Haemonetics Corp (HAE) 2003 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Haemonetics conference call.

Please note that during the course of this call Haemonetics may make statements that could be characterized as forward-looking and actual results may materially differ from actual results. Additional information concerning factors that could cause actual results to differ materially is available on the company's press release and 10-K. Sir Stuart Burgess, Chairman of the Board will moderate this call. Here is Sir Stuart.

Good morning, and welcome to the conference call on Haemonetics second-quarter results.

Let me start by saying something about our Chairman's succession plans. As we announced on Tuesday, I plan to retire as Chairman next March at the end of our current fiscal year. Mr. Ron Matricaria will succeed me then and in anticipation of that he joined our Board this week. That is an important transition. And we have taken great care in choosing my successor. I am delighted that Ron will be our next Chairman. As most of you will know he's had an outstanding career in the medical device career first, with Eli Lilly and -- he has exact will it right combination of abilities and experience, Haemonetics needs for its next stages of development and growth. And I look forward to introducing him to those of you who don't know him already.

Now to our quarterly results. We knew that this year was going to be a tough one. But it's turning out to be tougher than we thought. The base business continues to do well, but new products a growing more slowly than we planned. We made a preliminary announcement on this a couple of weeks ago and today we can fill out some of the details.

Let me hand you over to Jim Peterson who will take us through this briefing.

Thank you, and good morning. Today I have here with me Ron Ryan our Chief Financial Officer and Lisa Lopez, Senior Vice-President and General Counsel who also directs our Investor Relations.

In today's call, of course, it follows our October 7 call where, as was mentioned we had updated our outlook for Q2 and the rest of the year so during this conference call today we will fill in some of this with more comment on the second quarter, also addressing the year, fiscal year '03 and then finally the year ahead, fiscal year 04. After I've made my initial comments Ron Ryan will offer some more financial depth and relative to the quarter and fiscal year '03/'04 and then I'll return with some additional comments on the business.

In today's conference call I believe there are three key points. One is, although growth for the rest of the year will be constrained with some new product issues, we see fiscal year '04 returning us to double-digit territory, double-digit growth territory. The second point for today is upclose we confidently foresee accelerated red cell growth rates coming in the second half of this year. And number three, we have confidence that not only can we get these new product issues behind us but the more experience we have in these market places we have, the more we've seen the long-term potential of these products substantiated.

Now, addressing that first point, as you've seen the top-line sales growth for the second quarter ease from the 11% currency growth in Q1 to 8.6 for Q2. For the rest of the year sales will continue in the high single digits while we project next fiscal year to get us back into the double-digit range which we were last fiscal year.

Let's take a look at product line performance. It helps the underpinnings of this and for that, of course, I would suggest you turn to the sales analysis page of the financials, attached to the earnings release to better understand where the growth will come from. And here I'd like to direct your attention to the column on the right labeled increase, decrease in constant currency. And here I'd like to start in the disposable section, in fact, three lines down which is the red cell disposable line. And this addresses the second most important point of today and that is accelerating growth rate of red cells in the near future.

As you see, for the quarter we're reporting 32% growth. And in the important U.S. market not reported here but in the important U.S. market rate sales were up 47%.

The 32% was below our goals and Q2 as we go back and look at it we realize in blood collection, especially in red cell collection, that the summer quarter is an important seasonality, and so we did have that seasonality in this marketplace that we were not necessarily accustomed to seeing since we hadn't been in the red cell collection business to any magnitude.

As we move past this Q2 seasonality we do see ourselves moving into the 70 to 80% growth range at second half this your and, of course, maintaining this momentum through the year into next and this is based on the combined effect of three elements. The first one is that throughout Q2 we did have significant new device placements into the field. And due to the installation and training cycle we will start to see impact of these placements, in fact, starting this month in October. Secondly, we continue to get positive feedback from our customers utilizing our new filtration protocol, customers have written SOP's done validation procedures and we have visibility on the details of their filtration protocol development and so we see this finally in details starting to become a more important factor. And number three, we have attained new accounts over these last six months and these new accounts will be coming online over the next two quarters. So these are three important points that we believe substantiate our moving into a new growth range for this product area in the coming second half of this year.

Now let's look at surgical disposables. As you see surgical disposables were flat for the quarter. And as you know the OrthoPAT is the driver for the growth of this product line. On October 7 we announced a product performance and quality enhancement program that had the effect of flattening shipments for the quarter. In addition, as reported at that time, this program will impact sales for the rest of the year and will be managing the rollout of these products to ensure that only our best product is getting to the customer. This kept our total surgical sales flat as I said in Q2 and will give us a total surgical growth for Q3 and Q4 in the upper upper single-digit range. In fiscal '04 we anticipate the OrthoPAT will be back on track and starting to push that product line growth back into the teens.

