to help investors understand Baxter's ongoing business performance. These measures include gross profit, SG&A, operating profits, sundry (ph) and earnings per diluted share, each excluding special charges. In accordance with SEC Regulation G, a reconciliation of the non-GAAP financial measures being discussed today to the comparable GAAP financial measures is included in our earnings release issued this morning and available on our website.

It should also be noted the given our announcement regarding our plan to restate financial results, all comparisons in this call to prior quarters or years do not reflect the effects of the restatement. Now it is my pleasure to introduce Bob Parkinson.

Thanks, Mary Kay. Good morning to everyone. We're pleased to be with you here today to review our financial results for Q2 2004 and update you on restructuring initiatives and the anticipated benefits for 2004 and beyond. We will also discuss the background and the basis of the restatement that we announced in our press release this morning, and then of course provide our outlook for the full year 2004. At the conclusion of our prepared remarks, we will open up the call for Q&A, and at that time we will be available to answer whatever questions you may have.

First of all, as you saw in the press release this morning, we reported solid sales growth of 10 percent, 6 percent net of exchange, and earnings per diluted share before special charges of 40 cents, in line with our expectations. I am pleased to report that our restructuring programs implemented in the second half of 2003 and throughout the second quarter of 2004 are on track and will achieve the savings levels in 2004 and beyond that were previously communicated.

I know you are all anxious to get into the details and also the Q&A this morning, especially in light of this situation that we described in our press release in Brazil. However, this is really the first opportunity that I have had in my new role as CEO to speak with all of you in this setting, and as a result, I want to take just a few minutes to share some thoughts and perspectives at the beginning of our call this morning.

The last three months, as you would imagine, have been total immersion for me. I have met literally thousands of Baxter employees and have traveled to numerous Baxter facilities around the world. While as you know I was somewhat familiar with Baxter as an outsider, one never, of course, really gets a full understanding of a company until you operate on the inside. The challenges that this Company faces, most of which I knew coming into the role, have become clearer to me based on my experiences over the past number of weeks.

It is just as evident to me that there are great strengths in this Company that can be more effectively leveraged going forward. I remain convinced, in fact, I would tell you increasingly so over time, that we will effectively extract what I have come to refer to as the embedded value that resides in this Company. Our ability to do that, however, will require greater focus and greater discipline in everything that we do.

Toward that end, let me give you just a brief summary of what my priorities have been and will continue to be in the short term. First of all, restoring investor credibility. While I don't underestimate the magnitude of the challenges that we face as a company, our first step is to regain credibility with our shareholders, correct our course, and move forward with a sense of direction. Clearly, we have experienced too many surprises in the recent past. We're focused on having rigorous financial planning processes and are committed to establishing realistic and achievable financial objectives. I understand that ultimately the best way to improve our credibility is to consistently meet the expectations that we set, and improve our financial vitality necessary to fuel our future growth.

Second, we are intensifying our efforts on quality, and not only the quality of our products, but the quality of our business processes. We have, for example, recently implemented new corporate-wide quality and regulatory approaches that standardize activities across all of our business units. These efforts too are a matter of focus and discipline, and of course, having the right people in the right roles who know how to lead and effectively execute.

Which leads to my third immediate priority, and that is organization, both structure and people. As you know, recent changes have been made in the senior management ranks within the Company and this will continue over the next 30 to 60 days. I am hopeful that we will have the President of BioScience position filled shortly. While I am confident that we will successfully address the challenges we face by focusing on these three areas that I mentioned, in the longer-term, the more fundamental question of course is what are the growth prospects for this Company and what actions will management take to ensure sustained and accelerated growth in the future?

I have commented previously on my favorable predisposition personally toward a diversified healthcare model, which Baxter represents. Much of the growth opportunity in the future, I believe, resides with the expansion of our diversified platform into new markets and new businesses that are complementary or synergistic with our current franchises. In order to strengthen each of our existing core businesses, we must identify new businesses to enter that are complementary, but that also offer significant opportunity on their own.

Doing this, in my view, has two fundamental prerequisites. First, an internal rededication to science and technology. This is truly the lifeblood of being in this business. Second, significantly improving our financial position provides us the latitude to pursue selected acquisitions of products and companies that complement our existing businesses and can benefit from our global strengths. To define this approach, I have assembled an internal Baxter team of high-caliber, experienced individuals, augmented by outside support, to define a company-wide strategy that will support our vision. And we expect have this strategic plan finalized in the near future.

Our immediate focus in the meantime will be on improving the financial performance of the businesses we have today, as we evaluate opportunities to generate a growth profile commensurate with our collective expectations and consistent with our strengths, our competencies and our global market position. We also look forward to sharing our progress with you as we move ahead.

At this time, let's get back to the matter at hand, and let me turn it over to John Greisch, Baxter's Chief Financial Officer, who will take you through our financial performance for the quarter. After John's comments, I would like to offer some additional perspectives and then provide you with our outlook for the remainder of the year before then opening the call up to questions and answers.

Thanks, Bob. Good morning, everybody. I have had the opportunity to speak to you over the past several quarters in my previous position at BioScience and I'm looking forward working with all of you as Baxter CFO and working with Bob to re-establish Baxter in your eyes as a Company that has the discipline and capability to achieve our expectations.

As Bob mentioned at the start of the call, on a pro forma basis, our second-quarter financial results were in line with our expectations. However, as we reported, earnings on a GAAP basis were impacted by special charges totaling $414 million, or 68 cents per share. These charges included two things. First, the restructuring after-tax charge of $394 million, or 64 cents per diluted share; and second, a net after-tax non-cash charge of $20 million, or 4 cents per diluted share, to address several issues that developed throughout the quarter. As a result of these charges on a GAAP basis, earnings per share for the quarter was a loss of 28 cents a share.

We have a lot to cover today, including details of both of these charges, but I would first like to address the restatement of our previously issued results, which was covered in our press release. As you saw, we are announcing today that we are restating our financial results for the years 2001 through 2003, as well as for the first quarter of 2004. The restatement is primarily to adjust incorrect revenue recognition and inadequate provisions for bad debts, largely in Brazil. We became aware of these activities as part of our corporate governance and ethics program and conducted an investigation under the direction of the audit committee of the Board of Directors, along with independent accounting and legal third-party experts who worked with our internal audit personnel, as well as our external accounts, PriceWaterhousecoopers.

As a result of this investigation, we have concluded that a restatement of our financials is appropriate to properly reflect the related adjustments in our previously issued financial statements. The impacts of the restatement on revenue for the three-year period is expected to be a reduction of reported revenue by no more than $70 million, representing less than one-half of one percent of sales in any single year. In addition, net income is expected be reduced by no more than $40 million, or 7 cents per share, over the same period.

