Haemonetics Corp (HAE) 2002 Q4 法說會逐字稿

Good morning ladies and gentlemen and welcome to Haemonetics Conference Call. Please note that during the course of this call, Haemonetics may take some statements that could be characterized as forward looking and actual results may differ materially from the anticipated results. Additional information concerning factors that could cause actual results to differ materially is available in the company's press release and 10-K.

Stuart Burgess, Haemonetics Chairman of the Board will moderate this call. Here is Stuart. Sir, you may begin.

Good morning and welcome to this conference call on our fiscal year 2002 results. I am delighted to say that the past 12 months have seen the further strong development of our business, fully in line with the company's plans. So, growth has accelerated, investment in new product increased and we have continued to deliver our targeted 20% growth in earnings. Let me now hand you over to Jim Peterson, who will give you more details.

Yeah, thank you. Thank you Stuart. I have here with me today of course, Ron Ryan, our Chief Financial Officer and Tim Surgenor, our Executive Vice President that will be available during our questioning period.

During today's conference call, I will comment a bit on the Fourth Quarter and fiscal year 2002, and fiscal year 2003, the year ahead. After that, as is our custom, Ron Ryan will offer some additional financial insight into the past year and describe expectations for fiscal year 2003 and then I will return with some expanded comments on the business.

I believe that there really are three key points in today's conference call. The first point is that fundamental topline growth for Haemonetics is in double digits and in the year ahead this will strengthen and continue. The second point is, as you know, we have talked about this over the last several quarters, in fiscal year 2003 we anticipate currency will be an unusual factor, which will mask some of this strong fundamental growth in sales and especially earnings. Looking beyond that, I really believe is point number three, and that is once we are through that period, looking into fiscal year 2004 we certainly expect reported sales and earnings to parallel the continuing fundamental growth we have here, which is mid-teens, topline, and 20% on the bottom line. Now addressing the first point, that of the topline growth as you have seen from the press release from the Fourth Quarter, our currency independent sales, increased 12% and 13% for the year and this is the fundamental growth in units and the fundamental growth of the basic business. Now as we take a look at that growth and I would encourage you to look at the section called of the press release called 'Sales Analysis Page'. There I would like to draw your attention to the column on the right labeled 'Increase, Decrease and Constant Currency' and let us talk about our primary products lines and how they were doing and how they are doing.

Surgical disposables is the first one. As you see the business was up 9% for the Quarter and 11% for the year. Now as we have mentioned the introduction of the OrthoPAT is becoming the primary driver of this business as we penetrate and discover more and more of the orthopedic market. As we discover more and more about this, we become more even excited about the potential for the OrthoPAT to grow to be larger than our total product transfusion businesses today.

It is basically indicated for every hip, artificial hip procedure that is done and appears to be close to 80% of knees. So that is a market that is extensive. It is far beyond the market potential of our current open-heart and cardiovascular business.

Moving into next year, we see the surgical growth strengthening into the high teens.

Next, a few words about bloodbank disposables. As you see they were flat for the Quarter. The plain [phonetic] portion of the market is rather mature and looking into next year, the primary growth driver in this product line will in fact be the automated cell-processing product which is used to manage frozen blood inventories. We expect that new product to strengthen the product line growth to be in the low to middle single-digit range.

Moving on to red cell disposables, you see they exhibited a 30% quarterly growth and 40% growth for the year. Here we are seeing a rebound as we predicted in the growth of the business as we recovered, the blood system recovers from the disruptions of September 11.

In the important US market, that business for Q4 was up 54% so that is rebounding, indicative of a rebound - not as strong as we would have been had we not seen September 11, but still a nice indicator that we are getting back on track. And for the year of course the US business was up 60%.

Now as you also know, looking into next year we are planning to more than double that business and we believe that it is completely achievable, realistic and we know where that has to be done.

Moving on to plasma disposables, up 11% for the Quarter and 25% for the year. Most of the growth was from the fundamental procedure growth in this Quarter, it was from the fundamental procedure growth increase. The demand for plasma continues to outstrip supply. Collectors over this year did appear to be closing that supply and demand gap. However that gap still remains.

Will the collectors continue to grow and respond to that, in physical year 2003 or will it be a year where they will recovering a bit from the growth they saw in fiscal year 2002. That we do not know. We are a bit cautious. Looking at the next year, we expect to see growth in the mid-single digits.

And finally in Q4, Q4 - I am sorry, finally in Q4, with the first quarter, where we start to see the impact of the important acquisition of the plasma data management system of Fifth Dimension. This business is being reported for now in the 'Miscellaneous and Service' category and as you look there you can see that really did account for the 29% growth over last year. This was our first quarter with being with the Fifth Dimension business in the field and we are finding that the products fit very well - not only to pure traditional plasma customer base, but in fact also into some of the main stream blood systems. The big event there in fact this quarter was with the American Red Cross. During the past quarter, the Fifth Dimension division signed an agreement with the American Red Cross to provide data management information systems, that will track the collection and disposition of plasma, by the Red Cross to the practitioners [phonetic]. Now this will enhance their quality control protocols which are so important to the development of quality within the American Red Cross. So we expect from this one contract just signed a few weeks ago, that revenues will be in excess of $1 million for fiscal year 2003. So taking all these product lines together. Last year with the equipment as you see finished at $320 million of sales, which is constant currency up 13%. In the year ahead, we will maintain this double-digit growth momentum.