Now, moving to blood bank disposables. Although they were 3% ahead of sales in Q1 they were below last year's level. Last year we had a one-time large order and absent this, Q2 actually would have been rather flatish. The blood bank product line also reports the automated cell processor, which we refer to as ACP, to 15. Although the adjusted sales would be flatish we anticipate growth based on a 510K approval for added protocols [inaudible] to 15, and we elaborated on this in our October 7 call. These protocols will see approvals in fiscal year '04 providing strength to the growth of the total blood bank disposable business.

Now let's move on to plasma. Plasma disposables were up 5.8% for the quarter. All of the growth was procedure growth. The demand for plasma continues strong. In our understanding it continues to out strip the demand continues outstrip supply. And collectors are catching up, they are ramping up in their collections to close this gap. For the year we expect to see growth from mid- to high-single digits and continuing into fiscal year '04 for the plasma product line.

Finally, equipment sales, you see they were up 52% over last year and 66%, in fact, year-to-date. As we see international sales impact of selling our new products including the Super Light for plasma collection in Japan, the OrthoPAT for surgical blood recovery. In the U.S. market equipment is generally placed at no charge in return for a disposable contract while in most of our international markets, in fact, we sell the equipment outright.

So, addressing the first point top-line growth, we have just reviewed new product issues that are constraining this year's growth to upper single-digit territory and we visited the assumptions for each new product line that we believe will allow us to resume double-digit growth in fiscal year .04.

Now Ron Ryan will give us more details on Q2 and the outlook and then I will return and then I will address the third key point of the day which is as you may recall is the growing confidence that not only can we get these new product issues behind us but the more experience we have, the more we see the long-term potential of these new products substantiated. So, now Ron Ryan.

Thanks, Jim, and good morning.

Today I will discuss the results of the second quarter, our expectations for the third and fourth quarters and the full year. And how we see FY '04. Please note that we've begun to include profit margins in constant currency in our earnings release financials. We hope this will assist in understanding our cost currency comparisons. First, addressing the second quarter just completed, in constant currency as Jim described sales increased by 9% to $87 million. The U.S. grew 13% and international gained 6% with another strong contribution from Asia. We matched up against the strong Q2 last year in which revenue grew 17% over the prior year in comparable terms.

In the quarter, we incurred an unusual provision to deal with OrthoPAT quality enhancement. Consequently not withstanding the revenue increase operating income increased 3% before exchange. By comparison, last quarter's operating income grew by 50% on the same basis.

To summarize the change in earnings per share from last year's quarter, operating income contributed a one cent per share increase, currency was an 8 cent negative and nonoperating items principally related to the lower interest rate environment were negative 3 cents per share. Our customer oriented redesign for excellence or core program generated $400,000 of savings and our TQM target this year is 3.5 to $4 million.

Moving to cash flow, in the quarter we generated $4.5 million of operating cash flow. Inventories and payables together contributed $4 million of cash, while accounts receivable increased by $9 million. Accounts receivable day sales outstanding were 78 days, up from 72 days last quarter, because customary end of quarter payments in Japan occurred just after the fiscal quarter end. The U.S.' 53 days was down three days from last year's quarter. Depreciation and capital expenditures were about equal.

During the quarter the Company purchased 554,000 shares for $15 million bringing the year-to-date share repurchase program to $41 million. Net debt increased $2.5 million to $35 million, but closed the quarter with $44 million of invested cash up from $42 million last quarter. Debt was $79 million up from $75 million last quarter.

Turning to the second half of full year, as we stated on October 7 we anticipate full-year earnings to be within a range of $1.15 to $1.20 per share on revenue growth of high single digits. The FY '03 earnings range represents a low to mid-teen cost of currency percentage from FY '02 before a foreign exchange negative of 30 cents plus per share. We see mid single-digit revenue increases in the second half consistent with our high single-digit guidance for the year as a whole. Second half sales are anticipated to increase sequentially approximately 4% over sales in the first half, reflecting seasonality. For example, last year second half sales exceeded the first half by 6% and the year before the second half increase was 5%. We're finding 62 to 67 cents of earnings per share in the second half. Weighted somewhat more in Q3 than Q4.

Included in our current current second half outlook is a one-time tax benefit of approximately 8 cents a share which most likely will be recorded in Q3 if the resolution of certain tax contingencies occurs as anticipated during the quarter.

Now, it makes a full year's income tax rate 27% which is been reflected in our earnings range and Q4 at 36% which is approximately next year's anticipated tax rate as well. Constant currency operating income in the first half grew 21% before Q3/Q4 in the 30% growth range each quarter on the strength of the revenue increases, manufacturing effectiveness and operating expenses continuing at about the Q2 run rate and increasing in percent less than sales. This translates favorably to constant currency operating margins which are expected to pick up sequentially by about 200 bases points. Negative currency comparisons are foreseen to be approximately 8 cents a share in each quarter.

