Haemonetics Corp (HAE) 2003 Q1 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Haemonetics conference call.

Please note that during the course of this call Haemonetics may make some statements that could characterized as forward-looking and actual results may materially differ 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.

Sir Stuart Burgess, Haemonetics' Chairman of the Board will moderate this call. His is Sir Stuart.

Good morning and welcome to this conference call on our fiscal year first quarter results. I'm delighted to say that we made a good start to our fiscal year and are on track to deliver our yearend sales and profit targets.

In the present climate, it's probably worth saying that this is being achieved by solid operating performance and without any of the questionable financial devices that we've been hearing about recently. You should know that we take corporate governance seriously and already have in place many of the changes being recommended by the New York Stock Exchange and others, which incidentally I consider imminently sensible.

Let me had you over to Jim Peterson, who will take you through the details of this quarter's results.

Thank you, Stuart and good morning. Today with me I have , Executive Vice President of the Company and Ron Ryan, our Chief Financial Officer. Both will have comments on today's call.

During today's conference call, I will comment first of all on Q1, fiscal year '03 and the year ahead. After that as is our custom, Ron Ryan will offer some additional financial insight and describe expectations for fiscal year '03 then I'll ask to update us on recent drivers of the red cell business and I'll finish up with some comments on the business in general.

Today - in today's call we have three key points. The first point is our constant currency top line growth is in double digits and in the year ahead this will continue. The second point is that market dynamics, what's happened out there over the last quarter, will continue to position our products for important future growth. And the third point is we are on track to achieve our top line and bottom line stated goals for the year.

Now addressing the first point as you've seen the top line sales growth for the first quarter increased 11 percent, constant currency eight percent as reported. Now let's take a look at the product line performance and for this I call your attention to the part of the earnings release titled sales analysis. Please look at the column to the right, increase/decrease percent of constant currency.

The first item you see there is our surgical disposable performance. It was up 5.5 percent for the quarter. The most important driver continues to be the penetration into the large and new orthopedic market. And as the momentum builds throughout the year we expect to see surgical growth to move into the mid to high teens.

Next is blood bank disposables, they were up three percent as the platelet business held steady and we saw growth from the new automated cell processor , which is used to manage frozen blood inventories. This product line will continue in the low single digit growth range throughout the year.

Red cell disposables exhibited a 40 percent quarterly growth and the important U.S. market sales were up 63 percent. Although the 40 percent growth was below our goals, we see moving into the 70 to 80 percent growth range in the second half of the year. Plasma disposables were up nine percent for the quarter. Most of the growth was from procedure growth.

The demand for plasma continues to outstrip supply and collectors appear to be attracting the donors to close this gap. For the year we expect to see growth from the mid to high single digits. Equipment sales, equipment sales were up 93 percent over last year as we see international sales impact of selling our new products including the super light for plasma collection and the for surgical blood recovery.

In the U.S. market as you know, equipment is generally placed at no charge in return for a disposable contract. Now to the contrary in many of our international markets, we sell the equipment outright. So this new product equipment sales will drive equipment growth during this year to the 40 to 50 percent range.

Miscellaneous and service was up 32 percent over last year and this is where our fifth dimension plasma data management systems are reported and these unique products account for the growth and will continue to account for a growth in this neighborhood in the year ahead.

So in addressing that first key point, top line growth, it remains in constant currency double-digit growth territory and this will continue in the quarters ahead.

Now I'll ask Ron to give us more details on Q1 and the outlook for the year.

Yeah thanks Jim and good morning. In my remarks today, I will discuss the results of the first quarter, our expectations for the second quarter and our outlook for the second half of this year.

The year began at predicted fashion. When we peel back non-operating items and currency, we can see continuing double-digit sales growth and strong underlying profitability. Three factors account for the change from last year's quarter. First and most important in constant currency an 11 percent sales increase combined with a three percentage point operating margin improvement yielding a 51 percent increase in operating income consistent with growth in recent quarters.

This translated at the operating income line to an eight-cent per share increase over last year. However, as we explained during last quarter's review, declining interest rates and last year's Q1 adoption accounted for an 11-cent per share earnings negative. And third also as expected, we experienced a seven-and-a-half cent per share negative currency comparison to last year.

In constant currency, sales growth spread across all regions. The U.S. grew seven percent and international gained 14 percent with a particularly strong contribution from Asia. Worldwide surgical disposables grew five-and-a-half percent as Jim indicated and plasma was up nine percent on the strength of international, particularly Japan.

Our customer-oriented redesign for excellent or core program generated $1.3 million of savings. Our TQM target this is $4 million of savings. Moving to cash flow, in the quarter we generated a million dollars of operating cash flow. Working capital consumed $8 million of cash. Accounts receivable days sales outstanding were 72 days, down from 73 days, at yearend. In fact the U.S. days sales outstanding of 50 days is the lowest in four years.

Depreciation and capital expenditures were about equal in the quarter. During the first quarter, the company repurchased 868,000 of its shares for $26 million completing purchases under that authorization to buy two million shares. As noted in the earnings release, our board has just authorized the repurchase of another two million shares.

During the quarter net debt increased $28 million to 33 million reflecting the share repurchase. We closed the quarter with $42 million of invested cash, down from 68 million at yearend. Debt was $75 million compared with 72 million of debt last quarter.

Now turning to the rest of the year FY '03, we continue to target an earnings range of $1.45 to $1.50, which would be around a 30 percent constant currency increase in FY '02 before about 28 cents a share of negative currency and this would yield up to 10 percent of reported earnings growth.