Now I would like to address for a moment the second key point for the day. That is fiscal year 2003 and in currency, the impact of currency, there will be an impact of currency on reported results versus fundamental results in the business. We saw some of that in fiscal year 2002. In fact if you look at the reported results our constant currency EPS growth for the past year was 30% and currency diluted out to 21%. As we look to fiscal year 2003, we will see continuing strengthening of our fundamental sales growth and profits that will be masked to a certain degree by currency impact and Ron will be expanding on this in a moment. For my third point as we look a bit toward the end of 2003 and into next year, the basic fundamentals will continue with sales growing in the mid-teens and the bottom-line growing faster. As we know currency will obscure part of this growth in 2003. While in 2004, we expect our reported results to be more closely matched with the basic constant currency results. You know, that said, that is reported mid-sales are - at that point will be reporting growth in the mid-teens and reporting 20% earnings growth.

Now I would like to ask Ron to take us to the next step here and give us a basis for understanding the current financial dynamics and what we will see coming forward into 2003.

Thanks Jim and good morning. My remarks today, - I will discuss the results of the Fourth Quarter; the summary of the year just completed on March 30; the guidance for FY03. In my comparison, FY02 is before the unusual charge in Q3 for the acquisition of rights related to Baxter's Pathogen inactivation of platelets.

FY02 completes another successful milestone on our road to shareholder value, as we achieved four main financial objectives. First, revenue from new product emerged as the key driver of 20% annual earnings growth. The sales posted constant currency double-digit gains in the last three quarters in the full year. Second, the business delivered on our earnings expectations. 1.37 earnings-per-share with 21% over last year, 30% before foreign exchange and solidified 20% compound annual growth during the past three years. Third, cost reduction and operating leverage drove up operating margin by two percentage points to 14.5%. While net income as part of percentage sales grew by 150 basis points to 11.6%. P&L investment continued behind new products. Fourth, internal sources generated the cashflow employed to buy technologies that will widen and deepen the product line. Reviewing the Fourth Quarter, as Jim noted, sales were up 5% over Q4 last year, before foreign exchange. This is a 4% increase on a reported basis. Continuing with comparisons on a constant currency basis, the US grew 15%on the strength of new products including red cell disposables. Worldwide surgical disposables grew 9% and plasma grew 11%. Earnings were $0.29 per share, were up 23% before a $0.04 per share currency negative, and were up 7% over last years' quarter on a reported basis. Constant currency Q4 gross profit was up 12%, over last year's product, while operating increased by 48%. 14% reported operating margin compares with 12% last year. Operating expenses were similar to 33% of sales, similar to the last two quarters and 2.5% below last year's quarter.

Our CORE cost reduction program - where CORE stands for Customer Oriented Redesign for Excellence - generated $1.2 million of savings in the Quarter, bringing total saving for the year to $3.8 million. For the full year FY02, disposable sales records were set in all product lines, plasma, surgical, red cells and the bloodbank category - and the bloodbank category is comprised of platelets and cell processing. The year finished with 13% constant currency sales growth for disposables. For the year, surgical disposables rose 11%, plasma increased 25% and red cells were up 40%. Bloodbank was relatively flat, reflecting that increased yields of automated platelets procedures require fewer collections to satisfy a modestly expanding platelet market. Constant currency total sales increases were strong in all four quarters of this year; 9%, 16%, 18% and 10% respectively. In constant currency terms, gross margin was 1.2 percentage points higher than last year; and operating expenses were maintained with 8% growth, resulting in an operating income growing at 41%. Constant currency earnings grew 30%, with currency effects included, reported operating income increased 27% and as Jim indicated, earnings-per-share increased 21%. Foreign exchange negatively effected earnings by $0.08 per share in FY02.

Now, when you look at the twelve months P&L in the press release, you will note the after tax effect of adopting FAS 133. This role changed the way of accounting for hedge points on forward contacts. As we noted when we reported on Q1, the effect of adopting this accounting rule was neutral to the full year, because the Q1 reported income that under the old rule would have been spread over Q2 through Q4 in other income.

Moving to cashflow. In FY02 we generated nearly $25 million of operating cashflow. Working capital consumed $22million of cash, primarily for inventories to accommodate sales increases. Accounts receivable days outstanding closed the year at 73 days, one year lower than last year in both US and International. Investment combination of capital expenditures, depreciation and reduced sales type lease receivables, provided $8 million dollars of cash. For the year and before foreign exchange translation, capital expenditures were $23 million and depreciation was $26 million. Reduced sales type lease receivables provided $5 million of cash, reflecting the more effective use of equipment placed with customers.

During the Fourth Quarter the company repurchased 896,000 of its shares for $27 million. We have adopted a 10B51 plan, which enables buyback to occur during blackout periods. During the year net debt increased $9.4 million. This means that the $10 million investment in platelet, pathogen and activation, the $10 million purchase of Fifth Dimension and the $25 million of share repurchase, were 80% funded with internally generated cash. We closed the year with $68 million of invested cash, down from $99 million last quarter and $74 million in FY01. Debt was $72 million compared $75 million last quarter and $70 million last year. Turning to the new year FY03, we are aiming at the high end of our earnings target range of a $1.45 to $1.50 per share, which would be about a 30% constant currency increase from FY02 before about $0.28 a share of negative currency and near 10% reported growth. Sales are planned to grow 10%, which is 13% to 14% in constant foreign exchange terms. Much of the growth will be from new product sales. This will include $24 million from red cells as well as products that did not a have meaningful presence in the market two years ago, such as OrthoPAT, Solutions, cell processing, plasma bottles, data management among others. For disposables by product line, again we are targeting a more than doubling of red cells, amid single digit increase in plasma, a high team gain in the surgical category and low to mid single digit increases in bloodbank. We plan constant currency operating income growth in the 40% range, like FY02, and in the high teens on a reported basis reflecting an increased operating margin 15.5%, which is a full percent over the 14.5% posted in FY02. Factoring lowest, factoring lower interest rates and changes in accounts in the shares outstanding, yields are planned, EPS growth in the area of 30% before foreign exchange . We are anticipating that FY03 will start with an income tax rate of 31%. This rate could be reduced somewhat later in the year.