I'd like to spend a moment on profit margins. You will note from the earnings release that operating margin for the first half was 110 basis points higher than last year. Yet the reported operating margin declined from 14.4% to 11.7%. This means that currency has depressed operating margin comparisons by nearly 400 basis points. This disparity will continue into the full year comparisons so that while we might be looking at reported operating margins south of 13%, compared to the 14.5% last year, this year's constant currency margin is expected to be one to two percentage points higher than last year.

Finally, reviewing the next fiscal year FY '04 we're projecting the resumption of double-digit revenue growth and a 20% increase in earnings per share. Now we'll return the discussion to Jim.

Thank you, Ron.

Now I'd like to turn to our third key point, and that is how recent market dynamics continue to substantiate the longer-term potential of our new products.

The first market dynamics I'd like to talk about is the continuing strengthening of our red cell index, in Q2 the red cell index as you see moved up to 10.4% from 9.9% the previous quarter and this is important because it shows quarter after quarter those customers that are engaged with double red cell collection using our technology continue to March forward and grow their programs quarter after quarter. If we just take the 10.4% index, for example, in Q2 this means that when the U.S. market, just take the U.S. market, and it is all at that 10 point 14% level as that selected customer base is, then that there will be $60 million in and annual sales of double red cell disposables annually only in the U.S.

A second data point that gives us confidence in the scope of this market is the collection success of the second largest blood collector in the United States, Blood Systems Incorporated. Currently 20% of all their red cells are collected with double red cell technology. When the U.S. market of achieves this level as opposed to the 10.4% of our selected red cell index, when it achieves that level, sales in the U.S. will be at $120 million annual level and we know from experience if you double the U.S. sales number you have a safe approximation of the worldwide sales and in this case the $240 million level. So we have data points here in hand that are substantiated and solid data and it is certainly an indication that people can achieve these levels, they are achieving them now and there is no reason whatsoever that their colleagues also in this marketplace cannot achieve that level in a reasonable period of time.

Now a second dynamic that gives us confidence of our new products going forward is a combination of forces encouraging the development of the OrthoPAT business. Recently published data on the growth of that marketplace which is the hip and knee market has shown a sustained 15% growth for the market. So we're in a market where not only is it basically not penetrated, but we're also in a market that is growing and in addition to that as you know, recent announcements have supported favorable rereimbursement trends in this market. We also know even though we have had a program for enhancement of the product that is somewhat dampened our sales for Q2 and Q3 and Q4 we also know that out fronts OrthoPAT customer demand continues very strong. So the Ortho as Pat based on this sort of data and these sorts of experiences we feel is going to have a sustained growth over several years.

And finally two other new product points we should not forget. One the Super Light is a new plasma collection platform that be initially introduced in Japan and is being very well-received and has arrived at the right time when we're seeing renewed growth in the Japanese plasma market. And the second new product point not to forget is that next year we will see the initial market appearance of pathogen reduction for platelets in the European market which is on track for fiscal year '04 initial sales.

Now I'd like to turn to your questions and ask our operator Dan to come online to help us through that.

I will coordinate the question-and-answer session. If you have a question, please indicate so by pressing the numbers 1 followed by 4 on your touch-tone phone. I will activate your system. Please give your name and company and then ask your question. The question line is now open.

Our first question is coming from Jason Robins from Deutsche Banc. Mr. Robins, your line is live.

A couple of quick questions. Jason Robins from Deutsche Banc here. First off OrthoPAT, Zimmer reported some very nice sales growth in their OrthoPAT in this quarter. I think they said sales were up roughly 65%. I was wondering, you mentioned that you're going through some challenges in redesigning the product. I was wondering are we still seeing some growth on the equipment side of OrthoPAT and that's what appears to be driving some of the market right now as opposed to dispose believes.

The growth is in customer usage and so we have an in their hands as we have this big 500 salesperson distribution organization between our organization and the final customer, the growth in their hands, they're seeing solid pricing out there in the marketplace which is certainly an element of that and the rest is unit growth. And so that's the best indication that, in fact, this product is doing very well in the marketplace. It's important for them, and it will be very important for us as the technology owner. We -- that's another one of the data points that makes us feel confident about the longer-term possibilities for this market. So I'm glad you referred to that. It's a good data point, it's a solid one, and we're delighted to be working with them here in the United States. Outside of the United States as you may recall we're seeing nice growth also and we will continue to develop our distribution channels to strengthen that in the rest of the world but it's a very good point and it's another data point that substantiates the fact that this is going to be a terrific product.