As a result of this investigation, two senior members of the management team in our Brazilian operations are being terminated, and as Bob mentioned, we take this matter very seriously and we will not tolerate this type of behavior, no matter how immaterial the amount may be. We do expect to complete the restatement of our financials as soon as possible, and further details of this will be included in our second-quarter 10-Q, as well as in additional amended SEC filings.

Turning to the second-quarter results, sales for the quarter were $2.4 billion, an increase of 10 percent over the prior year, 4 points of which was from currency, as we mentioned. This was in line with our expectations of 8 to 10 percent guidance. U.S. sales and international sales both grew 10 percent, with international sales growth improved by 7 points of currency overall.

In our Medication Delivery business, sales were $1 billion, increasing sequentially from Q1 of this year by 8 percent and 7 percent over Q2 of last year. Organically, sales growth for the quarter was 4 percent in Medication Delivery, with currency adding 3 points of growth. Domestically, sales increased 3 points while international sales increased 14 percent, including 8 points from currency. And within our individual business units, drug delivery sales growth was 12 percent for the quarter and infusion systems grew 11 percent, both growth rates being improved by currency by approximately 2 percentage points. Finally anesthesia sales increased sequentially from Q1 of this year, but increased only 2 points over last year as a result of actions at wholesalers to reduce inventory levels.

In our Renal business for the quarter, sales were $480 million and increased 6 percentage points, including 5 points from currency. U.S. sales for Renal were flat, while international sales grew 8 percent, including 6 points of currency. Looking at our two major product areas, PD and HD, sales grew in both areas by 6 percentage points including currency, which accounted for approximately 5 points of growth for each of these businesses.

In BioScience, sales were $893 million, and increase of 16 percent for the quarter. Organically, we saw a growth of 11 points for the quarter, with currency adding 5 points to growth. Here the U.S. sales for BioScience increased 25 percent compared to the second quarter of last year and are up sequentially from Q1 of this year by 5 points. The 25 percent growth that we saw compared to last year was influenced by distributor inventory reductions that occurred last year in the second quarter, which made for easier comparisons this year.

International sales for BioScience grew 9 percent, but were flat on a constant currency basis, as increased recombinant sales were offset by lower vaccine sales, as we expected. Including the benefit of currency, recombinant sales in the quarter were $320 million, a growth rate of 26 percent. This includes the benefit of Advate sales, which totaled $51 million for the quarter. Recombinant sales, excluding currency, grew 21 percent for the quarter and increased 10 points over the first quarter of this year. Antibody therapy sales were $90 million in the quarter, a growth rate of 26 percent, primarily driven by unit volume increases as well as continued improved pricing in North America.

In the plasma business, sales excluding antibody therapy were $267 million, an increase of 16 percent for the quarter. This growth was a result of favorable foreign currency, which added 4 points of growth, as well as strong growth of Feiba, an inhibitor therapy product, and Fiseal (ph), our fibrant sealant product. In addition, during the second quarter, sales of raw plasma from third parties increased over the prior year in connection with our own expected lower fractionation needs as part of our ongoing throughput reduction program.

Finally, transfusion therapy sales in the quarter totaled $136 million, which were flat to last year, and in this business sales were impacted in the quarter by lower sales to plasma fractionators as well.

Just a couple comments on Advate. We mentioned earlier Advate sales in the quarter totaled $51 million, with over 50 percent of those sales occurring in Europe following the first-quarter approval for us. As you know, during the second quarter we implemented actions to accelerate Advate sales over the course of 2004 in the U.S., including reducing the price premium in order to make Advate more accessible to all patients. As a result of these actions, Advate has captured over 10 percent of the U.S. market to date.

And in addition, the launch in Europe, as you have seen, is off to a strong start, as evidenced by our second-quarter sales performance, and we are now selling Advate in 10 countries in Europe. We expect to launch Advate in additional countries there in the second half of the year as reimbursement is finalized, particularly in Italy and Spain. For the full year, we continue to expect Advate sales to be in the 200 to $300 million range.

In terms of our margin performance for the quarter, on a pro forma basis, gross margin was 41.4 percent, compared to 45 percent in the second quarter last year. While margin improved 90 basis points sequentially from the first quarter this year, the margin in Q2 declined 3.6 points compared to last year. This decline is due to the impact of our hedging activities, lower margins in BioScience due to a higher mix of plasma sales for the quarter, as well as reduced margins in Medication Delivery due to the impact of the renegotiated Premier agreement.

With respect to SG&A, spending for the quarter totaled $477 million on a pro forma basis, an increase of 3 percent compared to last year. While restructuring actions favorably impacted SG&A by approximately 15 to $20 million this quarter, this benefit was offset by the impact of foreign currency, as well as higher pension and retiree medical benefits.

R&D spending for the quarter was approximately $129 million. In terms of specific milestone achievements, we did complete our regulatory submission for our next-generation liquid IGIV product to the FDA in the second quarter, which was ahead of our previously communicated second half of the year filing timing, and we expect to file for next-gen IGIV approval in Europe during the second half of this year.

In addition, as we stated last quarter, we expect to file for approval for Advate in Japan in the second half of this year, and continue to expect to launch Advate in Canada in 2005. And as we mentioned last quarter, both of these markets represent an opportunity of approximately $100 million for Recombinant Factor VIII products.

Let me take a few minutes just to comment on the restructuring and special charge that we took here in the second quarter. As you all know, we announced in January another set of actions implemented to reduce our overall cost structure and drive sustainable improvements in our future financial performance. Two key initiatives related to our restructuring charge that were taken here in the second quarter are the elimination of 4000 positions, or approximately 8 percent of our global work force, as well as the reduction of our plasma fractionation throughput by an additional 400,000 liters on top of the 600,000 liters announced last year.

Details regarding this charge I've already commented upon recorded an after-tax charge of $394 million, or 64 cents a share. Approximately 60 percent of this charge is cash. Specific details of the charge include the following. Severance costs will be approximately $210 million. The cost to close several manufacturing facilities, as well as write off several manufacturing idled assets, is approximately $70 million. There is a cost of $100 million in connection with our plasma throughput reduction of 400,000 liters, as mentioned earlier. And lastly, there is approximately $165 million -- these are all pre-tax numbers, by the way -- $165 million for either closure or sales of nonmanufacturing facilities, as well as a number of contract termination costs that we are getting out of early.

We expect savings in the second half of this year to be approximately 5 cents a share, which is included in our revised guidance, which Bob will touch on later. And consistent with our previous expectations, we expect savings in '05 to be approximately 20 to 25 percent per share, and savings in '06 and beyond to be 30 to 35 cents a share.