Finally, a word on our FY03 expectations by a quarter. The first half of the year is a little complicated and I will try and walk you through it in a deliberate way. We expect two solid quarters operationally, but results will be clouded by non-operating factors - which I will explain. We anticipate that earnings per share will be spread about 40% in the first half and 60% in the second half. This reflects good constant currency sales growth in all quarters over FY02. Low double digit growth in the first half rising to mid-to-high teens second half growth. Constant currency operating margins are planned to exceed FY02 margins in each quarter. Interest-related and accounting principle comparisons match up negatively in the first half of FY03 against last year and particularly Q1. Specifically addressing the First Quarter of FY03, in constant currency we are aiming to sustain revenue trends 13% or more. Constant currency income should again increase in the 40% range. However, three factors combined to reduce Q1 earnings comparisons by approximately $0.19 per share: the timings effects of adopting FAS 133 last year; the lower interest environment; and six sets of share currency. This yields a Q1 EPS estimate of $0.26 a share, compared with $0.37 in last year's quarter. In Q2 we anticipate that the constant currency operating income will be up in a percentage in the mid-teens, matching up against a very strong 16% revenue growth in the FY02 revenue growth in the second quarter. In the second half constant currency operating income is foreseen up 50% plus, reflecting mid-to-high revenue growth on the same basis. Looking into the future we expect the operating momentum building in FY03 will carry into FY04 and as Jim said if current foreign exchange rates prevail we are certainly capable of reporting earnings per share growth once again in the region of 20% with reported sales growth in the teens. Now I will return the discussion to Jim.

Yeah, thanks Ron. Ron commented on the impact of new products in this past year and next year. This fiscal year new products accounted for more than 10% of our total sales. In the year we are currently entering we are planning on new product impact to double, really, or more than double and account for over 20% of our sales in the fiscal year 2003. As you know, new product impact is coming from many different areas where we have widened and deepened our market opportunities. You just go back a few weeks in Q4 we announced two new product additions. We did announce the rollout of a new automated plasma collector, something called the Superlite, which is first being rolled out in the Japan market. It a smaller, lighter, machine, newer technology than current products, and solid fit for the Japan market to start with, and other international markets as a first step. Now Japan accounts for about 20% of our total plans for business and is growing nicely and this new product will assure that we remain leaders in this market and position is really to capture the lion's share of the growth in that market in the years ahead.

You will recall also recently that we announced FDA approval to market our own self-manufactured solutions for red cells. This is the anti-coagulate and the storage solutions for red cells, two different solutions now. Previously we had...our customers had to rely on other vendors for these solutions and we also purchased from these vendors and resold the product. Now we can supply all the solutions and of course all the disposables needed for double red cell collection and this help sales, but more importantly it will make an important contribution to the profitability of the product line. Also in Q4, you may recall, we concluded a multi-year contract with Blood Centers of America to enable them to purchase double blood cell technology both with and without filters and also our plasma collection products, machines and disposables. Now the Blood Centers of America is a purchasing group representing 30 US blood centers and the agreement solidifies our partnership, actually with many people who were already our existing customers, it extends the durations of our contracts with these customers as well as incorporating filtration technology into their red cells systems. It also gives us access to a new potential customer base that before we signed the contract was not as easily accessed.

So this is another step, we are reporting here another step and our continuing to build a foundation upon which we will have a substantial red cell business.

In closing, both Ron and I have filled in the picture of what I believe to the key points of the call. As you remember, level number one, fundamental topline growth, we are in double digits and in the year ahead we absolutely expect to stay there. Number two, as you know, and as Ron has expanded upon, fiscal year 2003 currency will be an unusual factor which will mask a lot of this strong fundamental growth in sales and in earnings and as we look in the fiscal year 2004, we certainly expect sales in earnings to parallel the continuing fundamental growth of the topline and what we have seen in the bottom line.

Looking back on the year, on fiscal year 2002, we delivered against our plans and as we look forward to 2003, we feel very good about the goals, we have set up for the year. We feel they are very achievable. Over the last year we have strengthened our new product pipeline in a significant way and these products will certainly support the company's topline momentum in the year we are in, fiscal year 2003, certainly 2004 and beyond.

Now we would like to invite your questions and like to ask the conference call operator to jump in here.

Thank you. The question and answer session will be coordinated through me. If you have a question please indicate so by pressing one followed by four on your touchtone phone. I will activate your system. Please give your name and company and then ask your question. The question line is now open.

The first question comes from Steve Hamill [phonetic], sir your line is live.

STEVE HAMILL [phonetic]: Thank you. I am from RBC Capital Markets. My first question for you this morning has to do with the revenue here we saw in the fourth quarter. It is a little bit below what we were looking for and my first sense is that part of that is the currency, but also it looks like plasma may have been a little bit weak compared to what we have seen in the second and third quarters. Can you comment on whether met your expectations in this quarter?

On plasma specifically Steve we had mentioned that we were anticipating a modulation in the growth rate we have seen. I mean we finishing the year as you have seen with a strong 25% growth which is quite exceptional for this business. It puts the business into a $100 million plus category for us. We knew that the plasma collectors had a catch up year and they invested in opening a lot of new centers.

We are anticipating that there will be some of their catching their breath, restabilizing before they go through their not [phonetic] next growth phase. So that was not a surprise to us. As you may recall, next year in plasma we are anticipating growth in the, I guess, mid-single digits - and so that part was not a surprise.

