Good morning, ladies and gentlemen, and welcome to Baxter International's Second Quarter 2016 Earnings Conference Call. Your lines will remain in a listen-only mode until the question-and-answer session of today's call. As a reminder, this call is being recorded by Baxter, and is copyrighted material. It cannot be recorded or rebroadcast without Baxter's permission. If you have any objections, please disconnect at this time. I would now like to turn the call over to Ms. Clare Trachtman, Vice President, Investor Relations at Baxter International. Ms. Trachtman, you may begin.

Thanks, Candice. Good morning, and welcome to our second quarter 2016 earnings conference call. Joining me today are Joe Almeida, Baxter's Chairman and Chief Executive Officer; and Jay Saccaro, Chief Financial Officer. On the call this morning, we will be discussing Baxter's second quarter financial results and updated outlook for 2016 before taking your questions. I would just like to remind you during the Q&A session, if you could please limit yourself to one question so we can accommodate others in the queue. With that, let me start our prepared remarks by reminding everyone that this presentation, including comments regarding our financial outlook, new product developments and regulatory matters, 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 factors that could cause actual results to differ materially. In addition, on today's call, non-GAAP financial measures will be used to help investors understand Baxter's ongoing business performance. 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. Now, I'd like to turn the call over to Joe. José E. Almeida: Good morning, everyone, and thanks, Clare. This is our first earnings announcement since our May Investor Conference, and the strategies we outlined at the time are clearly gaining traction. We're making steady progress in our efforts to enhance our financial performance through our disciplined focus on portfolio and innovation management (sic) [portfolio management and innovation] (02:15), operation excellence and capital allocation. As you've seen in our press release, Baxter delivered a strong top-line and bottom-line results in the second quarter, exceeding expectations. I will share…

Thanks, Joe, and good morning, everyone. As Joe mentioned, we're pleased with our second quarter results. It's another important building block as we look to achieve our long-term financial goals. Operationally, sales increased 6% in the quarter, and on a reported basis, sales grew 4%. Growth came in two points above our expectations, driven primarily by favorability in Fluid Systems, acute renal and anesthesia. Walking through the rest of the P&L, adjusted gross margin of 43.8% also compared favorably to our expectations and was driven by a positive sales mix and improved pricing in select areas of the portfolio. Adjusted SG&A totaled $663 million and decreased 11% on a reported basis. This represents a 440-basis point year-over-year improvement. The primary driver of the improvement was our ongoing focus on controlling expenses and the rebasing of our cost structure. SG&A also benefited from lower pension expenses and TSA income from Baxalta-Shire. TSA income totaled approximately $30 million in the quarter, compared to $20 million in the second quarter of 2015. TSA income from Shire will continue to decline as the need for these services ramps down. We expect TSA income in the second half of 2016 to be approximately $50 million compared to $65 million in the second half of 2015. Adjusted R&D spending in the quarter of $150 million increased 1% versus the prior year. As we had previously announced, we discontinued our investment in the VIVIA home hemodialysis program in the second quarter, but plan to reinvest that spending into new programs in PD, biosurgery and other initiatives to fuel future growth. Adjusted operating margin in the quarter was 12.3% and compared favorably to our expectations driven by increased sales, positive product mix and continued discipline around expense management. This represents a 530-basis point improvement over the second quarter…

Thank you. We will now begin the question-and-answer session. I would like to remind participants that this call is being recorded, and a digital replay will be available on the Baxter International website for 60 days at www.baxter.com. And, our first question comes from the line of Bob Hopkins of Bank of America. Your line is now open.

Hi. Good morning. Can you hear me okay? José E. Almeida: Yes, we can.

Yes, we can.

Hey, good morning. So congratulations on a really strong second quarter. I'll limit myself to two questions. The first one for Joe, I was wondering since it's such a topic of consideration for investors, I was wondering if you could just give us an update on kind of the outlook for the balance sheet and M&A; what's the environment look like right now? Obviously you've been disciplined to date, but just curious if you could give us an updated outlook for, again, the balance sheet and M&A across the businesses? Thank you. José E. Almeida: Bob, good morning. We don't comment specifically on targets as we want to make sure that that we'll get there first and don't get to pay too much for them. But we're very disciplined in that area. We've been looking at significant amount of opportunities. I just revealed yesterday we have probably more than 15 different opportunities in our pipeline. But I have to say that we also walked away from four deals in the last 90 days. They were too expensive. And we've got to make sure that we have the discipline to execute. We could execute those deals internally. We had absolutely the right teams to get them done, but the price was too high and somebody else was willing to pay more money for that asset. If we don't see a way there, we're not going to be competing on the price and innovation, prices of deals. They are now warranted. I'd tell you, our focus is acute and we have – having Andy Kidd as part of my operating team also raise the profile of the M&A jobs in our company and we're working very hard to find those as we continue to progress in creating operational opportunities for the company as well as organic opportunities. Our balance sheet is pristine at this moment in time, and so, one thing about M&A, it doesn't preclude us from buying shares back, and shares back doesn't preclude us from doing M&A. I think we need to have a balanced approach and we can do probably both of them if we do it correctly.