In currency, earnings per share variance is spread equally between the first and second half. We still expect to see reported sales growth for the year in double digits percentage wise. Despite continued sales increases, Q2 will be our less robust quarter for operating earnings comparison. We project that Q2 constant currency revenue and operating income will be up about 10 percent.

We're matching up against a very strong 16 percent constant currency revenue growth in the FY '02 second quarter. We're targeting Q2 earnings of 29 cents per share comparable to last year's earnings and constant currency with a shortfall against last year due to lower interest rates and about six cents a share of unfavorable currency.

Shifting gears to Q3 and Q4, we project that earnings in the second half will increase by an average of 18 cents per share per quarter over average earnings per share in the first half. Currency is the minor factor between the halves so I'll focus my comments about how the constant currency earnings step up derives from two key factors, revenue growth and an increased profit margin.

Now addressing sales, we are targeting low, double-digit constant currency growth for the year as a whole. This compares with 13 percent growth in FY '02. We're comfortable with the second half revenue because we experienced these growth rates last year. Second half sales are projected to increase by 13 to 14 percent over last year.

Again in FY '02 second half sales also grew 14 percent over the prior year. Second half sales are intended to increase sequentially about 10 percent over sales in the first half. One reason for the sequential growth is that the third and fourth quarters together tend to be seasonally higher than the first two quarters.

Last year second half sales exceeded the first half by six percent. The year before, that second half increase was five percent. The second reason for sequential growth is red cell unit volume and the impact is filtration conversion. The third growth factor is that our planned equipment sales are skewed somewhat to the second half.

The other drive of the second half earnings ramp up is higher operating margins. This is a result of operating leverage, manufacturing efficiencies and operating expenses maintained in the range of the first half run rate. The second half operating margin estimate supports our reported margin goal of 15 percent plus for the year as a whole compared with a 141/2 percent operating margin last year.

Now I'll turn the discussion over to Jim.

Yeah thanks Ron. Now we'll turn to our second key point, how recent market dynamics will continue to drive our product growth and first I'll ask to give us an update on the market dynamics affecting red cells.

Thanks Jim. As Jim described earlier, our red cell product growth this quarter was 40 percent worldwide at constant currency and was 63 percent in the U.S. market.

We also discussed in the release today that the Red Cell Index, which tracks automated collections on Haemonetics equipment within a group of early adopters showed a continued favorable trend indicating that our leading customers collected 9.9 percent of their red cell products on Haemonetics' equipment during the quarter, up from eight-and-a-half percent in the previous quarter and six-and-a-half percent for all of last year.

In the red cell business, we continue to see two important dynamics that support our growth. The first is limited red cell availability or red cell shortages and the second is the continuing increasing demands for product quality and regulatory compliance.

Now let me talk first about red cell availability. The most important objective for our customers, our blood bank customers, is to have adequate supplies of blood components on their shelves and it has become increasingly challenging, especially I think during this quarter, for blood banks to maintain those adequate inventories, especially of red cell, which of course are their leading product.

We see this trend continuing. For example in an effort to protect the U.S. blood supply from new variance CJD or the so-called Mad Cow disease on May 31st, the first phase of new FDA guidelines were implemented, which exclude donors who have spent substantial time in Europe.

In October, a second phase of these guidelines will be implemented. Although it's too early to measure the affect of these restrictions, there is evidence that they will further limit red cell availability. Let me just give you three anecdotes that just came from this quarter.

Over the past three weeks, 10 to 15 percent of the centers monitored by the Americas Blood Centers - Americas Blood Centers - is an industry organization that represents about 55 percent of the U.S. blood supply, 10 to 15 percent of the centers they monitor indicated that they had a one-day supply of red cells or less on their shelves.

A second anecdote in an appeal one of the major blood center's Web sites this week, the situation was described as quote/unquote unprecedented need with system wide shortages of certain blood types.

And a final anecdote during the past quarter in Pittsburgh, area hospitals were asked to postpone all elective surgeries requiring Type O blood and this is because their local blood supplier's Type O inventories were so low that if they didn't curtail elective surgeries they would have not had enough blood to meet trauma or emergency demand.

The good news is our technology provides the most compelling means for blood centers to impact this red cell availability issue. Our systems represent an economical and proven means to generate incremental blood supply from a constant or declining pool of donors. For example if we go back to the Red Cell Index customers, we said earlier they're using Haemonetics' technology to produce 9.9 percent of the red cells this quarter.

If you think about it, this means that they're generating an incremental supply of about half that or about five percent without having to recruit any additional donors. And that five percent margin is becoming increasingly important. The fit between our technology and the pressing need for red cell component availability is a major driver of our continuing rapid growth.

The second major driver is our customer's continuing focus on quality and regulatory compliance. You know that all of our blood center customers are themselves regulated manufacturers of the blood components that they produce. They are seeing increasing scrutiny from the FDA and from other regulators around the world.

They're also seeing increasing demands for component quality from their hospital customers, especially as prices for red cell components have increased. We are extremely excited with the success of our new disposable set, which incorporates a reduction filter.

This filter, as we call it the filter disposable set, provides a means for the customers to streamline their component handling by integrating filtration, which would otherwise be done in a second separate procedure into one disposable. It eases compliance and it produces a consistent filtered end product in one disposable.

As we have added new customers this year, the vast majority have started off from scratch with the filtered and in these centers, the benefits of automation are now combined with the integration of filtration, both of which help centers produce a consistent, high-quality product.