I think looking back on the quarter, it was...as you know in Q3 we really blew the top off everything, which was stronger than anticipated and in Q4 we continue to keep good fundamental growth. We know that it could have been more than, in fact, the 10% we are looking at. We finished at 13% for the year and I think the important point is that we continue to foresee solid double digit growth into next year. So we do not think that it was anything special to note in Q4 in that respect.

To us, the important thing is the opportunities we have in hand for the year going ahead - and we finished at 13%, which is not all that bad.

STEVE HAMILL [phonetic]: And if I can push back on that a little bit Jim. It does seem though that the constant currency growths slowed down from even, what even you perhaps might have expected back at the end of the third quarter. I know from my recollection is that the guidance for FY03, initially was high single digit growth for plasma. So did we see at least a little bit of an acceleration in this catch up trend?

Yes we could have, I do not recall whether it was mid-single digits and high single digits. It is a pretty fine line where that is. We believe we know where the business is going. We have confidence in our forecasts and we have something there that we can count upon. Hopefully there will be some upsides. Hopefully there will be something there we can count upon.

STEVE HAMILL [phonetic]: Okay. And Ron, I was wondering if you could talk a little bit about the other income line because I know that we had the large blip in first quarter due to the accounting change and we knew that there would be a catch up over the rest of the year. Will that look more stable throughout the rest of, through FY03 by comparison?

Once Q1 is behind us, those effects will start to moderate substantially. So in fact the non-operating negative I mentioned is $0.13 is pretty much stabilized for the full year.

STEVE HAMILL [phonetic]: Okay. So I guess...I am not sure that it is clear to me is, though, shall we see other income levels that are probably somewhat similar to what we saw in the fourth quarter, during the first quarter of 2003?

Yes.

STEVE HAMILL [phonetic]: Okay. And I was wondering if you could give us an update on the status of your leukoreduction filter rollout and particularly with the new PCA agreement and if you are starting to see uptake of that already?

Yeah. I am going to ask Tim Surgenor to help us on that.

We are actively pursuing the roll out of the filtration product, as you mentioned. We are focussed on two things. One is to convert existing customers who started off doing non-filtered sets over the filtered sets. That process is going extremely well. We are working through validations with certain customers and starting to see take-up of the product. The other things that we are doing is when we start new customers, we are trying to start from the beginning with filtration and that strategy is also working very well. So we are seeing customers signing up going directly to the filtration product.

STEVE HAMILL [phonetic]: Great. Thank you.

Thank you our next question is coming from Andrew Jay.

Two questions if I may. Can you talk about your salesforce plans for expansion? What you are doing in terms of bodies out in the field to drive sales of new technologies that you are rolling out? And then second, just your outlook for capital spending in fiscal 2003.

Yeah, Jim Peterson here. Let me comment on the first two. If we talk about some of the important new products that are going to impact the new year.

The first one let us talk about the OrthoPAT, which as I said earlier is the first autotransfusion device, washed out transfusion device, ever to be available in for the orthopedic market. It is based on a new technology that has been able to miniaturize the other transfusion package so that it fits on an IV pole. So that is the first technology that has ever been able to do that.

We anticipate over time that, that business alone will be in the $50 million to $60 million range - since you recall our current autotransfusion business total is in the $60 million range. Very exciting product. So, very exciting product and the customer is every orthopedic - everywhere orthopedic procedures are done especially hips and knees. That is our customer base. Big customer base there is scattered everywhere. To get the marketing muscle into that market in the United States we are in partnership with Zimmer. So, Zimmer in fact is our distributing channel. They have 550 people making customer contact everyday. So, we are in partnership with them everyday to reach that broad, diverse market and that is going very well. Zimmer is excited about it, we are and we feel as though that distribution channel is very well established and will make this growth possible.

Secondly, in red cells of course, we have continued to invest especially in people that are supporting and training our customers. That is where the action is. The truth is that we do not need many more new customers. We have contracts signed with the key customers that are going to provide the growth. So our investment has been in people who are training and coaching and running the monthly implementation meetings to grow these programs within our established customer base.

Now one of the things about the bloodbank business is that we have a small number of customers. So you can, if you can leverage a lot business through the existing distribution and sales channels it very quickly drives down your distribution costs. So that is a very important dynamic in our business, so for new products that are going into our new product area, it really is not adding a lot of new feet on the street. It is adding primarily support people in just putting more product through a distribution product that is already well established. So we are in a position to do that in red cells.

We have the people and we have the research needed to achieve this $24 million goal for red cells in fiscal year 2003. Now, Ron can you comment a bit on the capital expenditure side?

Yes. Yes we can anticipate some increase in capital expenditures. We are a razor in a razor blade business and certainly will be placing equipment to support our customers with this revenue growth. Traditionally our capital expenditures and depreciation have approximately equated and this tendency will continue into 2003. So we are not anticipating a significant cashflow negative as a result of capital equipment placements.

Excellent, thank you very much.

Yes, thanks Andrew.

Thank you Mr. Jay. Our next question is from Roberto Morales [phonetic] of UBS Warburg.

ROBERTO MORALES [phonetic]: It is Roberto Morales [phonetic]. If you could just please talk about the solutions business. How fast do you expect this to ramp up?

Yes, Roberto. Jim Peterson here. Well, there are two things. One is, over the last year in the new product category area we added sodium citrate as really a new product to our plasma business. It was that so that every time we sell a plasma disposable we can also sell the anti-coagulant and it would not have to come from another vendor. That was an element that accounted for our 25% growth in the plasma business that we saw this year.

And now of course, we just recently announced that we will be able to supply our own anti-coagulant and preservative solution for red cells. In the past we had been buying that from other vendors at a high price and we are now manufacturing for ourselves - and, as I said, this will have an important impact on the profitability of the product line.