Great. Thank you for that, Joe. And then, Jay, one question for you. I was just wondering if you could give us a sense of the really strong top-line growth that you're generating. Can you give us a sense as to how much of that roughly is coming from price? Of the 6%, 7%, is that one point or two points from price this particular quarter? And then maybe a quick comment also on just how we should be thinking about the sustainability of Fluid Systems growth, especially in the U.S. Thank you.

Yeah. Generally, you're right; it was a great quarter from a sales perspective if you look at businesses like the U.S. Fluid Systems, as you pointed out, and we saw north of 30% growth in the U.S. Just thinking about that business for a second, there is really two primary components to it. One is the infusion systems business, and that's really driven by sales of the SPECTRUM pump, along with sales of the attendant sets. So once you install a pump, you have the sets that ride along with that. Our sets growth in the quarter was north of 20%, and then the infusion systems' overall growth was north of 30%. And then, on the other side, we have the IV therapy business in this particular area, and that also grew north of 30%. In the case of IV therapy, it was a balanced mix of price and volume that drove the growth. The other area where we saw some pricing in the portfolio is in the area of U.S. PD where we did see some opportunities to capture value. But beyond that, it's a fairly stable pricing environment. I wouldn't say that there are massive or very significant changes to price beyond those two areas that I referenced.

But is that one point to two points of the total 7% roughly the right way to think about it this quarter?

We don't really do price volume on the entire portfolio for a number of different reasons, but I think that the two areas where price was most pronounced would be in the PD arena and then also in the U.S. infusion systems business, in the Fluid Systems business. The only thing I would add is we do see some pockets of price pressure in the portfolio, and so in some instances, there are offsets to price increases that we see. In certain markets, for example, where we see dialyzer pricing or other particular product areas, there are certain areas where we do see price pressures, so it is a balance. It's hard to answer the question across the board.

Great. Thank you.

Thank you. And our next question comes from Vijay Kumar of Evercore. Your line is now open.

Hey, guys. Thanks for taking my question. Congratulations on a really strong quarter. So maybe one high-level question on the guidance. When you look at the back half right, just given the one half performance, it seems to be a tad light in the back half, especially when you look at cyclo your assumption is now in a cyclo to impact in 4Q versus I think what we had originally thought as a 3Q impact. So can you maybe just walk through what changes one half versus back half as we think about the top-line?

Yeah, sure. I think from the first half to the second half, there are a number of drivers of change. One is we do have a cyclo impact in particular in the fourth quarter we'll expect to see around $40 million of year-over-year decline related to cyclo on the sales line. As it relates to other areas in terms of sales growth, we are taking a very disciplined approach across the portfolio. So as we look at areas that don't earn the right economic return for us, we will very much walk away from particular tenders or businesses. And so in the fourth quarter of this year, there is probably another $30 million to $40 million of low-margin sales that we choose to forego. And then the other comment I would make on the third quarter relates to PROTOPAM last year. We did have a PROTOPAM order in the third quarter of last year that makes a tough comparable. That was about $20 million. So if you adjust for those items, I think the sales is more explainable. Overall, as we think about the guidance on EPS in the second half, if you were to go back to last quarter's earnings call, the implied second half guidance was $0.85 to $0.91 in earnings per share in the second half. As we think about today, our current view is $0.87 to $0.92. So essentially, we've raised the midpoint of the second half guidance by about $0.015 and which you have to realize is there're a couple of drags on the second half number. The tax rate is slightly higher than our expectations, in part because of profitability coming in higher tax jurisdictions, so that's about one point, and the share count is a little bit higher, I should say $0.01 and then the share count is a little bit higher as well in the second half of the year so that's about $0.01. We do see a benefit of cyclo of about $0.01, but the ongoing organic base performance that we anticipate improving in the second half is about $0.03 relative to the last time we shared guidance. So overall, I think it's a story of continued momentum, but there are some factors that do slow second half relative to first half.