From the Haemonetics' point of view this is really important because the filtered product is a revenue driver. It has an average incremental selling price of about $20 per disposable. We are continuing to focus on the rollout of the filter set to our new customers as well as to our current customers.

And because of the clear benefits of this set, we anticipate it will be another driver of revenue growth this year. So in summary, looking back on this quarter and looking ahead this year, there really are two important drivers of the red cell business.

They really are the fit between our product offering, between what we are offering customers today, and their two most important dynamics, their need for more red cell components and their need for improved quality and regulatory compliance.

Jim is now going to talk about growth drivers in other parts of the business.

Thanks Tim. As you know, we have several other new products and current products being pushed along by similar market dynamics that will - are giving us growth this quarter and will certainly continue in the quarters ahead. We've talked about the opportunity, an important one.

The growth this quarter was in the 40 percent range and will move ahead at that rate for the rest of the year. As this grows in importance it will drive the total surgical growth number into the high double-digits towards the end of this year.

Now there are two important drivers worth noting. First this is the first time this large market has been addressed. The is indicated for a hundred percent of reconstructive hip surgery and a high percentage of reconstructive artificial needs - knees.

The brings washed auto transfusion to 1.4 million patients per year that have not previously been served by this process. So not only is this market large, but it also has annual growth rate that is in the high teens. So the first important point is that we uniquely, the , will serve a large market and that market is growing.

Secondly, a high percentage of hip and knee replacements ask the patients to pre-donate today and for those of you have been through that or had friends or relatives through that, this is a burden on the patient, it's a burden on the surgeons, the blood centers and the hospitals.

This results in a complicated and costly process. Now the eliminates the need for pre-donation. We've had several customers who have started this process and today they have basically closed down their pre-donation process, not needed. They rely a hundred percent on the to meet the blood needs of that patient.

So it's a welcome alternative for the surgeon who is the primary decision maker. These are two important elements that will grow the business. So that down the road we will see an business that is the size of our total surgical business today.

I'd like now to talk about a third driver of growth in the coming years and that will continue to be in the plasma market. Recently industry experts have come to the conclusion that the demand for source plasma will double from its current level of 20 million liters of plasma a year to 40 million liters of plasma a year by 2010.

Now this growth will have to be met by additional automated plasma collections. And as you know Haemonetics supplies 50 percent of this collection market. And in addition we have expanded our value-added to this market with the recent acquisition of the Fifth Dimension Plasma data management business.

So it appears that we will see a sustained 10 percent range growth of this business for years to come. Several other new products in the marketplace, we make sure to remind ourselves, are either in the market or in the pipeline and will continue to push growth. Right now the super light, the plasma collection system in Japan, is an important element of this - of this - equipment growth that you've seen reported already in Q1 and the automated cell processor.

Now the automated cell processor is primarily and equipment sale and not a disposable sale and as the managing of frozen blood - cell - red cell - inventories increases that will - we will - see that number also showing up in the equipment growth line. Starting next year, we will see the chair side separator in pathogen and activation of platelets in the marketplace.

And in the longer-term we expect to be a player in the - in activation field beyond that of platelets, but in red cells and that's through our partnership with VI Technologies. So that concludes the second important point for today.

And finally the third point Ron has already walked us through how we will be on track for our sales and earnings outlook for the year. This is no change from what we communicated last quarter at this time. Some products are stronger and others are less strong than anticipated, but the portfolio of products and opportunities have delivered and will deliver as anticipated.

So in summary, those three key points, fundamental top growth double digits, market dynamics still enthusiastically supporting our new products and the products in the market and the third point being we are on track to meet our commitments for this year.

Now we invite your questions.

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 touch-tone phones. I will activate your system. Please give your name and company name and then ask your question. The question line is now open.

Our first question is coming from . Please announce your affiliation and proceed with your question.

RBC Capital Markets. Good morning.

Good morning.

Good morning, Steve.

My first question has to do with the red cell business and specifically I was wondering if you could give us an update on the situation with the Red Cross and their attempt to get approval for implementation of the two-unit system from the FDA.

And then as a follow-up to that, I was wondering if you could address your evaluation of the system and when it comes to market whether or not there would be any risk if you see further delays in the Red Cross of the actually losing that piece of business to .

Yeah I'm - best address that question, Tim.

Sure. First on the Red Cross status, we don't participate as you know directly in the filings or the discussions between Red Cross and the FDA and so we'd direct you to the Red Cross in terms of any information or news on the timing there.

What we are trying to do, as we said before, is we're prepared to move forward rapidly once they get their go-ahead for the rollout. And I'd remind you that we have pilot sites today that are continuing to use double red cell technology. In fact now all of those programs we understand have taken the technology out into the mobile environment and they're all looking at ways to expand the use of double red cell in the pilot sites.

Our revenues this year are not highly dependent on the Red Cross, but it's certainly an important customer and we are, you know working hard to make sure that we do a great job on the rollout when it comes and you know we're looking forward to that date.

In terms of the , for those of you who may not know, is the name of product that Baxter is in development of, which is purported to be an automated double red cell machine.

It's clear that our rapid progress in developing the market for automated red cell technology has made an impact on Baxter and we see now is that Baxter is in a catch-up mode trying to bring the out into the marketplace.

With respect to the Red Cross or with respect to other customers, I think we have a terrific first mover advantage. So for example with the Red Cross, we've already established pricing, We've already established SOPs. We've been working them to expand the program.