So the way to look at solutions, is it makes our business more profitable. It does add revenue, because there are now our solutions rather than somebody else's solutions and when we can manufacture them ourselves. As I said it has an important profitability impact. So it has those two impacts. We will not see any special significant individual wrap up, ramp up. So those sales will be part of red cells sales. So, if you keep your eye on total red cells sales, within that will be these important solutions.

ROBERTO MORALES [phonetic]: Okay. And could you discuss a little bit about the acceleration in red cells now that you have all those contracts. How soon do you think they are going to start adapting [phonetic]?

Let me have - I will ask Tim Surgenor to take a pass at that.

Sure, we, based on the progress that we made this year, we expect red cell revenues to be in the $24 million range for next year. During fiscal year 2002, we did see a slow down as a result of the events on September 11. But, as Jim said earlier, we are very pleased to see the business coming back in this quarter - and I would also draw your attention to the red cell index, which was in the press release.

ROBERTO MORALES [phonetic]: Right.

Red cell index for Q4 grew to 8.5%. It had been in the 6% range for most of the year. That is a group of leading customers and what that means is that those customers really began to increase their activity in the fourth quarter. If you applied that 8.5% penetration in the red cell index group to the total market, just as a point of comparison, it would give you about a $40 million revenue number. So we are pleased to see that starting to grow and we look forward to next year to getting into the $20 million range. But we continue to focus on that red cell index group as a leading indicator.

ROBERTO MORALES [phonetic]: Thank you.

Thank you Mr. Morales. Our next question is coming from Anthony Kavelli [phonetic].

ANTHONY KAVELLI [phonetic]: Hi, this is Anthony Kavelli [phonetic] at Dresdner Kleinwort Wasserstein. Sticking along with the last topic. Is there any new news on the issues between the FDAs and the American Red Cross?

There has been no update from any of the discussions between the Red Cross and the FDA. It is something that we continue to monitor, but we do not have any insight in terms of the resolution of that.

I think a couple of main points to make about the Red Cross. Our fiscal year 2003 plans do not count on resolution of that issue. We have some Red Cross sights that we are working with. We have a plan with those, so that we can carry froward without that resolution. When it gets resolved we are prepared to jump into action and work with the Red Cross to expand the program.

The other thing I point out as we continue to work with the Red Cross as a key account and trying to develop that account and although the red cell activity is little bit held up at the moment, last year for example we did a lot of work with them on the ACP 215, to try to help them with the new program.

As Jim mentioned earlier, we just signed a contract this quarter with Fifth Dimension, again as an example of trying to work with them in places where we can and where they need our help. That is an important new activity, with the Red Cross. But we do not have any insight on the status of negotiations between the Red Cross and the FDA at this point.

ANTHONY KAVELLI [phonetic]: Okay. You answered my next question about what was in your outlook and it is good to hear that basically there is nothing in there. Can you give us an update on where the Chairside Separator stands and what is the timing?

Very quickly, as many of you know the 510-K filing for the Chairside Separator was finished up this last fall and is in next year - I am sorry this year, towards the end of this year. Let us say, in Q4 we expect to see approval for that and we will be starting the business at that point. One of the things about the Chairside Separator is that, yes, it is a whole new concept. There are important markets out there for it and in time it will grow also to be a very large business. But given the regulatory dynamic, it looks like we will be in, start the build up phase towards the end of fiscal year 2003. ANTHONY KAVELLI [phonetic]: Do you have a sense, Jim, of what that product could do in its first full year following marketing, following approval?

Well, I would anticipate that we will not see as long a drug out S-curve as we have for [to in a] red cells, because it is just a one way pass for its owner. And in fact is easier from an implementation viewpoint. However there will be, you know there will be, a period of gaining momentum and when you introduce in this business when you introduce a new product into a market, you have a period of selling, of adoption, of licensing and so forth that will not give you a huge acceleration over a year or two. You have business that does build. But once it hits a critical mass, then as you know you do get this take-off.

One of the good things about the Chairside Separator is that it is unique. We do have a strong proprietary position on it and consequently we believe that it will not have a lot of competition for what it will offer. So it is a great product, it will take time to build it and it will be - down the road it will be quite a large potential business.

ANTHONY KAVELLI [phonetic]: Okay. Terrific. Just two other ones. What were OrthoPATs sales over the quarter or for the year so we can get a better sense of that product?

Well, the OrthoPAT really is accounting for the growth that we are seeing in the autotransfusion business. As we said, next year we expect that total growth to be in the high teens. So, here we have an OrthoPAT business that is what $66 million.

Surgical.

I am sorry a surgical business of $66 million total and we know most of the growth next year is going to come in from, the IT and growth will come from that so you can back into that number.

ANTHONY KAVELLI [phonetic]: Okay.

We are not breaking it out specifically, at this point - what it is. But you can get a sense for the magnitude of the business.

Thank you. Our next question is from Robert Goldman. Please state your affiliation.

Yeah thanks, Buckingham [phonetic] Research. I have a couple of questions that would impact the topline and then if I have got any more time I have got a couple on expenses. First on the topline, equipment sales look to be becoming a more meaningful driver of growth. I think you might have answered this when you spoke about capex, but I might have missed it. If you could just again give us an explanation of why equipment sales are accelerating? And on equipment sales as well, you know if there are any margins maybe you could give us some sense on what they are relative to disposables? The second question on revenue, just to get them both on the table. If you have any particular insights in the development of a screening test for the so called pre-on-screen [phonetic], which I suspect might effect your business as it might affect the blood supply the screening test for mad cow disease.

Well, thank you. Two big questions. First of all on equipment, on equipment we are seeing - usually, if you know our sales model, is customer commits to a large number of disposables we place the machines needed to use those disposables and as they use more disposable they get more machines - and if they happen to decreases the machines come back. That is our normal business model.