That was helpful, Jay. And just maybe a follow-up on gross margins. You mentioned sales mix and pricing. As you sort of look at on a medium-term basis, right, if you look at the white space in general, a lot of your peers talk about anywhere from 50 bps to 200 bps of pricing headwinds. How should we think about pricing at the corporate level for Baxter on a medium-term basis? Should we think about a net neutral? And in the Q, gross margin, obviously the other part was mix, right? So as we roll forward the model how sustainable is some of those underlying strong gross margin trends we're seeing? Thank you.

Sure. I mean from an overall gross margin standpoint, clearly, we were pleased with the results in the quarter. And as we think about what drove margin in the second quarter and what drives it to the balance of the year, gross margin that is, there is the price, net price positive impact that we've seen in the quarter, so that's one element. Now, importantly, we've signed many of our agreements, we've concluded many of the agreements in a variety of our businesses. So as we move to next year, we don't expect to see the same level of price or economic value captured that we've experienced but there are still some opportunities for pricing. The other element in the second quarter that was, from my standpoint, very exciting was the area of mix. And so I commented earlier on 20% growth in sets. Sets carry a higher margin than the corporate average. We talked about the acute business which was just a star performer in the quarter. That too carries a higher margin than the corporate average. We also saw good growth coming out of anesthesia and nutrition. This idea of accelerating growth of our higher-margin products that's something that we expect to continue for the balance of this long-range planning period, and that will be one of the contributors that takes us to our aspiration of the 17% to 18% operating margin by 2020. The last comment I would make is generally speaking, we saw very solid volumes in the first and second quarters and its accelerated sales growth does have a positive absorption impact on the entire manufacturing and distribution network, which allows us to benefit from higher margins by absorbing more costs. So it really was a confluence of events. We do expect to see continued margin improvements moving forward.

Thank you. And our next question comes from Mike Weinstein of JPMorgan. Your line is now open.

Hi Mike. You may be on mute.

Hi. Can you hear me okay? José E. Almeida: Yes. Now we can.

Now we can.

Much better. Thanks, guys, and congratulations as well on a very nice quarter. So there is a couple of items I just want to follow up on. One, it looks like the cash flow guidance for the year has been relatively unchanged and started the year despite obviously very significant provisions to the EPS expectations. Jay can you just spend a minute on that? And then the second one, I just want to follow up on the price discussion thus far. Thanks.

Great. From a cash flow standpoint, you'll see in the 10-Q when we report it. We're finalizing cash flow for the quarter with PwC working very closely. But we're pleased with the second quarter performance. What I would say as we look for the full year cash flow forecast is the probability of achieving our forecast has increased based on the two quarters that we have under our belt. I'm very pleased with the performance. At the Investor Day, we talked about a number of important initiatives that we're embarking on. We just started a days payable project, and one of the comments I made at the Investor Day is the ratio between days payable and days receivable, days sales outstanding doesn't quite work for us. It's a real opportunity. And I will tell you, the early signs are that some of these projects are going very well. But the reason that we haven't changed guidance on cash flow is a lot of our cash flow is back-end loaded due to normal seasonality patterns, and until I get a little bit better line of sight to how Q3 emerges and expectations on Q4, it is a bit premature to raise the cash flow guidance. But I will tell you that the probability of achievement has increased. The other thing I will say is we have been really focused on CapEx, so this is an area where we believe that there is opportunity for us. The 9% of sales is something that we're striving very aggressively to improve. We have long-term plans to do so, but that's another area that as we move towards the end of the year that may be another area that we update. So on balance, I feel quite good about how the cash flow story is shaping up for our company. And frankly, from a free cash flow standpoint, this is a real opportunity for us, not only this year, but moving forward.

And then on the pricing discussion, if I look across the portfolio, I was hoping you could maybe just provide some more insight into the contribution from price in different businesses. And obviously it's most pronounced in Fluid Systems, but the ability to take price in PD is something that's relatively new for the company. The growth in the anesthesia business this quarter was particularly strong. Are you getting price there? If you could just help identify maybe the level of price you're getting in some of these businesses within Hospital Products? And where you're able to take price today that maybe you weren't 12 months ago? Thanks. José E. Almeida: Mike, we have contracts that are signed very recently in the last 12 months, they're three to five years, they have price clauses built into them. Okay? If we look at their trajectory area of growth like Fluid Systems going forward, we're going to continue to see growth in that business. Perhaps the rate is not the same as we took a significant amount of market share lately. But that is built into the contract, so I feel comfortable about that. The point that you underscored by AMIA. Our PD business for many years has not experienced new technology, and we have this breakthrough technology with AMIA that really had stunned the market. We have significant amount of providers coming to us, and the price of the product is coherent with the technology and the benefit of things to our patients. So we've seen some really good momentum, and we see a lot of interest, not only from the providers, but from the payer side in this program, because of telemedicine and the innovative aspect of AMIA. So we have slowed down the price erosion in dialyzers. So all-in-all, the company is looking at price neutral to slightly positive going forward versus any negative price pressure or erosion. So just, again, price neutral to positive going forward.