When reaches the market, they'll have to go through that same process, which is as you know has been a quite lengthy process for us. I think probably the most important advantage we have though is our experience in the market over these last years, which has created a tremendous amount of know-how and expertise to help customers roll out these programs.

And I'd remind you that, although Baxter's a terrific company, they have no direct experience in double red cell programs. So that's probably a more hidden advantage that we have, but we continue to be confident that our product portfolio that we're offering to customers now and the products that we're in development with will maintain our leadership here as this market grows.

Great. And if could ask one last question. From a financial standpoint, I was wondering if you could talk a little bit about the shift in mix at least from what I had been expecting towards more equipment and service and whether or not that has any significant impact on your gross margins going forward?

Let's see the shift in mix, the - certainly if we look at our Five Dimension business as it shows up in the other and service category, that software business is a very profitable business for us. So it will continue to positively impact the margin of that particular product area.

As we look at equipment, equipment does not traditionally bear the margin that disposables do. However, they - it does bear a positive margin so it does have a positive margin impact. And so that's a micro fluctuation within the whole - the whole - P&L. I think the important thing is, that when customers do buy equipment then they - it's off our balance sheet and it's on theirs.

And so they really are as committed as our contract customers are, they're super committed. And of course as that equipment is sold, the disposable growth comes along - comes along - with that. So I don't believe that we should be looking at any, as in your forecasting, looking at any change from what the previous mix would have looked like going forward.

Steve this is Ron just to put it into a final, broader, financial context, we have been progressively increasing our operating margin. Last year we were at 141/2 percent of sales. The previous year was at 12 percent of sales. This year we continue to target an operating margin north of 15 percent and then every quarter our constant currency operating margin is showing substantial growth as evidenced by the 50 percent we launched in Q1. So this is all factored into our expectations.

Excellent. Thank you.

Thank you. Our next question is coming from . Please announce your affiliation and proceed with your question.

Hi it's . It looks as though your guidance on red cells for the year are at six to $8 million lower than they were before. Can you just expand on this a little bit? Is this less filtration or is it simply a slower rate of adoption?

I'll ask Tim to take a run at that.

Sure I think - I think - as you indicated in your question obviously the growth in revenues has two components. One is the growth in units and the other is the growth in average selling price, which comes from the shift in mix to the filtered product. And you'll remember that the filtered product has about a $20 higher average selling price.

So if we look at those two components this year, the adoption rate of the technology has been excellent. The growth of the index gives you some feel for that, again from eight-and-a-half percent last quarter to 9.9 percent this quarter. UBS, whose our largest customer, has now just reached 20 percent, just a phenomenal result there.

And we continue to see strong interest and new customer adoption. What's been slower, as you indicated in your question, is the conversion to filtration. Although we've been very successful in starting new customers off with a filtered product, it's taken longer than we'd anticipated for some of our current customers to shift their protocols from the non-filtered to the filtered side.

So although the base business has grown well and the unit growth is strong, this conversion effect does increase the total revenue growth and that why we've proposed or we've projected to you that this flatter filtration adoption curve should result in red cell growth of 60 to 70 percent.

OK. To follow-up on that my understanding is that most of the $20 that you get for the filtration, you know is actually expanding, buying the filter from an outside supplier. So it doesn't bring much down to gross margins. Is that still true?

No that's absolutely not true. In fact the contrary is true, the value provided to the customer of having an integrated filter is so high that in fact we're able to price very well. And so as we move into filtered product from non-filtered, it has quite an important positive impact on our margins.

OK, thank you.

Thank you. Our next question is coming from . Please announce your affiliation and proceed with your question.

Sure, UBS Warburg. Just a couple questions I wanted to follow-up on Steve's line of questioning specifically with the . When you looked at the time it took to gain the approval from - not really the approval, but the approval of the protocols from both the Red Cross and the non-Red Cross centers, was it - was there a significant difference in timing?

And the reason I ask that question is, if you assume that gains FDA approval by the end of the year, would we likely see that product starting to go after your customer based and the non-Red Cross centers, you know sometime early 2003?

Well the - I think there are couple important points here one is that they will have to go through a - run a regulatory gauntlet very similar to what we had to. When you - our industry is highly regulated as you. In our industry, a blood center becomes licensed, becomes practiced, SOPs are written. It's a manufacturing process to prepare a blood component one specific way.

It's licensed approved, people are trained. They do it that way every day. As a new technology comes in and knocks on the door and says, by the way you can do a similar thing using our technology, that means a big change. And they have to invest a lot of their own time and their own money incorporating an additional technology to do a similar thing.

So there is a natural impedance in the marketplace to a change. So as they, let's say if an FDA approval is announced on the part of another product, the time between that approval and in fact building the business, is large. It's going to be similar to what we had go through.

I might mention one thing that might be overlooked and that is that there is another competitor out there with FDA approval of two-unit red cell collection on their machine and that is . But as you notice, we talk very little about in the marketplace and the reason being that, even though they have a machine with approved protocol on it, it's been very, very tough for them to turn that into day-to-day practice in the blood center.

And of course, they do have other issues that make it less competitive than our current machine. But that is an example of how difficult it is to get any new technology into this marketplace.

So the good news is once you're there, then you're shipping product in volume. It's a linear system, all the way from raw material right through to the consumption of the product at the other end. And you're just very well established. And you will -- as long as you do the job, day after day -- you will enjoy a very high degree of customer loyalty.

OK.