A couple of exceptions to that, one is the ACP 215 and there it is straight sale. There we are selling that equipment we are not placing it under this usage plan. In another, somewhat of an exception to that is in Japan as the Superlite is rolled out there, that market has a larger component of just purchase equipment than anything else. Certainly the margin on our equipment is very similar to the margin on the overall business, in general, especially for these two products that I am talking about. So that would count, I think, for some of that equipment growth.

Going forward, again we want to keep our eye on disposable growth however, because that is where the - that is the best indicator the best metric to use as to the business is doing overall.

So that is equipment comment.

Secondly, pre-on-screening [phonetic], yes there is talk about that. If in fact it does work its way into donor screening, there is no question that it will again, especially in some countries in a dramatic way decrease the number of eligible donors. That is there, in the - over the horizon. How all that is gong to play out, the bloodbanking community does not really know at this point. But it could be quite a significant event in the blood transfusion field.

A few quick ones if I still can on the expense side or the cashflow? indiscernible].

I noticed that your inventory returns were down in the latest fiscal year. I might have missed if it if you spoke to that, but perhaps you can explain why that occurred?

Yes, certainly. First talking about our cost-reduction programs. As I mentioned, we took out $4 million of costs in FY02. Our goal, every year, is to take out $3 million to $4million of costs out and so that is at least our expectations for FY03. Turning to inventory, yes our finished goods, disposables, inventory returns did decline somewhat in the quarter as we prepared distribution for growth in our new products. However we certainly expect to get back to about five returns for our disposable finished goods in FY03. So we will be seeing that in cashflow, for the upcoming year.

Right. Thanks a lot.

Yeah, while we are ahead, one other follow up, remember we were talking about pre-ons [phonetic] for mad cow disease...

Right.

is to remind ourselves that already the donor restrictions that are being made in the United States will start to bite this year. As you know the Red Cross has already implemented the restriction to exclude anyone from donating, who has spent more than three months in the United Kingdom since 1980 and more than six months in any European country.

The FDA has recommended this deferral. It is starting for the rest of the blood system in this month of May and will take effect right through until into probably the month of October. So we are going to see a tightening in the number of people eligible to donate here in the United States. A decrease perhaps, as people are talking 8%, and so the mad cow factor, the pre-ons [phonetic] factor will have an increasing impact on the availability of donors and just over this coming year.

Two other things are happening as a result of that, there are more and more people thinking technology is an answer to that problem. It is pretty much as I wonder round the market out there and bump into the laggards in new technology, they are starting to feel as though well everybody else is going to do this, I guess is better to. So it is starting to have a wide grip if you will, throughout the field.

The second thing is more and more testing, more and more exclusions, driving up the cost of blood. It is now common to see people talking about over $200 a unit for a unit of red cells and the higher the cost of blood, the more dramatic the cost effectiveness of double red cells are.

So for the technology, as time goes by it just seems to be more and more good news.

Just to confirm that date you mentioned. I gather that the FDA deferral comes in two phases. One whose deadline is in May of this year, the other which is in October of this year and it seemed to me that the actual deferral of the donors would not occur until October. Do I have that wrong? In fact, will the donor deferral take effect in the first phase in May?

Yeah, Tim?

Yeah. Sure, just to try to be clear, the Red Cross has already implemented all of these restrictions. The May deadline is for people who have traveled to the UK and France and the October deadline is for people who have traveled to the rest of Europe.

In reality though what we expect blood centers to do, since it is hard to implement these rules to begin with, they will probably implement them together, because it is extremely hard to change their questionnaires and change their donor recruiting process. So we are already anticipating that, this month in May. They will start to defer people who have traveled for those periods of time in all of Europe. Does that answer your question?

Sure does. Thanks a lot.

Thank you our next question come from Steve Hamill [phonetic]. Sir, please state your affiliation.

STEVE HAMILL [phonetic]: RBC Capital Markets. I have just a couple of odd questions for you. The first one has to do with the PCA deal that was signed during the fourth quarter.

Will we be - should we be looking for any announcements in terms of key customer wins that might come from that over the course of this year. Particularly since there is quite a dramatic ramp that you are looking for in that business.

Yes Steve it another enabler, it is another foundation that we just reported on that is going to help us build that business. We would not expect to see any dramatic benchmark announcements, but it certainly enables and facilitates our sales people that are out there working with these accounts to not have to be discussing price. Price is set and they know they are going to get their best pricing and so it certainly enables the development of their business in these 30 accounts.

STEVE HAMILL [phonetic]: And since I know that there is normally an individual bloodbank licensing process that has to go, that a bank has to go through in order to actually implement the two unit. Do you have some visibility already in terms of whether or not you have enough customers in the pipeline who are going through that licensing process, to hit the estimate this year?

Yes we certainly do. Our sales organization knows exactly where it has to go. They have means and know exactly what they need to do to make the number. So it is, yes, the answer is yes, we understand what we have to do and where we have to go and we do not see any structural blocking elements such as licenses, that will not make it possible to get there.

STEVE HAMILL [phonetic]: Okay and in terms of the ACP 215, is the rollout of that to both the US military and the Red Cross pretty much complete at this point, or could we anticipate additional revenues from those two sources in FY03?

The ACP 215 will have - will continue to be very strong in the fiscal year 2003, going to a diverse group of customers. Primarily, certainly, outside of the Red Cross and outside, some of it will be US military, but a strong market outside of the US military. So it is a mixed market. We are not relying on just one or two people to make the ACP 215 number for next year.

STEVE HAMILL [phonetic]: Okay and do you see anything in terms of new competition in the form of closed cell processors that might mimic the ACP 215?