And, Joe, that comment is about your dialyzer business, or is that a broader comment? José E. Almeida: No, this is about the whole company. The whole company, I see the company when you look at all the price point analysis and what is built into contracts, the pressure in dialyzers, the EMEA launch and some of the new product launches we have, I would say Baxter will have price neutral to positive going forward, at least for the next foreseeable future.

And Joe that's a comment beyond 2016, right, because in 2016...

Yes.

...the price contribution is more meaningful? José E. Almeida: Yeah, this is beyond 2016. As I said, some of these contracts are long into the future, so this goes into 2017, as well.

Perfect. Thank you, Joe. José E. Almeida: You're welcome.

Thanks, Mike.

Thank you. And our next question comes from Brooks West of Piper Jaffray. Your line is now open.

Hi, guys. Thanks for taking the questions. I had a question on the growth trends in the U.S. versus international. It seems like you had pretty meaningful outperformance in the U.S. this quarter, and I'm just wondering are you seeing something in the OUS markets that's changing? Is this just a one quarter phenomenon? I wonder if you could spend a little time on that? And then secondly, just curious what you're seeing in the OUS markets between emerging market performance, Europe, et cetera? Thanks.

Sure. Overall, the U.S. did benefit from two very – well, two very significant product launches, more so on the SPECTRUM side than the AMIA side. But in the U.S., we are seeing the continued adoption of our SPECTRUM Version 8 pump, which is really a great innovation but also very exciting for, you know, from an overall financial standpoint. And then the U.S. PD business also benefits from AMIA and also some of the execution that we're seeing overall in the U.S. PD business. And then finally, the acute business has seen outstanding growth in the U.S., in part benefiting from a flu season that extended and was a bit more acute than we previously expected. So there were a number of factors that set the conditions up for success in the U.S. that allowed us to overachieve our expectations and deliver the 10% growth. Outside the U.S., we reported 3% growth internationally, and what I would say is emerging markets, roughly mid-single digits growth. We did have lower growth in China in the quarter, so low-single digits. In large part, you'll recall we exited certain tenders for PD where the margins weren't attractive to us. So there was that overhang on our overall business in emerging markets and in China. We do expect to sunset that after this quarter, so we'll see an acceleration we expect to see in emerging markets in the Q3, Q4 timeframe. So those would be a few of the overall comments I would make on that.

That's helpful. And then on the biosurgery business, if I could. It looked like a nice step-up in performance there. I'm wondering is that just getting the portfolio straightened out? Is it underlying volumes? Any detail there would be helpful. Thanks. José E. Almeida: A couple of things. One was focus; make sure that we are on a global basis focusing on that business. We have great portfolio, and I think other things are taking precedence. The second thing was we have launched HEMOPATCH as well, and our efforts there is trying to ramp up. I have to tell you that we are in process of very – in final stages of hiring a President, a Global President for Biosurgery, which creates a vertical for this business on a global basis and it creates a very different focus in our company for biosurgery, which is a very different product than the rest of our portfolio and requires a significant amount of detailing into accounts. So that associated with us doubling the amount of R&D going into biosurgery is – and also two or three potential small adjacencies that can go into this business, it will revitalize our biosurgery business and put us on track to overperform.

Great. Thanks, guys. José E. Almeida: Thank you.

Thank you. And our next question comes from David Lewis of Morgan Stanley. Your line is now open.

Good morning. Two quick questions for Joe or Jay. The first one is on U.S. Fluid Systems. So I'm looking at that performance here in the quarter, and it looks like about half the organic growth for the business is coming from just the U.S. Fluid Systems business, about 3.5%. So Jay can you sort of walk us through sort of anything you tell us on the mix of capital and consumables? And sort of how that contracting sort of falls forward into 2017 and what you think the structural growth rate for this business is on a longer-term basis? And I had a quick follow up on guidance.