The other special charge we recorded in the quarter again was an after-tax non-cash charge of $20 million, including adjustments to receivable and inventory reserves, certain hedge positions and asset impairments. As you can see on page 9 of the press release, these adjustments, totaling $115 million on a pre-tax basis, were reduced by the reversal into income of tax reserves of approximately $55 million during the quarter as a result of the completion of several tax audits during the second quarter.

Specific details of this charge, the increase in receivables and loan reserves is approximately $55 million that we took in the quarter as part of this charge. We also increased our inventory reserves by $28 million, largely related to our plasma business. In addition, a charge of $17 million related to excess cash flow hedges that we have in place was recorded as part of the charge. And lastly, an impairment charge of approximately $15 million related to fixed asset investments behind our pathogen inactivation project was taken to reflect an impairment that occurred during the quarter.

Cash flow for the quarter on a pro forma basis, we had a strong quarter. We continue to maintain an intense focus on our balance sheet and cash flow performance, and I intend to lead a very disciplined approach towards the needs within the Company around our balance sheet management performance issues. Cash flow from operations in the quarter on a pro forma basis was $305 million compared to $228 million in the second quarter last year. Year-to-date cash flow from operations is approximately $251 million, compared to $205 million last year for the same period.

Cash flow from working capital improved in the second quarter compared to last year and improved sequentially. This was driven primarily by improved DSOs, as well as higher inventory turns, which are up over 15 percent from last June. Specifically with respect to inventory, as you all know, we have a high plasma inventory level, and over the past 12 months, we've seen a reduction of $150 million in our plasma inventory. And here during 2004, we have seen reductions in excess of $100 million during the first six months of the year, so we're seeing great progress in reducing our plasma inventories. We ended the quarter with a net debt to capital ratio of 41.5 percent, compared to 46.7 in last year's second quarter.

Before I turn the call back to Bob, I would just like to touch on several issues that I know are of interest to many of you on the call. First, our hedging activities. We have, as you know, cash flow hedges and net investment hedges in place. On the net investment hedge liability, approximately 35 percent of that liability matures in 2005, and the rest matures beyond 2005. We will be taking a more conservative approach towards the level and the duration of both our cash flow and investment hedges going forward, and we will communicate as to how we plan to deal with our net investment hedge position on our third-quarter conference call.

Second, with respect to pension assumptions, our pension year ended September 30 and we will be reviewing the pension assumptions underlying our pension accounting, and we will also be prepared to discuss this matter in more detail at our third-quarter conference call. Finally, our construction in progress balance has declined nearly $100 million or more than 10 percent this year, and we will continue to see declines in this asset balance as projects are completed and capital expenditures remain lower than they have been in recent years. With that, let me now turn back to Bob, who is going to cover some comments around our guidance for the rest of the year.

Thanks, John. Before we open it up to Q&A, let me conclude our formal comments this morning by providing our outlook for the remainder of 2004. As you have all seen from our press release that was issued earlier this morning, we are lowering our full year 2004 guidance. While we continue to expect our sales for the full year on a reported basis to be at the higher end of the 5 to 7 percent guidance, our sales growth organically is expected to be in the 3 percent to 4 percent range. This is slightly lower than our original guidance of 3 percent to 5 percent, primarily due to lower sales in our transfusion therapy business and expected reductions in wholesaler inventory levels.

For the full year 2004, excluding the impact of special charges taken in Q2, we expect earnings per diluted share of $1.65 to $1.72. This is a result of one, lower earnings in Brazil for the remainder of the year; two, reduced wholesaler inventory levels; and three, the impact of foreign currency, given that our hedge losses are not fully offset by improved underlying earnings in our foreign operations. Given these dynamics, we are now estimating a gross margin of approximately 42 percent and an operating margin of 16 to 17 percent for the full year.

Due to lower earnings for the full year and the expected cash flow impact of restructuring payments, we are also lowering our guidance on cash flow from operations to approximately 1.4 billion. As John mentioned earlier, we are significantly intensifying our discipline and focus on the balance sheet and cash flow performance as we move forward.

Specifically by business, we continue to expect organic sales from Med Delivery to be in the 4 to 6 percent range, driven primarily by accelerated sales in our drug delivery business. We continue to expect Renal organic sales growth of 0 to 3 percent, with both PD and HPD therapy growing in that range. Lastly, we expect Bioscience organic sales growth of 2 to 3 percent.

As we said earlier, we continue to expect sales of Advate to be in the 200 to $300 million range, with continued pricing stability within the plasma protein market. However, as mentioned, we now expect transfusion therapy sales for the year to be below prior year.

For the third quarter and the fourth quarter, we expect organic sales growth in Q3 for the Company to be in the 3 percent to 5 percent range and sales growth in Q4 to be flat versus prior year. This is consistent with our earlier comments both John and I made regarding the expected reduction in wholesaler inventory levels.

At current rates, we expect the impact of foreign currency on sales to be approximately 3 to 4 percent favorable in each quarter. And we expect earnings per diluted share in Q3 to be in the range of 41 to 44 cents, and Q4 earnings per diluted share in the range of 54 to 58 cents.

To be certain, much more work needs to be done between now and the end of the year, but I believe we're making good progress on the priorities that I enumerated at the outset of the call. Our goal is to establish a solid foundation to build upon as we move into 2005 and beyond, and as our financial strength improves, we will have greater latitude to pursue those opportunities that I know will emanate from our strategic plan that I mentioned.

I am really looking forward to getting out, to meeting with many of you over the next 30 to 60 days to talk about our Company and to talk about our plans at greater length. At this point, let's open up the call to Q&A, please.

Thank you. (OPERATOR INSTRUCTIONS) Dan Lemaitre from Merrill Lynch.

Good morning, everybody. Bob, since maybe we have the first shot at you in terms of strategic issues, I am just curious as to where your head is at in terms of a sustainable, targeted growth rate that you would think and the Board would think is acceptable. Should we think of that as still a single-digit number? Is it a double-digit number? Where's your head at? Where's the Board's head at in terms of what they think Baxter can do?

Let me compartmentalize that between the immediate term and longer-term, because I think the answer to your question is different. I think first and foremost, we have to deal objectively and practically with the portfolio of businesses that we have today. I think it is fair to characterize the balance of businesses that we are in today as being able to support what I would describe as a mid-single-digit top-line growth.