No, we do not and it is a long tough regulatory field, our pathway to get there, and our hope is that we will have the definitive product in this area for several years to come. So, we do not see anyone making a run at this and we feel as though certainly for the next several years we have a terrific opportunity to become the supplier in this area.

STEVE HAMILL [phonetic]: Great. Thank you.

Thank you, our next question comes from Anthony Kavelli [phonetic]. Sir, please state your affiliation.

ANTHONY KAVELLI [phonetic]: Hi. Anthony Kavelli [phonetic], Dresdner, Kleinwort and Wasserstein. Did you complete any R&D projects? And I ask that because the R&D number is a little bit light on what we were looking for and if you could also please comment on R&D either in dollar terms or as a percentage of sales in 2003.

Yeah. For the year, the R&D in fact did increase 6% our key R&D entry increased 6% at a planned rate and finished at 6% of sales and we believe it is 19, a little over $19 million. Thus in - R&D is producing new products that are driving our growth.

Going forward we anticipate to hold the 6% R&D expenditure level. However it is worth noting and you are inferring that a lot of that new product as it gets closer to market the investment to the more SG&A line and in manufacturing. But I think that looking forward R&D will stay at 6% of sales. That is good placement to generate the products we need to drive our growth.

ANTHONY KAVELLI [phonetic]: Terrific. Thank you.

One of the things that I would add to that is also that, as you may recall, we will be implementing towards the end of this year, starting in Europe, the banks, - the serious flat backs for the pathogen and activation system. As you know we are working with them as partners for platelet pathogen and activation and that will start to impact, will impact our sales towards the end of this year. Now a lot of the expense for that is showing up in SG&A as opposed to R&D. But this is an example where we use our balance sheet, rather than strict R&D muscle to bring new products into the company. So that, and we wanted to make that into a comment on the importance of looking at R&D all alone, is yes that is a very important way to get new products in but, because we have been so successful in running a balanced company and generating cash, we have been able to fund the acquisition of important technologies from the outside.

Thank you. Our next question is a follow up question, coming from Robert Goldman. Sir, please proceed with your question.

Thank you. You started to answer it actually with your last comment, but listening in on the Cirrus [phonetic] or VITEX or Baxter conference calls in the last couple of weeks, they had a lot to say about viral inactivation, including Baxter. But you guys did not. So I am wondering whether you are trying to give us a message as far as what you see as to the potential in that product.

Well as you, you know - this is the, we are participating in the platelet rollout and as you know, the platelet pathogen inactivation is the smaller of the pathogen inactivation opportunities. There are probably about five to six million platelet events a year worldwide. And that is the market potential and as you know, if Rhesus [phonetic] we Haemonetics are disposable to collect well over a million platelet units a year and so we will be able to add value to our customers in that million plus collections a year with the PI systems so we are part of developing that market and it should be a nice reasonably sized business.

As you move on to red cells, as you know there are competing technologies, Cirrus [phonetic] has one technology, VITEX has another. We are - VITEX is using our cell processing technology as an integral part of their inactivation steps and so to the extent that VITEX is successful in the marketplace, we will be down in the engine room there and every time a unit of blood is virally inactivated, Haemonetics will have a disposable part that will be a part of that process. So we feel as if there we are pretty well positioned.

There are, yes there will be other PI issues down the road. We feel that we are very strong in the worldwide bloodbank marketplace. We have shown an ability to participate in this important pathogen inactivation so far and we anticipate that there will be more developments as we go forward.

Okay. Thank you.

Thank you our next question comes from Dana Walker, please state your affiliation.

I am with Kalmart [phonetic]. Good morning.

Morning. Your line is a little rough.

Can you hear me better now?

A little better yes.

I think it was my voice not my line.

Okay.

A little bit of these allergy groups.

It is that time of the year.

How about a comment or two about the use of the red blood cell system, in whether it is the stationary or mobile settings, today, versus how you see that unfolding in 2003?

We have been surprised quite candidly at the number of people that are taking our machines mobilly, right from the beginning. We knew that it did have a mobile application, a 50 compound [phonetic] machine, but it seems to be doing quite well in the mobile area. So part of the growth we will be seeing in red cells in the new year in fact, will be in mobile applications.

I left a question unanswered there for you, but maybe you can help me on it.

Well, I am curious if you, if there is growing comfort in developing that. I think that one of the things that you have talked about developing in the past is that your customers have invested in the stationary systems and if they were to then begin to use them in abandonment [phonetic], in a mobile basis that they would need to buy more and yet that comfort would have to come first.

Yes, the important thing there is that the machine is mobile, people are using it in a mobile environment and it is proving successful. Now how the market take-up will be, mobile versus fixed-up, we will have to wait and see. We anticipate though that mobile will have an important role to play and as we know down the road, we do have a the next generation technology in our product pipeline, so that we will in fact be able to even compact the mobility, we will take that even to a newer level where we will have a much smaller, much more easy to move about package that will be battery powered.

So in the long term, yes it will be an important area of growth, but it appears as though it is not waiting for the new technology it is growing right now. But once the new technology kicks in, we would expect it to really take off.

Have serious investors been looking at the red blood cell ramp entry year? When would you suppose you would have your first $5 million red blood cell quarter?

Well, we are looking at $24 million for next year and I think you can do the math to probably see when that would be.

Would you expect that to be a Q2 phenomenon?

Well, maybe we should not nail it down to that much precision right now, but we are obviously going to have to see that in fiscal year 2003 as we get towards the end of the year.

We have not yet heard from VITEX about any of their desires to push on into phase three. Do you have any insights as to how that process is going?

This is Tim. We do not really have any special insights there. We know from our conversations with VITEX that they are working with the FDA to get approval to start their phase three trial. We are not involved in those conversations, but what we are planning with VITEX is how we can within a very short period of time after the approval get out into the field and get the trial done, because that requires our equipment and our disposables to be provided.