Yeah. I mean, look, overall, Fluid Systems business we anticipate over the next five years to be a 3% to 4% grower, although when I look at this particular quarter and it's a very solid data point in terms of growth and adoption that we were pleased with. Thinking about the performance of the business, it's important to decompose it into a couple of different segments, right? One is the IV business and we are working very hard to bring additional volumes to the market. We're very focused on delivering. So as we think about the sustainability of this particular aspect, this should be a steady grower for the next several years, in part because of the contracts that we've discussed, but also in part because of continued volume that we look to bring to the U.S. In the other roughly half of the business, the infusion systems area, there is two component pieces to this. The larger one today relates to pump sales, so we've had great success with pump business and we continue to perform in line with the expectations, or better than with the expectations that we've shared with investors over the last year on pump placements. But then, the other benefit is as we place pumps, going with those pumps is a non-capital sale and that's the set piece, right? So our sets were up as I said earlier north of 20% in the quarter, just a very solid element. This becomes more of an annuity or an ongoing stream of business that's related to pumps, and so I would say that's a more sustainable business than the capital sales, which are a little bit lumpier in nature, if you will. Overall, though, we feel confident that the business will grow; I believe north of 10% on a full-year basis globally; and then moving forward for the next five years, this 3% to 4% kind of mid-single digit type growth is what we can expect to see from Fluid Systems.

Okay, Jay, very, very, helpful. And then second is just to reconcile kind of the fourth quarter number. My way of thinking about it is, maybe you print a 2%, 2.5% constant currency for the fourth quarter, and then we sort of add back a point and a half from cyclo, and a point and a half from the discontinued operations you talked about. And that kind of gets you back to sort of 5%, 5.5%, which is sort of consistent with the first half. Is that sort of a decent way of thinking about the fourth quarter?

That's exactly how we look at it. So we had about a point and a half of cyclo. I wouldn't characterize it as discontinued operations, but for us we're going to be very disciplined about sales, we will forego sales in certain instances that don't make sense. That's about a point and a half of impact. In that case though, that's a very low-margin impact. As you know, the cyclo on the other hand is a higher-margin impact.

Great. Thank you very much. Great quarter.

Thank you.

Thank you. And our next question comes from Matt Miksic of UBS. Your line is now open.

Hi. Thanks for taking our questions. So one follow-up for you Jay on gross margin. So very strong in the quarter at least relative to our estimates. I'd love to get some additional, anything you can quantify around some of the puts and takes there, biased to a business line or product line. I mean, based on David's question, it looks like even though sets for example has started to pick up growth, you're not quite growing as fast as capital and infusion systems. So is that reflecting some of the strength here? Is cyclo some of the strength? Just maybe take through the business lines and can you talk a little bit about that, and then I have a follow-up for Joe.

Sure. Just from a gross margin for the quarter, actually cyclo was below our expectations by a little bit, and there were a variety of reasons, but it was not meaningful. But when you talk about missing cyclo sales relative to expectations by $5 million to $7 million that has an impact on both gross margin and EPS. So the margin that we saw was even in excess from a pure operational standpoint. But, look, there are two primary factors, right? One is price. So we did see some price benefit in the quarter. But another, and again this is the more sort of exciting area as I look at the business, is a area of mix. So when you have our sets business, our acute business which is a $400 million business, our anesthesia business which is I believe north of $700 million, our nutrition business which is also a very healthy size business for us. When you have roughly 20% of your portfolio growing at a faster rate than the corporate average, and when that has a much higher average margin than the corporate average, it really is a benefit that you see on the gross margin line. In our case, that's something that we experienced in the second quarter. Now, turning to the rest of the year, we do expect to see some of that continued benefit from the accelerated growth of those higher-margin businesses, but then there is also a secondary impact which I referenced earlier which is as your plants fill up with incremental volume, there is additional absorption that's occurred. The manufacturing network becomes more utilized, so you do see an attendant absorption benefit on the cost profile, which also impacts margin. So second quarter great; you see price and mix playing coming to bear. Moving forward, we'll have price, mix and volume. That's why we've been able to increase the guidance in the second half of the year.

Great. Thanks. And the follow-up for Joe, you had mentioned when we were out to see you just these initiatives of reinvigorating the entrepreneurial spirit of some of the teams across Baxter as one of the things you've been focusing on, and I'd love to get your perspective. If you could spend a few minutes just on the progress there, and just specifically on what we'll see from that? The types of benefits you hope and expect to see in terms of growth and margins, and when maybe we start to see some of that flow through? José E. Almeida: We have a pretty structured program. We have somebody in charge of that who reports directly to Paul Vibert, our President of International. Couple are notable. As we just launched a pain pump in Italy, in Europe, that was a local initiative. The Elastomeric business is active outside the U.S. and we didn't have the right product for parts of Europe. We just launched that, so good pickup in margin and sales for the group. We also have a plan to bring China to $1 billion by 2021, which is now much shorter than that in our LRP. So that brings growth up to the – to close to 10%. So we're very excited about that. That was all done local, China for China; significant amount of change in direction and mix of products with parts of the business refocusing nutrition for China, which is a great opportunity and introducing biosurgery in China, which we don't have today. So these are just two examples. I can give you a great example in Brazil and Colombia, where we're relaunching our Ringer product and – with big sales in three years of $15 million, they're highly profitable. So we have significant amount of programs going on in the company to sustain organic growth driven by more discipline in cadence of launching products. They had products available for the rest of the world. We didn't do particularly a good job in launching products on a global basis, and we reinvigorate that, and we have so many good products with good invention and innovation in-house. So those are really exciting and they're creating momentum in the company.