Obviously, from our comments this morning, what is going on in this Company right now is about focus, discipline and basic blocking and tackling. That's the number one priority. And if our current portfolio of businesses can drive a mid-single-digit top line operationally, we should be able to affect, then, bottom-line growth, something in excess of that. I won't be definitive; something in excess of that. That is the first-order priority that this Company has right now, is to be able, first and foremost, to demonstrate that we can deliver that mid-single-digit top line growth, accelerate EPS growth at a faster rate, and do that in a sustained way.

Now, I mentioned the initiative that we have kicked off internally in terms of development of a corporate strategic plan. I emphasize a corporate strategic plan, not the rollout (ph) of the strategic plans of our various what I call vertical businesses, but a corporate strategic plan that incorporates the gaps, the white spaces, the dimensions that exist between our businesses today, because that is much of the opportunity to grow this Company longer-term.

In the short-term, we also have to deal with the issue of what I will just describe as financial vitality. We talked a lot this morning about cash flow improving our balance sheet. Not only is that about investor credibility, but that is about improving the robustness of our financial position that then will enable us to both invest internally and pursue those opportunities that, as I mentioned, I know will result from our strategic plan. 5 percent top line, something faster on the bottom line, is not acceptable long-term to either the Board or management. and I suspect our investors as well. And so longer-term, clearly our aspirations are then to be able to drive top-line growth at a faster pace than that.

But I kind of compartmentalized this in my thinking because it doesn't mean that we are not concurrently evaluating all kinds of opportunities for additional growth and new initiatives that come in across the transom, as well as internal R&D initiatives. But first and foremost, as I said before, it is about focus. It is about blocking and tackling. It is about executing and demonstrating that we can do first things first, and then longer-term, as I say, our aspirations clearly are higher than that. Does that answer your question?

It does, Bob, and just one follow-up, if I may, and then I'll get off. But again, I know you're probably not ready to say anything about 2005, but most of the folks on this call are buying stocks for something beyond what happens this year. If we were to just look at the midpoint of your range for this year of EPS -- call it $1.69 or $1.70, whatever you want to call it, since the operating -- just the benefit from the restructuring, let's say, it's a 20-cent increment next year could get you 12 percent earnings growth, I suspect you do not want us to necessarily take that 12 percent and add what you just said as a goal of what you could do internally and come up with an EPS estimate. That would be based on restructuring on top of operating gains for next year.

You're trying to bait me into giving you guidance for next year. (multiple speakers) I'm not going to do. But your question is a good one, because as we mentioned, our restructuring program is moving on track. It will generate significant benefit. And one of the decisions we need to make is this balance between delivery and earnings growth and making internal investments, and we have plenty of opportunities to do that.

So that too is part of the process that we're working through right now. But to conclude that the full savings associated with the restructuring on top of whatever you might want to assume as earnings increase from, as I said before, our current portfolio of businesses, and adding those up, I think it would probably be premature to do that.

Okay, thanks, Bob. I look forward to seeing you.

Glenn Reicin from Morgan Stanley.

You gave three reasons for the revised guidance. I think you mentioned Brazil, reduction of wholesaler inventory -- and I don't know if that includes the write-off of inventory, and then FX. Can you go through the mechanics? I'm trying to understand. are these just accounting entries, whereby next year everything reverts back to normalized numbers, or are these permanently impaired numbers going forward?

Glenn, good morning. Maybe I will handle the first two. I will turn the third over to John on the foreign exchange hedge impact. The Brazil, frankly, is just a residual of the situation that we informed everyone about this morning, and frankly, results from different business practices. So as we looked at the earlier forecast for the rest of the year out of Brazil, which is a fairly large operation for us, clearly we had to down adjust sales performance for the rest of the year. I would tell you that represented maybe 20 percent, roughly, of the total down adjustment in the guidance, or thereabouts, to put that in perspective. And so that will re-baseline their operating levels and performance levels through the rest of the year. And for 2005, they will continue along those lines. So obviously we need to go back and do the restatements for Q1 and so on. But that is what the Brazil effect is.

The inventory levels, these are not inventory write-offs. This refers specifically to inventory level, which is the channel, what inventory is in the channel, primarily the wholesalers. As you know, a lot of our products, BioScience products, a lot of our injectable drug products, Med Delivery products and so on, go through the drug wholesalers. And we felt it responsible and prudent to have what I would just characterize as reasonably conservative inventory assumptions in the trade as we go out the year. That particular dynamic represents, I would say, probably about 30 percent of the down adjustment. So between Brazil, which I described, and the wholesaler stocking effect, which inventory levels that I described, that's about 50 percent. The other half is associated with the third explanation, which is the hedge impact, which I will let John expand on at some length.

Hi, Glenn. Just briefly, the hedging costs that we got this year, as you know the dollar has weakened during the second quarter and the hedges that we've got on (ph), I think you are aware, are roughly at the 95 cent level. So relative to where the dollar is today, those hedges obviously have a cost to us. Relative to ongoing, next year we have a similar level of cash flow hedges in place for 2005, and a relatively small amount that extends into 2006. So if rates stay where they are right now, you will see similar impacts from these hedges in 2005 as we have seen in 2004.

Just to follow up on that, on the distribution channel, (indiscernible) talking only BioScience or Medication Delivery as well?

It is pretty much across the board in all the products, BioScience and Med Delivery, that go through the traditional drug wholesaler chain.

So that will a little bit challenging in terms of modeling.

Yes.

But next year, you would have a bounce-back obviously in growth?

The point would make of all three of those, and I'm not trying to dress this explanation up, I guess, but none of these three I guess are inherently a byproduct of the quality of our business and the performance of our product lines.

Sure. And then the FX, does that explain the large other expense line below the operating line? Is that where that cost will be reflected?

Some of it is up in cost of goods sold, Glenn. The FX down in the other line is more from the higher devaluation countries. But those are really non-hedge related FX impacts.

And that is the cause of that other expense line?

In Q2, yes. That is largely the reason for the increase.

I'll get back in line. Thank you.

Mike Weinstein of JP Morgan.

Good morning. Let's just start with Brazil, because I just want to make sure we have covered that in enough depth. Maybe you could just give us a little bit of insight into how this came to light and the process behind them covering it?

As was mentioned in John's comments, this actually emanated and came inside to the home office from an employee in our operation through our established business practices office. We became aware of a call or an e-mail or letter -- I can't recall which it was -- from an employee in Brazilian operations some time in the May time frame. And obviously, we embarked on an internal investigation through internal audit. And as John described in his comments, over time and after communicating with the Board and the audit committee of the Board and operating really under the direction of the audit committee, the Board brought in outside advisers, both accounting as well as legal counsel.