Our development work with VITEX is pretty well finished and what we are now doing is providing, equipment, disposables, and then service and training to them once the trial starts. But that is where we are and all we know at this point.

Talking about currency for a moment you have expressed the wish that by fiscal 2004 you would hope your operating results are not impeded by currency headwinds. Are you just hopeful that your important currencies; the yen and the euro no longer trip versus the dollar? Or is that reflecting a change in strategy?

Our strategy is unchanged if you look at the current conditions particularly affecting the dollar. Even press articles in the last day or two about the US policy about a strong dollar. It does seem that the dollar is softening somewhat in the world markets and certainly that would be to our advantage.

Are you likely to hedge though at different times than you would ordinarily on a rolling twelve basis? Seeing that and believing that you are at an inflexion point?

We do not try to outguess markets, so we ware very consistent with our hedging.

So your point would be - I suppose the yen has been the more difficult currency comparison for you, you are just of the mind that if the yen is stabilized, that as you rolling twelve, willing to hedge, you will be hedging at comparable rates roughly, rather than incomparable rates.

Yeah the yen went sideways, that is the case. The foreign exchange impact in 2003 is basically the end, whereas the currency negatively experienced in 2002 was basically the euro. So Dana, we have not changed our policy certainly on hedging forward. The advantage to that is of course is that we can with confidence do our planning and our budgeting and with confidence say where are our earnings are going to be. So that is what we get for the exercise, so that is what we gain.

I guess there is a little price paid and that everything is a year later and people have to think in those terms rather than an immediate translation. But if you weigh all the pros and cons to it, I think that there is a real advantage to having a predictability in our planning.

Two last questions. One is currency in 2003. I believe in your guidance you talked about currency being as much as - what is the number here, $0.28 negative?

0.28.

And I believe in the December/January time frame, you thought that $0.20 might be the pain that you would have to pay and yet you have not changed your guidance? Maybe you can just cross connect those two numbers.

Yeah. We put out an estimate of $0.20 back in December based on the prevailing exchange rate and of course at that time, we had only hedged up to that point and as the balance of the year went into place, at weaker yen rates of exchange, the balance of that currency impact had not materialized.

The reason why you did not have to further lower your guidance bill would be?

Alright, we did not effect our earnings per share guidance, which at that time was a $1.45 to $1.50, regardless of currency.

But if you had an additional 8 cents of penalty to pay, are you not calling upon the underlying operations to drive a little bit harder.

No there are other both operational and non-operational factors weighed into our consistency with earnings guidance.

Well we do realize today that currencies do move around. We know where they are going. But also it is our obligation to deliver top line and bottom line performance for the stockholder and that is what management is all about.

Okay. Final question, relates to the surgical market and we are thrilled to see the continuing acceleration. Are you seeing any headwinds though on what has been the legacy business, the cardiovascular business as some these [indiscernible] technologies, possibly the extent procedures are less frequent and how that might effect certain open heart related prophesies [phonetic] that effect your business.

You know Dana we have not. That business is has maintained quite solid. Even minimally invasive surgery of course, also loses blood and we find our autotransfusions even still being used there. No, we have found the business to remain solid in the face of all the additional new techniques and so far in this point in time we do not see an erosion of our business at all.

Thank you very much.

Thank you our next question is a follow up question coming from Robert Goldman. Sir, please go ahead with your question.

Just one final thing from me. A couple of days ago it was reported from, this came across on the newswire, it is entitled, 'Studies: Filtering helps Kidneys' and they are talking about a study where filtered blood from one kidney donor can result in a successful kidney transplantation to somebody who needs the kidney. This came out of the American Transplant Congress, evidently on Tuesday. Are they talking about leukosight reduction, because they talk about removing antibodies from the donor's blood, is this something else? Do you know what they are talking about here?

Yeah. Robert, my best understanding is that it is in fact an attempt to modulate the immune response of a system, so that it will not reject, not reject the transplantation of whatever it might be.

There is a lot of work going on within that field right now and we will be hearing more and more about that, whether is be bone marrow transplants or kidneys or whatever.

A lot of work is being done at the animal level at this point. We are not directly involved in any of this, but we are just peripherally aware of it.

Is any of your equipment though involve in the separation?

No, this is all primarily back in the lab at this point.

Okay. Thank you.

Ladies and gentlemen, there are no more questions. Here is Sir Stuart with closing comments.

Well thank you. I would just like to close with a couple of comments or so.

Firstly as you have heard, this year has seen a further all round improvement in our performance. Top line growth is continuing to drive Haemonetics strong financial performance, with new products making an increasingly important contribution. Our underlying earnings growth exceeds 20% and as Jim has indicated it is our intention to stick with that level of performance, driven by double-digit sales growth.

If you missed some of the call and would like to hear it again, the call will be replayed through May 23rd and it can be accessed by phone at area code 973, 341 3080, using pin number 3246213. I will just repeat that area code 973, 3413080 and the pin number 3246213.

And finally a couple of dates for your diary. The first one is that we will be presenting at the Deutsche Bank Alex Brown Healthcare Conference in Baltimore on May the 7th at 8:30 am and we hope to see you there. But if you cannot be there in person, please view the presentation beginning May the 8th on line at www.haemonetics.com and if you need more information about this, then please call Julie [Fallon] at 7813569517, that is 7813569517.

And then finally our annual shareholders meeting is scheduled for the July 23 at 9:00 am at State Street Bank in Boston and details of this meeting will be issued in early July. Thank you for being with us today.

Thank you ladies and gentlemen, this does conclude this morning's [indiscernible] conference. You may disconnect your lines at this time and have a great day.