And just as a follow up to that -- as you look at -- well, maybe if can -- maybe you can give us a little idea what the status of the next-generation red cell system from Haemonetics -- what's the timing of that?

Yes, sure. This is again.

We -- let me just take one step back -- the red cell collector, for those of you who may not be familiar with it -- the red cell collector is our next-generation platform in this area. It is a very lightweight, highly mobile, two-unit specialized machine based on the .

And it's also important for you to know that the is the same technology that's being used in the .

So we're already gaining experience with this, and generating, you know, a lot of usage of the disk. And this is now rolling forward into the red cell program.

We are moving very quickly to bring that product to market. We anticipate getting approval by the end of this year. And we'll be starting our filing process with the FDA around that same timeframe. Now of course, it takes longer in the U.S. because of the FDA process.

But again, part of why we're very confident about our response to the is because we feel the red cell collector matches up very well against the features that it has. And remember, they don't have our current type of platform. We have -- we have extremely economical, very robust -- it's been used in high volume. Our current product is extremely reliable. And that's really a major part of our strategy going forward.

So instead of us bring just a new technology to market, we're adding a new technology, which I think gives us a great positioning in the marketplace.

And would you need to go after the or the change in protocols with the FDA -- not with the FDA, but the Red Cross and other blood centers on that product as well? Or is that kind of ...

No.

... grandfathered through?

No, it -- I believe that it will be -- it will not be grandfathered. In other words, it's similar to what we're doing now, but it is a different technology. So we'll have to go through that process again. It'll be similar in the use of anticoagulants, but it'll be different separation technology.

But that's part of our -- of our process.

OK.

So with -- maybe just to add to that -- so next year at this time, in the European markets, the product will be out there, and we will be in business with the .

So, as you may recall in our growth of the total red cell business, Europe is still moving along nicely. And it will be an important player, even though the U.S. is growing at a higher rate -- it will for sometime. But that product will start to show up on our P&Ls next year at this time.

OK.

And one additional question, dealing with the plasma business -- how much of your plasma revenue is actually tied up with collectors that had been purchased by Baxter; i.e., , et cetera? And if you look at the timing of the expiration of those contracts, what's the risk factor in the plasma business over the next year to two years?

Yes, the industry is somewhat breaking down, in that on one hand, you have Baxter and -- that also was the only other technology to collect plasma. And so of course, they moved their own machines into centers they own.

An example of that was when they purchased Immuno. The Immuno -- we have -- all the Immuno collection machines were Haemonetics'. And over the years, they did move that -- it took them several years -- moved that to Baxter technology. And in spite of that, of course, we continued to grow through that period of time.

Now, the most recent one, of course, is Serotec. They did acquire Serotec. Serotec has had a lot of our equipment. And over time, that is moving over to Baxter.

I might mention on the other side, as far as Aventis and as far as is concerned -- that on the other side, there is Baxter equipment with those accounts, too. And those accounts are growing more and more in the direction of Haemonetics.

So we do have somewhat of a dichotomy, a split in the industry. However, in spite of all this, you saw the growth rate we saw in this area last year. We see an industry that's going to be totally growing, at a pretty solid 10 percent a year. And as you know, this year, we're talking about probably being in the upper single-digit range.

So, in spite of the fact that there is reorganization -- who's collecting at Serotec -- we're growing fast enough in other areas to compensate for it.

A big growth area for us right now, in fact, is Europe and Japan. They both were up substantially in Q1 and will have very strong -- very strong performances this year.

So it's a -- it's a mix of things going on out there. However, at the same time, we still need to go from our 20 million liters this year and compound it up to kind of a 40-million-unit collection just in 2010. We're going to be doing at least half those collections. And yes, it'll be -- it'll be moving around a bit in -- between collectors, as the industry goes through its various consolidations.

OK, thank you.

Thank you.

Our next question is coming from .

Please announce your affiliation, and proceed with your question.

Thanks, .

Got a couple questions on some of the trends.

First, I thought I heard at the last conference call that you believe the earnings for the year would be skewed about 60 percent to the second half.

It looks, based on the guidance now -- for the second quarter and the rest of the year -- that the skew to the second half is higher than what you were thinking previously.

If I got my numbers right, you know, what's changed to give it a little bit change of skew?

Yes, , I'll answer that.

As you say, our guidance last quarter was approximately 40 percent of the earnings would be in the first half of the year, and the balance in the second half. If you combine the 26 cents in Q1 and our 29-cent guidance, and compare that to the range that we've given -- $1.45 to $1.50 -- the guidance we've given, I think, is consistent with that.

It would be, however, at the lower end of the range, the $1.45 to $1.50. Our aim is to work as aggressively as possible to move our year-end earnings per share to the high end of that $1.45 to $1.50.

Hey, Ron, follow up with trend.

On SG&A, we've come to expect the SG&A-to-sales ratio to show improvement year over year.

I'll address that.

Our Q1 operating expense in cost and currency was up about eight percent from last year's quarter. We believe we're fully invested right now. And so on a sequential basis, Q2 through Q4, we expect our op ex will continue at the current run rate, which gives us the basis for the operating leverage that's into our full-year projections.

So will SG&A -- specifically, the sales -- would that show year-over-year improvements beginning in the second half, second quarter, or ...

Yes, on a cost and currency basis, will show reductions, yes.

What about on a reported basis? I mean, you know the currency now; it's all locked in for the year. So on a reported basis, will we see improvements?

Yes, most likely.

OK.