And it was, frankly, only in the recent week or two we began to get our arms around the magnitude of this issue. But as John commented, and I'm going to turn it over to him in a minute to explain some of the things we did in the other markets concurrently, this is -- I think the terminology was primarily related to Brazil. Virtually all of the financial adjustment, 98 percent plus, was associated exclusively with inappropriate and what we would certainly characterize as intolerable and unacceptable behavior, largely associated with two individuals in senior management in our Brazilian operation.

Mike, the other part of the investigation -- as Bob said, the vast majority of this, in excess of 90 percent of it -- relates to Brazil. The only other piece in the restatement earnings impact is from a country also under the direction of the individuals who are being terminated. So the entire restatement as quantified is contained to the responsibility of the individuals involved.

We also spent considerable (ph) time over the past several weeks reviewing the other markets, other countries that I would put in the higher risk category, if you will, to see if there was any other indications of either assets buildups or any other apparent problems that would be the result of similar types of problems, and we have not detected any and do not expect to detect any at this point either.

Okay, that is definitely helpful. If I look at the extra charges you took in the quarter beyond the restructuring, maybe just spend a minute, John, on why some of those items -- the changes in the receivables and loan reserves, the inventory reserves -- why are those items write-offs rather than items that you would naturally work through the income statement?

They are all different, as you would suspect, but I will touch on each of them briefly. The receivables, we took a look at various loans and receivable reserves that we had, and based on a number of factors involved, determined that it was appropriate to take a charge to cover exposure on both outstanding loans and receivables. And in the inventory area, as we reduced our plasma throughput and looked at the plasma inventory that we had on hand, again, also thought an additional charge of $28 million was appropriate based on all of the activities going on across the plasma business.

The cash flow hedge is pretty simple. We have an excess cash flow hedge position -- technical term, an ineffective hedge level -- and this is pretty much -- this charge relates to an excess position in out years, but the accounting, as you know, requires us to take that charge immediately, which is what that is reflected. And the pathogen inactivation or Intercept project, based on both our view and some of the activities of our partner and our view towards the discounted cash flows of Intercept into the future --

That piece is understood.

That impairment charge was appropriate.

I think part of what -- I just want to increase our comfort level here -- is just on the accounting. I think when we hear about Brazil and we see what you are having to do relative to second-half guidance, if we (indiscernible) that number back 12 months, it was clearly a push by the prior management of the Company to meet 2003 guidance back in the fourth quarter and the second half of last year. And that led to what felt like, to most people on the street, like a push on performance in the back half of last year, part of which is (indiscernible) you guys have comps.

Other than the fact that your basically (indiscernible) of comparisons and that's going to make the numbers look difficult as you move particularly into the fourth quarter, how comfortable are you at this point with the accounting issues? I'm not talking about the pension assumptions and things like that -- how comfortable are you with the controls that are in place at the Company at this point in time?

I am comfortable with them, Mike. Obviously, Brazil was an issue that was the work of two individuals specifically who were working outside of our control environment. But generally across the Company -- as you know, I have operated in two of our businesses, both of which are extremely global in scope, and have spent a lot of time in many of our operations around the world, and I have a high degree of confidence that we have the right processes and the right controls in place.

Brazil is something that will make us a stronger control company. We will learn from it and we will improve where appropriate the depth of our internal review processes, as well as our audit processes, but generally the control systems within the Company are good. There will constantly be execution improvements required, capability improvements required. As Bob said, there will be further changes in management. And that applies to the financial area as well as the rest of the Company as well.

The other thing I would add to that is I have been heartened by John's perspectives. He has been in his role now about a month, and frankly we're fortunate in Baxter to have someone with not only John's financial background and capabilities, but as you mentioned, in his time here at Baxter he has operated in 2 of our 3 largest business units. So to have someone in this role who not only is an outstanding financial executive but also in my view is an outstanding operating executive and has familiarity with our businesses. And this is a subject -- the question you asked, very frankly, John and I spent a lot of time over the last month or so. And as I said, I'm heartened by his views and his perspectives, because he has a good sense down in the organization from having been in (technical difficulty) capacities previously. So I would echo John's thoughts.

I'd just like to add also, just some of these specific charges, 2 things. One, we've obviously gone through these with both PriceWaterhouse and the audit committee, and everybody is very comfortable with the accounting around these. Two, without going into the specific any more than I did, they are all related to either actions or events that occurred during the second quarter, which led to our determining that these reserves were appropriate.

I think as much, I'm just trying to ask for everybody that you have only been there for a limited amount of time, both of you in your positions, and I think we just want to know how much more time do you need, or do you feel like you're at this point where you can say the controls are good, the controls are -- we're not worried about accounting issues of the Company.

That's a fair question.

And then I'm going to just ask one follow-up to Dan's question and then I'll drop; I apologize. The discussion of '05, which understandably you guys aren't in a position to give commentary on yet; as we think about the balances between the potential benefits of the restructuring that you're doing, plus obviously making some commentary that you're going to review your investment hedges, you're going to review your pension assumptions for next year. Should we just view those as potentially having some offset on that? We shouldn't necessarily assume that we get the full benefit of that restructuring as we look at 2005?

Yes. To be very direct, that's a fair assumption, yes.

Thank you very much.

David Lothson from UBS.

Having taken over a company with some real challenges, one of them, of course, is cash flow. And when you look at the dividends you've been paying for the last several years, that puts you in the hole to begin every year. Are you rethinking whether or not that level of payout is appropriate at this point in time? Is that part of your long-term restructuring thoughts?

No, we meet once a year with the Board, Dave, to talk about this. We talked about it as recently as this spring, in the May Board meeting. The position of the Company at this point is no change in our dividend policy.

You're happy with the onetime-a-year payment, or you can make it easier on yourself if you just made it four times a year?

That's a different question; that has other issues. We talk about that and we might think about that, but that is a different question than the first one.

Thank you.

Yes, sure.

Rick Wise from Bear Stearns.

Good morning. A couple questions, Bob. First, can you talk a little bit, a little more detail on the cash flow working capital balance sheet issues in a couple regards? First, what do you think is -- what are the appropriate targets for each in your mind? Where should debt to cap be, and maybe some general thoughts about should working capital be a user of cash? When do we get there; how do we get there? Maybe, John, as well, you can help us understand what you think CapEx will be this year and next.

Sure, I will address all three of those. Our debt to cap ratio, as you saw, is about 41.5 percent today. Based on the cash flow that we expect, we do expect that to come down by the end of the year into the mid 30 range. That, as Bob said, will give us more flexibility going forward to execute our growth strategy. So at that level or below even, we will obviously have greater flexibility going forward and we are confident we will be able to get it down to that level by the end of the year.