Thanks.

Thank you. And our next question comes from Glenn Novarro of RBC Capital Markets. Your line is now open.

Thanks for taking the question. It's more of a macro question. Your Fluid Systems, your Hospital Products business all grew very strongly in the U.S. and very specific to the company in your execution. But I was wondering if in the second quarter you saw any favorable macro trends? In other words, did you see any pick-up in hospital admissions or surgical volumes? I wonder if you can speak to and address the health of the U.S. market in general, Joe? Thank you. José E. Almeida: Thank you, Glenn. We see a slight uptick in the procedure volume, probably 3% or 4% growth in the U.S. This is a good thing for us with the Fluid Systems being driven primarily by that. Also a good flu season helped. It was important this year; more use of fluids and pumps. We see the environment in the U.S. is stable, not with a trajectory of growth that we probably saw before, but with growth as we see unemployment still subdued and below, sub-5%. So it is a good trend for the country.

Okay. And... José E. Almeida: And they're continuing.

And just on an unrelated, just I wanted to get back to Bob's question on M&A, I believe it was handled at the Analyst Day or one of the previous calls, you talked about Integrated Pharmacy Solutions and that's a business on the M&A front, I believe you used the words you wanted to double down. And you also just mentioned on this call that there were four deals that you just passed up on in the last 90 days. So were some of these deals in the Integrated Pharmacy Solutions? And why has the dynamic become so competitive of late? Thank you. José E. Almeida: You're welcome, ahead of answering my question. I will say to you that there are very few areas of growth if you think about the healthcare and about the targets. The multiples in EBITDA are skyrocketing in some areas. Go figure out why. I just saw a couple of deals, one that just got concluded in the U.S. on the front-end generics company, the multiples are extremely high for a capability more than anything else because the company did not make any products. So we have those capabilities in-house. We look at some of these deals and we don't see the price, the coherence between price and value. And I think when we don't see the coherence and it does meet our expectations – we have a very established guidelines with our board that reflect our best interest of our shareholders – I would say we will not step into those deals. We walked away from another deal that had a significant difference between us and a foreign party was trying to buy the company. There is not a deal that is important enough that will make us spend our shareholders' money in vain. So we're going to continue to pursue the couple of deals on the table right now that we think are actionable. We are pursuing them but we are going to always keep our eyes on value.

Okay. Thanks, Joe. José E. Almeida: Thank you.

Thank you. And our next question comes from Danielle Antalffy of Leerink. Your line is now open.

Thanks so much. Good morning, everyone, and congrats on an excellent quarter. Jay, I was wondering if you could talk about Brexit and the impact both on sales overall but specifically as it relates to FX, your exposure to the U.K.?

Great and thanks for the question. Overall, from a volume standpoint, we don't expect an impact from some of the macro challenges we're seeing in Europe. Most of our product lines are more steady stream from a unit standpoint, so we don't really anticipate an impact in that sense. From a foreign exchange standpoint, really, we have a number of hedges and opportunities that we have. So as it relates to the U.K., we have roughly 5% of our sales in the U.K. We do have a manufacturing plant in the U.K. that provides natural hedge against fluctuations in that currency. And then in the eurozone area, we have a number of plants, so as the euro moves, we do have natural offsets to sales – the currency fluctuations in that market as well. But the other thing that we do is we use synthetic hedges or derivatives, principally options, to hedge foreign currency exposure. And we have a well-disciplined approach where we hedge out up to five or six quarters. We hedge roughly 20% per quarter, and we use options, which really caps the downside associated with those instruments. Now, for us, as we evaluated the Brexit situation leading up to that particular event, we actually did a couple things. We increased our exposure or increased our derivative positions on the pound and increased our derivative positions on the euro as well as an insurance policy to ensure that there would be no adverse impact this year or next year. And so the result of that is, despite the movement in the pound and the euro, we really offset some of the translational impact of the P&L with gains associated with those derivatives that we've put in place, and we're very pleased with the situation that we're currently in. The other item that we did is, as the yen strengthened, we did take the opportunity to increase some of our exposure, again, using options so that the downside is limited to the yen. So we hedged some of our incremental yen positions at basically ¥100 to $1. Again, a trade that we were pleased with and situated us well for both this year and next year from a foreign exchange risk standpoint.