And then on sales trends -- aggregate for the U.S. and international -- in the U.S., it looked like the growth rates in sales was the lowest we've seen in some quarters; whereas on the other hand, in international markets, excluding currency, was greater than we've in several quarters.

Any aggregate things happening that would account for the -- you know, these change in trends?

On the international side, plasma -- as I just had mentioned earlier -- has turned into an important driver for us this year. It's above our expectations, in fact. And the OrthoPAT continues to be a very solid product in the international side.

So those have been the two primary growth drivers to see that strengthening on the -- on the international side.

Back on the domestic side, last year at this time, you may recall, we were seeing what one could characterize as possibly euphoric growth in the plasma part of the business. You may recall, quarter by quarter as we saw that, we kept commenting that, you know, Well, you know, we don't expect this next year. But it is a catch-up period we're going through.

And so, from a comparable basis, that big plasma -- remember, that's a big business; over $100 million business for us -- as it had such a great year last year was biased primarily domestic. But what's happening this year is that international is kind of taking over that plasma -- you know, the plasma growth. And so that's reflected -- both of those, I think, are swing factors you see in the two comparative numbers.

And those are trends that would continue going forward, international growth will be in excess of U.S. growth, do you think?

Well, no, I wouldn't say that. I was referring to the product line dynamics that are fueling the two.

Certainly, we expect, for quite some time, the power of red cells and the power of the OrthoPAT to show up in a very important way in the U.S. growth number.

So we have those two going forward. On the other side, we have a year where the plasma U.S. growth is more modest, as we talked about.

So it's a mixture of those two that'll show up in the -- in the U.S. .

OK, thank you.

Thank you.

Our next question is coming from .

Please announce affiliation, and proceed with your question.

I'm with . Good morning.

Good morning.

Good morning, .

The surgical revenue growth -- would you expect it to get up to double digit in Q2?

Well, certainly, towards the end of the year, we're going to be looking at high double digits for surgical revenue growth, as I'd mentioned, powered by the -- by the OrthoPAT, as the OrthoPAT number becomes more substantial in the mix.

In Q2 at this point -- I think it's a little too refined to maybe provide too much of a specific detail on Q2. I think you'd kind of have to back into it at this point.

But the important thing is that the OrthoPAT is a very important product for us. And our primary distributor for this in the United States is Zimmer. They're very high on it.

As you know, Zimmer also is doing quite well in the marketplace. They represent 20 percent of all reconstructive hips and knees out there in the marketplace. And this product allows them not only a way to sell more products to the same customers, but it gives them an opportunity to go call on customers they're not previously working with, because of the unique nature of the product.

So, the OrthoPAT will be just a very important part of the total number going forward in the surgical number. And as I said, down the road, from everything we see, that this business is going to be the size of our total autotransfusion business today.

On another topic -- are you in a position to comment what percentage of the red cell procedures are today using filtration, and what your assumptions are, let's say, in Q4?

want to attempt?

I'm not -- I'm not sure ...

Yes. We're not -- no, we're not prepared to kind of give a percent conversion right at this point.

The -- as mentioned, the new customers that are starting with us are pretty much starting with filtration right from the get go. The customers that traditionally had been working with us in a non-filtration mode have been the ones that have been slowest. Because again, something new -- they have to go through all the , they have to get their QC stabilized -- a whole bunch of procedures that have to now change to something else.

And they have less incentive, because they're saying things are going really well right now. I know I have to get there, because it's cost effective and easier. But they're moving at a slower rate than our new customers.

So we have a mix of those things -- those things going on in the marketplace.

One thing we can say is, overall, we estimate about 70 to 80 percent of the blood collected in the U.S. is , or filtered. So -- and in fact, the Red Cross, I think, has moved to 100 percent filtration.

So eventually, our goal is to reach that penetration. Because it doesn't make any sense for a customer to subsequently filter on our disposable. It's good for us to sell them the filter disposable, and good for them to use the filter disposable.

But we're just in the early days of that process, and, you know, we're working hard on it. I don't think we should -- we should try to begin to give you specific guidance on that.

But that 70 to 80 percent is the -- is the target.

Would an account like UBS, where the index appears to be high -- would they fall in the old customer camp?

Yes. UBS is an example of a customer who still have to go through their conversion from what we call the non-filtered set to the filtered set.

My guess is we have to adapt to new market environments on the buy side every day, .

No, they ...

... much more complicated ...

Well ...

... regulated environment.

Yes. UBS is -- for example, we would be -- or just take a large account like UBS, not so specific -- but we would be dealing with their corporate -- their "corporate quality group" to do the validation of the protocol, and their corporate regulatory group to do the filing -- their filing protocol.

Once that was all done, then each of the individual centers would have to go through the process of adopting the corporate protocol and would all have their own reasons for doing so, and their own issues in terms of training and so forth.

So it's really quite a complex process when we get into it, and perhaps more complex than we anticipated.

So, the other overlay of all that is they are just very sensitive about making changes, especially when they're doing such a large volume of their red cells on a -- on a given product like this. They really want to make sure everything is ironed out before they make the change.

So they would be a good example of that.

On the other hand, the new customers -- as I mentioned earlier -- don't have to go through that process. We start them from scratch in the filtered product, and we've been very pleased at the success of that.

Could you make -- whether it's a qualitative or quantitative -- stab at addressing how active your new placement activity levels are for red cell systems?

Well, the new placements come in two forms. One -- we have several what we call silos of growth -- one element of growth, or silo of growth, is new customers, new accounts; people we're not doing business with today. And that's an important element to it. And new placements consequently.