In terms of working capital usage, we have opportunity to improve our working capital, as I mentioned. We have seen improvements in DSO and in turns, and obviously the plasma inventory reductions have had a big impact on that. With the Company top-line growth rate, as Bob said, in the mid single digits and as we have the opportunity to add to that through some of the strategic growth avenues that he alluded to, we will obviously need to be investing in working capital. So I think it's going to be in line with the growth profile of the Company. In the short term, I think we have opportunities to reduce our working capital. Longer term, it's going to be obviously driven by our top-line growth.

Okay. And a similar question on pension to both of you. Obviously, you are saying you can review it, and I don't expect you to tell us today the number, but either one of you, what is an appropriate -- where should a company like Baxter, what kind of range should Baxter's assumption be? And just one other quick follow-up, can you comment on Advate and recombinant pricing and how it is changing, where it stands and where you expect it to go?

Sure. I would rather defer the pension assumption issue to the next quarter. I think you know a half-point change in the return assumption is about 9 to $10 million of pre-tax, and there is a similar impact from about a quarter change in the discount rate, and we'll obviously be looking at both of those going forward. So rather than speculate where it should be, let's put that off to the third quarter, if you don't mind.

With respect to Advate and recombinant pricing, it is stable, is the short answer. We have not seen any changes of any material amount in either product category. We went out in Europe with a pricing strategy which has obviously taken hold and been successful, and here in the U.S. the actions we took in the second quarter with Advate have been consistent and accepted, and we've seen no changes in recombinant pricing in either of our major markets.

I apologize, I'm going to sneak in one last question for Bob. Bob, are the challenges here greater than you expected when you arrived?

No, not really. I knew there were issues when I came on board. As I mentioned, you never know until you get on the inside what form they actually take, but no, I think I had a pretty realistic sense of what a lot of the challenges are at this company; no major disconnect there. As an insider, you get your arms around specifically, as I say, what form they take, but no big difference.

Thank you very much.

Matthew Dodds of Smith Barney.

A couple questions for John. First on the plasma side, the raw plasma sales, can you give us an idea of how much of that helped the 12 percent organic growth? Then is that something we should expect to occur for a couple more quarters or more, because the plasma reduction in capacity has already occurred? I'm not sure if the plant -- if there's some spill-over in that raw plasma that's in inventory?

Yes, the raw plasma sales accounted for -- the increase in raw plasma sales, let me put it that way, Matt, because we sell plasma that we collect generally, as you may know. But the increase in the quarter accounted for about half of that growth rate.

And how about the second half of the year? Do we expect that to continue?

It will be lower than you saw in the second quarter.

Then one follow-up. On the R&D expense, it looks like that's been coming down. Is there a right number for that in the next couple quarters, and into '05, we should look for 5 percent better than 6 percent at this point?

This is Bob, Matt. I don't know that there is a right number for the rest of the year. I will tell you one of the things that I am working with Norbert and his team and the business units on is evaluating the scope of our R&D investment and rationalizing our programs and so on. Clearly, we need to get to a point longer-term where we're spending more money internally in R&D than we have. I would frankly tell you, however, that if we had $100 million more today to spend, I think my higher priority would be reevaluating where we're spending the roughly $0.5 billion plus that we spend annually in R&D. So, as part of our strategic planning process that I described earlier, a big piece of this is understanding in research and development how we are organized, how we're structured, how we define process; to prioritize programs within the business units versus investments we want to make outside the parameters of our existing businesses. And so that is the mode that we are in right now, but that's more of a longer-term comment. Relative to spending between now and the end of the year in R&D, you'll see comparable spending rates the second half of what we spent in the first half.

Thanks, Bob.

Bruce Cranna from Leerink Swann.

I apologize, I missed the commentary on the year-over-year gross margin. I know you mentioned Premier, but the other factors in the margin kind of slipping from the year-ago period. Can we just go through that again, and then quickly if you can give us some idea as to within IV therapy or Medication Delivery, what percent of that sales line is actually Premier?

I'm not going to answer the last one, Bruce, just in terms of specific sales levels by customer. It's not something we really are comfortable disclosing. The margin, I assume you're referring quarter-to-quarter Q2.

Right, the gross margin.

The main impacts of the decline and the main factors impacting the decline are the cost of our hedges with the weak dollar and the cash flow hedges we have in place, which you saw in Q1 as well. So that will be an ongoing cost for the year, and relative to last year, those are more out of the money than they were last year. Secondly, my comment on third-party plasma sales and BioScience, we generally sell plasma that we collect to other fractionators at little to no margin. So there was a higher level of plasma sales within BioScience, so from a mix perspective, that had an impact on the overall Company margins, as well as higher plasma generally for the quarter. We had a strong quarter with our plasma sales overall in addition to third-party sales. Thirdly, the impact of reduced margins in Med Delivery, largely driven by lower pricing with Premier.

Okay, thank you. If we could just talk about Advate for little bit. I think the number Q1 was 25 or 27 million, something like that in the U.S., and we were thinking that was about 10 percent share. And so looking at this quarter, it seems to be about the same. So when you look at the year and we're thinking about 200 to maybe 300 million in Advate sales, I am sort of at a 100 million run rate in the U.S., so clearly something is changing. In your mind, is that really EU being the engine of the second half in terms of Advate? And then just quickly, can you comment on whether or not you are really just converting recombinant folks or is there a share aspect to that?

Sure, the takeon rate in Europe has been more accelerated in the U.S., so we do expect to see stronger Advate sales in Europe for the second half of the year than in the U.S. But for the second quarter, as I mentioned, over half of our Advate sales in the second quarter came out of Europe. So right out of the blocks we're seeing stronger sales in Europe. In the U.S., we will see growth in the second half of year over the first half of the year. We are seeing growing demand at the patient level, which obviously is going to drive our sales at the end of the day. But to answer your specific question, growth out of Europe will drive our achievement of the guidance of 2 to $300 million.

Just to augment John's comment, as I think you know, we received reimbursement approval in France just recently, so there was very little of the European sales in Q2 that was associated with France. And we have, I think what was referred to in the comments, at least a couple of markets for further reimbursement approval we are anticipating this year. So as those reimbursements roll through in Europe, that obviously will continue to fuel the momentum there.

I guess we all get one kind of macro question for you, Bob, so I'll lob in mine. You mentioned you are partial to a diversified model, and I think that makes sense. But when you look at where you are now, realistically does that include all the current pieces of Baxter and when do you think it is reasonable for us to start thinking about you having really enough financial flexibility to kind of -- if it's not where you want it to be to get it to where it's going?