Okay. That's really helpful. And if I could follow up one more macro question following up on Glenn's question about U.S. volumes. Ex-U.S., there is a little bit more uncertainty, turmoil, if you want to call it that in emerging markets also in Europe. Just wondering what you're seeing from a volume trend, procedure volume trend ex-U.S. and whether that's offsetting some of the strength we're seeing here in the U.S.? Thanks so much. José E. Almeida: There is a very high diversity of scenarios. So you have China with pretty stable market regarding our products, the products we serve the Chinese market in terms of pricing, but you always have the trend of risk of price controls and things like that. We've always seen China with a pretty stable outlook as well as some parts of Latin America, even Brazil depending on – independently of the currency situation. You still have Brazil with good prospects for growth, Colombia, Mexico. I will say when you move away from emerging markets, developed markets such as Australia have very strong growth, good performance. And we see our markets there for areas like hospital admissions, but we see that via our compounding business there, that is doing very well, no issues. I would say Europe is always a point of attention with very slow growth in most of the five large countries in Europe with some exceptions in parts of probably England and Spain, we see a little bit of growth there. But it is a market that we are being very careful with how we compete, we are very disciplined in pricing, but we see that market a bit more tenuous than the rest of the developed markets.

Very helpful. Thank you. José E. Almeida: You're welcome.

Thank you. And our next question comes from Larry Keusch of Raymond James. Your line is now open.

Okay. Thanks. Good morning, everyone. Joe, I wanted to come back to emerging markets. I think if I have got the math right, you've probably done somewhere in the 4%-ish range growth in the first half of the year. I think on the first quarter call you were talking about more like 9% to 10% growth for 2016 after you do some adjusting for the Renal situation in China. So I want to see if the thoughts around that kind of high-single digit growth, 9%, 10% are still in place? And if so, what gets you from that kind of 4%-ish range to 9%, 10% for the year? José E. Almeida: The 9%, 10% for the year is towards the back end of the year. Then we also have China being the biggest driver. So think about the size of China for our business is over $600 million in sales, and that drives a lot of the numbers when you look at emerging markets and primarily Asia. China, there was – we walked away from an unprofitable bid last year for PD patients. And because we lost those patients, the impact was felt this year in the first and second quarter anniversaried – just anniversaried. So we're going to see a recovery in China by the third and fourth quarter, which subsequently will create the momentum for the growth rate that we have outlined.

Yeah. Overall, Larry, what I would say is that, we expect emerging market growth for the full year in line with the guidance that we provided at our May Investor Conference of around 5% to 6%. So that's the outlook for the full year. As Jay referenced earlier, there are certain markets and products that we're going to be exiting or not participating in those tenders. A lot of those are in emerging markets, and that in fact will be in the fourth quarter. So that will depress growth in the fourth quarter in emerging markets. But overall, we'll grow in line with that guidance that we outlined in May.

Great. Okay. Terrific. That's very clear. And lastly, just on CRRT, obviously the growth has been very impressive. I was wondering if you can deconstruct that a little bit as to what's really driving that? Is that market share gains? Is it increasing use of the therapy? And how do we think about the runway for that growth? How sustainable is it? José E. Almeida: It is all of the above. So the way to deconstruct – see the underlying growth for acute renal care, which uses CRRT technology to be at 10%, 11% growth business. And we have benefited from a couple of things. One is we've been gaining market share from other modalities on top of the growth of usage of that technology. Now, we can see there by the sales of equipment by sales of capital. So when we have the sales of capital being increased, we know that the pull through will happen, but we need to be at the hospitals to make sure that that technology is used instead of flat or something else. So it's a very good underlying market growth. Second is, there was a supply issue in the marketplace, primarily in the U.S. And Baxter is always there for our customers. We're able to supply products for our patients and by doing so, we were able to help our hospitals as well as create some momentum and potential conversion opportunities of those accounts, because not all of them probably will go back to the original manufacturer who was in that quarter and shorten the market. So we'll be able to pick that up in the near future. So it is a great business for us, hence our ability to continue to tag other technologies like PrismaLung and the other things we spoke in May at our Investor Day because it's a real door-opener into the ICU for us.

The only other thing I would add, too, is the first half of the year really benefited from a strong flu season that we don't expect that to repeat in the second half of the year. So that's why the growth in the acute will kind of come down to the levels that Joe referenced earlier in terms of the underlying market growth rates.