Actually, the more powerful for growth right now are people that we've been doing business with for the last year-in-a-half. Their the ones who are more mature in the program and where we see a - quite an acceleration in uplift of their growth. A good example of that is that we've seen even within our test centers of the Red Cross. We've seen people growing into mobiles. Taking their machines out in mobiles where it's they've just been . So that placements within the current accounts, people who we've been doing business with for some time is - actually our primary growth driver right now.

Another element that is a primary growth driver, there are people going to what's called "total automation". That's where they have blood centers that they're not even collecting blood in the traditional way. All their platelets are collected on machines, all their plasma is collected on machines, and their red cells are also collected on machines. So that's another growth that we have and one that is quite exciting. It's smaller but it's doing - it's doing quite well and is a vision of the future.

So within all of those placements that are taking place, and as we've mentioned, the most important thing to look at in fact is disposable growth, because the productivity of each machine enters into that. So if we start chasing - we can put on a lot machines. That's easy to do. But the question is, are they using them and are they using them at a rate that makes the business profitable?

All right, a few questions on the numbers. If we were to look at inventory levels, how would you describe your satisfaction with your inventory turns?

We have a turn goal to have our disposable goods back to five turns by the end of this year - in fact, probably by Q3. Q4 we ended at 4.4 turns. Q1, which we just completed, at 4.5. We had been disposable inventories in anticipation of the new product launches.

As far as the other part of inventories, our equipment has grown somewhat, and we expect to see the back off. Actually, our - if you look at our cash flow for Q1, if anything, our inventories compared with our own expectations came in maybe one, $1.5 million higher and receivables came in about a million, a million-in-a-half better so. We will be improving our utilization of inventories going into Q2 or Q3.

, you're still there?

Does that answer your question, sir?

Our next question comes from of William Blair and Company.

Hi. Three quick questions if I could. One, on the OrthoPAT, assuming one doesn't know the size of your auto transfusion market, it's hard to interpret your comment that OrthoPAT could be in sizes as largest that autotrans. So if you could just maybe highlight what do you think that the two separate components might be.

Secondly, some of the ortho guys are talking about knee and hips that require less blood loss during surgery - different techniques. Are you concerned that that may be impinge down the way on the opportunity of the OrthoPAT?

Second question is, the dollar has been weak, could you just remind me as to why you have such a sizable currency hit this year and is - how should one think about whether this is unusual, and assuming where we are now in currency, what might you get back from this hit next year?

And then the third and last question is, any order of magnitude of the size of the opportunity within a reasonable period of time of the Chairside Separator once it gets released? Thank you.

All right - thank you, . Why don't we deal with the currency question first and - so, .

Yes. The background on currency is that approximately two-thirds of our business is conducted in Europe and Japan. And because of that exposure, we take a couple of measures to heads that. First of all, when possible we produce our products locally and we also have offices - sales offices in the countries where these currency exposures exist.

The second thing we do is that on a rolling four-quarters basis, we hedge our anticipated sales proceeds one year in advance. And we do that, as we did last year for this year, in order to have a more predictable impact of currency, because it is such a large part of our business. And we're able to do our resource planning and also have better earnings and operational projection.

So basically, quarter-by-quarter last year, we were locking into the rates that we're reporting this year. Our currency has really not changed over time, which is 28 a share. Naturally, this year we're hedging at prevailing rates that will impact our results next year. So certainly, if the current exchange rates were to continue, that would be beneficial for next year .

OK - moving on maybe to the Chairside question next, Jim, who's...

Sure. Let me just...

... in the middle of that project himself.

Let me just remind people what the Chairside Separator is. We've talked a lot about it in this about double red cell. Double red cell is a - what we call an apheresis product where we actually take blood from the donor into the machine. We process it and give back the parts we don't want. The Chairside Separator is a completely different concept where we take blood from the donor, we don't give anything back, but at the end of the donation, the machine goes into a processing cycle and separates the blood into it's two major parts, the red cells and the plasma. So that for the blood bank, it takes an operation which might have occurred previously in their laboratory many hours later and does it right there on the donor floor. So it's a little different concept of a product.

But the market potential is, you know, theoretically, is the - all of the red cell collections that are not done in double red cell mode, we've talked about a market for the double red cell of 25 percent of the 40 million units collected around the world. So the theoretical market potential for the Chairside is - it would be 30 million.

Of course this is a brand new concept. It's something that we are trying to pioneer, and we're going to take it out to the market and see how we can develop it going forward. But it's way too early to make projections in terms of what the revenue growth might be. But it's a very exciting concept because it takes a process that they currently do in a laboratory, moves it out to the donor floor. And that's important because they have many other new processes that they're contemplating are going to be required of them that they'll have to be doing in their laboratory some day soon. So it frees them up to do that. I don't know if that answers your question.

Yes, thank you.

OK.

Yes - one of the nice things about the Chairside Separator, it's the same technology platform as our machine...

I should've mentioned .

... for those that are going to be the same customers that have a similar looking technology platform, and so those, in fact, our success with two units will help pull along the Chairside Separator.

Now...

... dynamic technologies giving you a...

Yes. I should've mentioned that. It's based on the same technology that the red cell collector and actually, the OrthoPAT are using. So, it's another example of leveraging that separation chamber.