The portfolio question. What's new and what do you have that you may not have? Let me start with the divestiture dimension of this first, because it is a question I will tell you day one I got asked by so many people, even internally, in various businesses. And I have deferred dealing with that for the specific reason that I believe we have an opportunity to improve the profitability in all of our businesses, even those where the growth profile in a inherent profitability characteristics are perhaps less than others. And that is not a decision on the divestiture piece that needs to be made today or in the short term for that matter, as long as we have opportunity to demonstrably improve the profitability, which I believe we do in all of our businesses, even those that have lower growth and profitability characteristics.

On the acquisition side, I will say that the transactional question, if you will, in terms of potential deals and acquisitions is also something that is not a high priority in the short or the immediate term. That does not mean that if there are opportunities that we become aware of that we are not going to evaluate those seriously. But given the latitude, as I mentioned in my comments, and the flexibility of our financial position, the need to focus internally in this Company in all of our businesses to improve our growth and our profitability, there is not a lot of time spent by this management team, I think, today and for the foreseeable future relative to aggressively evaluating myriad acquisition opportunities. Again, I'm not saying it's black and white and we are not going to do anything, but we've got other fish to fry here in the coming months.

Thank you.

Ted Huber, Wachovia Securities.

Just following on what Bruce just asked there. Bob, what is the right level of operating profitability of this portfolio that you have? You're talking 16 to 17 percent this year, but over the last three years, we have seen levels of profit as high as 21 percent. There are so many moving parts with the accounting, currency, whatnot, what should we expect when the ship is righted here?

I'm not going to specify an exact number on that, because I don't know. I believe certainly it is higher than what it is today. That reflects in my comment in the earlier question from Bruce on focus in portfolio. As I said, every one of our businesses have opportunities to drive profitability, so that operating margin has upward elasticity. There is no doubt in my mind. Exactly what that number is -- can it get back to the 21 -- you know what? I don't know. We get there 1/10 of a percentage point at a time, and that's the commitment of the organization.

Fair enough. Around this year-end wholesale inventory reduction, I want to understand that a little better. Would you characterize this as there being a bloated level of inventory out there from prior practices of perhaps year-end activities, or do you just want to be ultraconservative and take the opportunity, since you have it, to bring levels down that were already perhaps not inappropriate?

In no way would I characterize historical inventory levels as being bloated. That clearly -- that is not the case. But you all know the level of variability that can exist in terms of inventory levels with various products in the wholesaler chain. And as we have sat down -- and I have sat down every month in the three months that I have been here with the operating team and gotten into all of our sales forecasts in, I will tell you, a great level of detail.

The direction that I have given all of our line executives is that what we clearly want to manage is we want to be in a position clearly to provide exceptional customer service. You never want to compromise that. But beyond that in working with the wholesalers, there is no percentage in having inventories begin to blip up at a level that is higher than necessary. And that is something we all know that can be managed within certain parameters, and generally we have adopted positions, as I characterized before, as what I would just say reasonable conservatism in terms of the inventory levels of those products in our businesses that are stocked through the wholesaler chain. It is really that simple.

That's helpful. Last question, specifically on your anesthesia business, you've now posted two down quarters year-over-year in revenues on a reported basis. Can you comment on the dynamics there, expectations and the latest on Propofol generic competition?

Dave Drohan is with us this morning and is intimately familiar with the details of the anesthesia business. I think I'll pass that question over to Dave, if I might. There were two questions actually.

Thanks, Ted. I will answer the second one first. The entry of a competitor on Propofol, we have forecasted this year that we would probably see a competitor towards the end of the year. We are not sure when or how it will happen. We have figured out what the impact will be. So far we haven't seen a competitor and Propofol is doing very well, and the brand seems to be actually growing.

In terms of wholesaler adjustments in the anesthesia business, wholesalers sometimes do buy-ins in anticipation of price increases, and we see those levels usually force it up toward the end of the year. We think that they're beginning to bottom out now, and hopefully we will see a better second half in anesthesia. So the growth year-to-year, as you know, in '03 was pushed up by the acquisition of ESI, and we're seeing the impact in the first half of this year of some of these wholesaler levels at higher levels than we had anticipated. And we think now that they are coming down, we will see the factory sales catch up with end-user sales in the second half.

Thank you very much.

Robert Goldman from Buckingham Research.

I wanted to ask a couple questions on the change of guidance and the components, just to make sure I am thinking this through correctly. I had thought that the old guidance, the one given out by the Board last quarter, was $1.75 to $1.80, not including the 5-cent benefit from the announced restructuring. So including that, that would be $1.80 to $1.90. The new guidance looks to be $1.65 to $1.70 or $1.72, which already includes that 5-cent benefit. So the change is about 15 cents, 20 cents.

About 15 cents, yes.

But that all applies to two quarters, given that you hit the numbers for the second quarter. So it looks to be on an annual basis that it's like a 30-cent reduction. And you broke it down by percent -- 12 percent Brazil, 30 percent inventory, 50 percent hedging. The hedging, I don't understand why that came as such a surprise to, evidently, the Board, given the prior guidance. And am I properly looking at this that this is 30 cents per share, 15 percent of your total net profits, that basically your annualized guidance reduction would suggest?

I don't think you should look at it that way, to annualize the second half of the year. I think the way to look at it is the annual earnings per share for the company is expected to be in the 1.65 to 1.72 range, and that is the basis for outlook going forward. I think annualize the reduction and say there must be another reduction coming off of this if I want to look forward is not the appropriate way to look at it. And in terms of your questioning whether 5 cents benefit from the restructuring was excluded from the previous guidance, that is absolutely correct, and it is now included in the guidance here.

The final piece was the hedging. I'm trying to understand why that is coming now rather than was embedded in the prior guidance.

It is largely driven on the movement between the dollar and the euro, which if we look at the depreciation of the dollar through April, it was trending stronger. And since then, it has weakened, not dramatically but enough to have a leveraged impact on these hedges, which has the impact on our earnings, as we alluded to earlier. So it is really driven by the movement in the dollar from where the trend had been at the end of the first quarter to where it is today. And we are assuming it is going to stay where it is today. We are not trying to estimate is it going to get better or worse. But based on today's rates, look forward to the impact of those hedges on the second half of the year.

Okay, thank you.

Glen Novarro from Banc of America Securities.

Thanks. The long-term growth strategy does -- contingent upon a pickup in acquisitions, in the past, the Company has made acquisitions more in the Bioscience than the Medication Delivery side of your business. Is this what acquisitions will be focused going forward, or are you willing to go outside of the current portfolio? That is question one.

Then, Bob, maybe if you can give us your appetite for dilution in terms of deals. And lastly, maybe define in terms of parameters what the niche acquisition inside and what you would consider a large acquisition. Thanks.