Great. Okay. Terrific. Thank you.

Thank you. And our next question comes from Joanne Wuensch of BMO. Your line is now open.

Hi. Terrific quarter and good morning. When I take a look at your third quarter guidance and full-year guidance and we back into the fourth quarter, it looks like you're looking at about 2% ex-FX. Some of that I suspect is cyclo. Some of that is probably flu because it's not going to be there, but how would we sort of peel away that somewhat lower organic revenue growth rate versus what you just delivered in the second quarter?

Sure. There is two factors. One is cyclo, which is about one and a half points. This year, the biggest year-over-year impact will be in the fourth quarter as we assume the entrance of a couple of new competitors to that business. So that's about $40 million or a point and a half. The other item is, it's more of a sales than a profit impact, but we regularly look at our portfolio and we'll walk away from certain sales that are below a margin threshold. And in the case of Q4, as we planned and expected, there are certain things that we are walking away from that will impact the fourth quarter by about 1.5 percentage points as well. So in combination, those two items yield roughly three points of growth to the fourth quarter.

That makes sense. Thank you. And then as my follow-up question, the U.S. Fluid Systems number is so wonderfully strong. How do we get that going outside the United States? Not that I'm asking for more, but just asking. Thank you. José E. Almeida: Well, we have a very nice base of pumps installed outside the U.S. still, with significant amount of channels and we through partnerships right now and a strong group work with our partner, we will be able to launch products in the future. Not too far, then we will start replacing our fleet outside the U.S. and continue to grow with more variety and different types of pumps that we need to sustain that business. I think that was the key. As we look back and thought about the priorities, U.S. is still a big priority business in terms of pumps. But as we have seen the SPECTRUM growing and have new versions coming up in product development, it's for us now to focus outside the U.S. with our global product line and I think we have better strategy in the products line now to do so, so we'll be coming out soon with new products that will create momentum outside U.S. and protect our base.

And Joanne, the only other comment to add is in the second quarter, growth was adversely impacted because we had a shipment to a particular country, Canada last year, of pumps. So it was a bullish order that we had that impacted growth several percentage points in the Fluid Systems business. So that negative 1% – we actually saw mid-single digit growth in IV therapy, which was a solid performer in the quarter, but we did have the overhang of that one order.

Thank you so much.

Thank you. And our final question comes from the line of Matt Keeler of Credit Suisse. Your line is now open. Matt J. Keeler - Credit Suisse Securities (USA) LLC (Broker) Hey, guys. Thanks for taking the questions. Just a couple of quick ones. First, now that the retained stake utilization has been completed, were there any changes versus your prior thinking to the P&L guide?

To what?

Our P&L guide. Any changes to our P&L guidance.

Oh, yeah, no, we're broadly in line. I mean, look, we were very pleased with the execution of the retained stake. Frankly, the tax, treasury and legal team here at Baxter worked very hard in the face of the Shire transaction to execute on those transactions in a timely manner, exactly as we expected it. And so from our standpoint, broad brush, we had anticipated about $0.15 of impact this year, we'll experience $0.15 of impact this year, and we're very thankful and appreciative of all the hard work that allowed us to get to that stage.

Matt, are you there?

I think we lost him. Matt J. Keeler - Credit Suisse Securities (USA) LLC (Broker) Oh, yeah, I'm here. Sorry, guys. Just the – just to wrap it up, the reallocation of spend from VIVIA to PD and biosurgery, any more color you can give us on where that spending will go? And is there any impact there to the either revenue or expense guidance for the year? José E. Almeida: A couple of examples; we have several, but we'll give three to you. One is we're going to be launching the variant of our pump sets outside the U.S. that we need. So some money is going there. And we're doubling the R&D dollars going into biosurgery. We've just launched several different programs in biosurgery. And lastly, our point of care is now being fully funded as we're planning to come into the U.S. in about three years with a new point of care to provide patients with on-demand manufacturing of peritoneal dialysis solution in the home. So good use of that money. That's one of the reasons that didn't flow through – will not flow through the bottom-line. We just have better uses for that money, very consistent with our capital allocation policy, as well as we see great opportunity across the board in many organic opportunities. And one last to mention is IPS. Actually we accelerated all the molecules that were out slated for 2019, 2020, 2021 to come earlier and that program costs money and we're funding that as well with some of the PTO money. So a great organic opportunities in the company. We could not pass the opportunity of putting money in the right places.

Thanks, everyone.

Ladies and gentlemen...

Go ahead and conclude the call.

Ladies and gentlemen, this concludes today's conference call of Baxter International. Thank you for your participation. Have a great day.