, maybe now to deal with that part of your question on the OrthoPAT outlook for the product line. First, on the blood loss area, there - if we look at the experience in open heart and vascular surgery where the auto-transfusion is basically routinely accepted everywhere that that area also has had it's surgery, it's other ways of being more - less evasive for surgery. However, during all this time, we found out there was still a need for blood recovery even on surgery. And so the total demand did not decrease, it stayed pretty steady.

Now open heart in cardiovascular surgery are market as roughly 800,000 procedures a year. And as you know, we do about - 60 percent of those procedures are done on Haemonetics equipment. So it's an 800,000 annual market. We have a 60 percent market share and it's stable.

Now once we turn to the orthopedic market, suddenly there are 1.4 million procedures a year that can be addressed. The OrthoPAT is the first product to bring auto-transfusion to this market in an effective way. So the market is 1.4 million, it's more than 50 percent larger than the current market we're addressing, so we have that working for us. We're in the early days; it's just starting that market. And if you do some math and you look at the - Zimmer, for example, as a distributor, and Zimmer is - accounts for about 20 percent of the worldwide, I believe, reconstructive surgeries. And if we can just get penetration into their business, that will already give us a business that's more than half of our current autotransfusion business.

So the numbers are large, we're the only product on the street, and so we - and we - the initial market reception has been very enthusiastic. So there may be minimally evasive blood things going on somewhere, but it certainly isn't going to impact the dimension of the opportunity and what we'll be able to see from that opportunity.

Thanks, Jim.

Our next question comes from of UBS Warburg.

I just had two quick follow up questions. First off, given the share repurchases, any idea of a forecast per share count for the rest of this year? And then the second question, if you could just give us what the mobile and fixed site mix of red cells is?

First, , do you want to address the share count question, and the...

I can't give you a direct forecast because there are a few in there. I would share - I would say that in the first quarter, the share count has less than a once-cent favorable impact against last year.

OK.

Secondly, to move on to your...

Yes.

The percentage of mobile's - the percentage of red cells that are collected on mobile - in mobile drives is estimated to be 70 to 75 percent. We don't track and we haven't given guidance on what our own percentage is. What we would tell you is that we're seeing it increase. We know that because of - as Jim mentioned earlier, have a few particular programs in the market. One of them is the Total Automation Program.

Total Automation is either a fixed site or a mobile unit - a mobile truck usually where they don't collect manual blood anymore. And we're seeing an increasing number of those. But we don't have a - we don't yet have enough of it that we can tell you our percentage or start to project that.

Wonderful - thank you.

Our next question comes from Robert of Dresdner Kleinwort.

Yes - a couple of questions about red cells. Your earlier is up to 9.9 percent red collections on your red cells. Why isn't it more than that? Obviously, there are a lot of donors where we're doing it the old fashion way where they could be collecting two units.

It's a good - why isn't it more than that? I'm sorry. We thought 10 percent was a pretty good number. If you take - just take the U.S., there's 13 million - well, actually 14 million collections a year and if you have 10 percent of all of those, you know, just at that level - just if there are - if our market was just at the level of the indicators here, they already have a substantial business in hand. The exciting thing, I think, about the penetration is within that, we have some people that are 20 percent big systems and accelerating.

And so, why isn't it more? I'll tell you, a couple of years ago when we were sitting down and doing our models and projecting this business, what we projected is a lower - a lower conversion rate than our red cell index, but with a broader market. And of course, when the realities are everybody doesn't start at the same time. And we have really been surprised at the conversion rates we have seen. We have some centers at 100 percent, which we just didn't imagine we would ever see.

And so, in fact, as far as the upside opportunity for this business, we're more optimistic than we've ever been.

The concept of collecting a unit of red cells and a unit of plasma, I think, has that caught on among, you know, when you can't get two units from a donor?

Yes, in fact, when I - just to go one question, we talk about this concept of Total Automation, what that means is that they are taking the vast majority of the donors that walk into either a fixed site or a mobile and putting them onto a Haemonetics machine to collect either two red cells if they're the right size donor or the right blood type - they know the blood type, or they're doing the red cell plasma procedure.

But the red cell plasma procedure's a very important concept, and you said, and it has caught on. It let's - when they - when they're finished with that drive or when they're finished with that operation at that fixed site, they have very limited additional processing to do on those units, and I think what the real hidden advantage that these customers are seeing is that it's dramatically cutting their need for overtime, and staffing in the laboratory, and all kinds of other things that we didn't anticipate.

So this red cell plasma concept is a really important one. And again, it leads us toward - it's not exactly the same - but it leads us toward the Chairside Separator concept.

OK - thank you. operator: There are no more questions. Here is Sir Stuart with closing comments.

Well, let me end with just a final comment.

As we've already said, we've made a very solid start to and we confidently expect to deliver our year-end sales and profit targets. I also think our performance remains very strong. As Ron has explained, this is in the first half comparisons, by adverse currency movements and non-operating items. But of course, you already knew that from the comments we made last year. We expect to see particularly good growth in the second half, fully much the same pattern that we experienced last year.

And then just finally, the board's decision to authorize an additional two million share buyback really demonstrates this continuing strong confidence in the company's underlying value.

If you wish to hear this conference call again, it will be replayed through August 9th. The number to call within North America is 877-519-4471. And from our side in North America, it's 973-341-3080. And the pin number is 3386687. I'll just repeat that last one, 3386687.

Let me give you finally two dates for your diary. Our Q2 Earnings Release and conference call will be on Thursday, October 24th and our Annual Analyst meeting will be in Boston on December 5th.

Thank you for being with us and we look forward to speaking to you again in October.

Thank you. This concludes the digital replay.