Okay, a number of elements of that question. First of all, the term acquisition, I guess, applies not only to the obvious of a company, but more specifically to products as well. And I think as we evaluate opportunities, clearly it is both dimensions, both companies and products. As we move ahead, I believe strongly we need to be open-minded to opportunities that may reside outside the parameters of the current businesses that we are in, on one hand; but on the other hand, leverage in some way a market position that we have, either channel access, physician relationships, or some other relationship with healthcare professionals, that would provide us a leg up or jump start, if you would, into other new businesses. So that kind of shapes the parameters of our thinking. Again, not to be redundant, but in the short-term, clearly, we do have practical constraints, given the strength of our balance sheet. Hence, all the priorities and focus as we commented before on cash flow and the like.

Now having said that, the second question or maybe the third question, I guess, that you asked was the issue of dilution. I am not going to take a position on that at this time. On the other hand, I wouldn't rule out if there is an opportunity where the strategic rationale is so compelling that we feel it can enable us to accelerate kind of a step-level increase effect beyond that mid-single digits that we talked about before, and it fits well, and that we are a Company that could exploit the opportunities effectively that would exist with that particular opportunity, I wouldn't close the door to consider it.

Just to follow up, we often hear companies say we will only do niche acquisitions. Can you maybe define, in terms of dollar size, is a niche acquisition a $500 million acquisition? What would you consider a major acquisition?

Everybody is going to answer this different. This is a very personalized thing (indiscernible). To me, a niche acquisition is probably anything under several hundred million dollars. You get over that, certainly for a company like this, when it becomes $1 billion plus, that is a major acquisition. So we all define that or quantify that, I suppose, a little bit differently, but that's my personal sense, Glen. I don't know if that is helpful or not.

No, that is helpful because a lot of CEOs when they come on board, you have to get their definition of dilution, nondilution, what is a big deal, what is not a big deal. Thank you very much.

I appreciate the question. Thanks.

Lawrence Keusch from Goldman Sachs.

A couple of things and I will just tick them off. One, I'm not sure if I missed it, but again, thoughts on just CapEx and where that could be positioned or where that may go. Secondly, if we could just come back to the plasma inventories and the comments that you made relative to the reductions that we have seen. I think the last I heard was there was about $750 million in plasma inventory. So I want to make sure that we are sort of thinking about that base correctly. And how confident are you at this point that, given the market dynamics, the pricing, the demand, that we are not in a situation where inventory write-offs might have to be taken?

And then just a much broader, bigger-picture question for Bob. You talked a lot about really digging into the operations and getting disciplined on the financial side of the house, but what about culturally? When you think about improprieties in the accounting occurring in Brazil etc., you can't help but think about, is there something that really have to change from a cultural perspective within the Company as well?

Let me takes the higher level question. I will give John a minute or two to think about the what were there -- three or four questions. (multiple speakers) The notion of culture is an interesting one. I commented on our strategic plan that we are developing within the Company, but not to be too expansive on this, but I will tell you that as we develop that, we are also evaluating several other peripheral dimensions that I think are inherent in the successful not only the development but in implementation of the strategic plan. And I would characterize those simply as organization structure, one; two, process and process engineering; and three, culture.

And we are developing special, dedicated work teams on each of those issues concurrently with the development of the strategy, and they are each very, very important for their own reasons. There are so many aspects of the culture of this Company that are so positive. At the end of the day, I think culture is probably, at least for good companies, is maybe the most important asset they have, and there is a lot about the culture of this Company that is very positive and needs to be sustained.

But I feel strongly -- coming in new, there's dimensions of this culture as well that need to be modified, developed, and, frankly, improved. Sense of personal accountability, sense of urgency, commitment toward results -- frankly, a certain toughness and a certain edge that I think we have to embrace in this Company. And these are things I talk about in employee sessions every single day. And we are going to take those thoughts as well as survey work that has already been done internally within the Company and congeal that and really deal with this.

Because a lot of people would say, gee, this whole question of culture is really soft, but I don't agree with that. I believe it is fundamental as a backdrop to what we need to achieve. And so to address the operational aspects, to address the strategic aspects clearly are critical. But to do those in a vacuum without dealing with the cultural dimensions would stop short of the goal line. And you affect culture in a lot of different ways, but one of which is by the leadership and the management team that is installed in the Company, and I commented on that in my formal comments.

Changes have been made. Changes are going to continue to get made, so we have a leadership team in place that is on board and manifests, frankly, the behaviors that are important and consistent with the culture that we think is critical moving ahead. So with that high level question, John, I'll turn it to you on the more mundane parts of Larry's question.

I think you had three questions -- CapEx, plasma inventory level and whether any write-offs are coming down the pike. I apologize -- I think it might have been Rick who asked about the CapEx level for '04, which I failed to comment on. We expect it to be about $650 million this year, and I don't see that going up for the foreseeable future. So I would expect that level next year to be no more than that, but again we will get into that later this year.

In terms of plasma inventory, you are right. Currently, it is about $700 million, which again is down from 850 a year ago. So the whole objective of managing that part of this Company for cash flow and sustained profitability, i.e. the plasma business, we have seen some good results over the past year. And with respect to write-offs in plasma inventory, the short answer is no. I don't expect anything coming out of there going forward.

Okay, great. Thanks very much.

We're going to take two more questions, operator.

Glenn Reicin from Morgan Stanley.

It's Matt (indiscernible) for Glenn.

Yes, Matt.

Glenn had to just step away for a second. We were looking for any kind of timing you could provide on the cash outlays related to the restructuring. You mentioned the 60 percent. Can you give us any insight into that?

I will have John comment on that.

This year, we expect about $100 million outflow for the restructuring. Next year, approximately $150 million. And the remainder, which is roughly $75 million to $80 million, would be '06.

Terrific, thanks.

Mike Weinstein of JP Morgan.

I didn't think we'd have another question. I didn't realize I was back in the queue.

Well, you are now. This is the last question.

You have a two-question limit, Mike.

But you're maxed out now.

I'm maxed out? Okay. Just to be clear, the expectation as you think about the third quarter call is at that time you will provide your guidance for 2005?

No.

You'll wait until January?

Yes.

So the (indiscernible) -- the company historically would give guidance on the October call, which was always a very fun event for (indiscernible) and analysts who cover Baxter.

Our plans are to wait till January.

Okay. But you will comment on the third-quarter call relative to how you are viewing some of these other issues such as the (multiple speakers) accounting, which is a September event?

Yes. Everything we talked about today, we will be prepared to update you on.

Thank you very much.

At this time, there are no further questions. I would like to turn the call back over to Ms. Ladone for any final statements or closing remarks.

We have none today. Thank you all for joining us.

This concludes today's conference call. You may now disconnect.