Super. And I was wondering, Ron, if you could possibly talk about gross margin. I know this quarter was sort of a higher mix of capital equipment sales. We saw somewhat of a depression in gross profit. As we look out to the back half of the year what sort of trends do you see sort of in gross margin, should we expect it to rebound as disposable sales and ramp back up?

Yeah, just to comment on margin in Q2, as you noticed from our release our margin is down sequentially from Q1 which was 47% over 45% in Q2. The change in sequential margin was basically the one-time manufacturing provision that we've alluded to in foreign exchange. Margins between the quarters were flat in constant currency so looking forward we expect to have -- we expect to sustain constant currency margins, of course, looking at operating margin we'll have the benefit of first of all, the sales growth which we've talked to. We'll have the benefit of manufacturing effectiveness in the second half and certainly our operating expense which is growing at the -- which would grow at the current run rate would be increasing at much less than the sales growth rate. So all those things combine to the strength that we talked to in our operating margins in the second half.

Okay. Super. And I know it's early at this point but as we look out to '04 should we expect to see sort of given the trends this year a stronger first half of '04 as opposed to growth to sort of sustaining at more of a nice trajectory in the second half of '04?

Peter, I guess you're addressing sort of the quarterly split of what we'd anticipate for fiscal year '04 is that correct?

Correct.

I think it will follow, there will be, you have to remember that our base business is very strong and will be an important driver. So, on the bottom line we have these powerful businesses of the plasma and platelets and standard auto transfusion that has their own seasonal cycle and as we know Q3 is always the strongest quarter for us. Q4 tends to fall off somewhat from that because of an important seasonal driver in Japan and then Q1 and Q2 ramps up to lead to a very strong Q3. So, if you're kind of in the mathematics, take the total number and smooth in that sort of quarterly pattern and then add to that the growth of our new products as they become stronger and stronger from quarter to quarter that's pretty much what it should be look like.

Thank you very much I'll get back in queue.

That you Jason.

Our next question is coming from Steve Hamill from RBC Capital Markets.

Good morning.

Good morning, Steve.

Couple questions. In terms of the guidance that you gave, Ron, on the quarterly split here in the second half of fiscal '03 can you go back again and talk again about the tax rate. I'm not sure it's clear to me whether or not the fact that earnings in the second half will be weighted towards third quarter is due to this tax benefit.

Yeah, let me just go over that. First of all, we said that we're planning, which -- for our first half, 62 to 67 cents of earnings in the second half. And in the absence of the tax benefit, that would still be weighted somewhat more in Q3 than Q4. And then if you factor in the 8 cents in Q3 which is our most likely scenario, that would further benefit Q3 against Q4. So operationally we're still seeing more strength which is seasonally our custom in the third quarter.

And just to make sure I got this right, you're looking for full year '03, you're looking for a 27% effective tax rate.

That's right. And you will have a 36% effective tax rate in '04? Approximately that is our current projection, yes.

okay. So what's causing the -- what's the principal cause of this effective tax rate going up so much from historical levels next year?

If you go back in history we experienced rates in the 35% range where the tax rate is a function of where you do your selling. And also special situations, often one time situations that change your tax rate. So we're most comfortable that our run rate for the tax rate in the fourth quarter and the next year are in the 36% range.

Okay. And just pushing on this point a little bit more, you mentioned that even excluding the tax effect you expect earnings to be weighted towards the third quarter which I guess is somewhat surprises me because based on recollection I thought third quarter of last year was particularly strong so it seems like you you'd have a tough comparison there. What other factors are causing earnings to be skewed to the third quarter?

Let me address a little bit the top line there, Steve, in that there are two things going on the. One is Japan is a very important market for us. And they have an important seasonality where they're very strong Q3 and Q4 is their weakest quarter, not the summer quarter but Q4. So that's one element. And secondly there's an important currency different between Q3 and Q4 as reported top-line, let's say, sales are concerned. And so in talking the top line, those are the two important drivers that account for the flow of, let's say, revenues between Q3 and Q4.

Okay. And in terms of the business lines then if I could ask a question on the red cell business which was very helpful, the information you gave to us, Jim. Are you still comfortable at this point with your $17 million guidance for full-year revenue for that product line?

Our guidance basically says that in Q3/Q4 moving into the sixty to 70% growth range for the product. Sorry, 70 to 80% growth range of the product. And so it's really a matter of taking those numbers and calculating backwards and I guess you'll end up with the right answer. I think the -- as I mentioned earlier, the important part of the -- the important part of our outlook is based on just being a lot closer to the dynamics and the details as to what's happening in the marketplace, as I mentioned, in my conference call.

We have had significant unit placements throughout this last quarter and have been going through their installation and training cycles, and so we see that that impact will start to move into quarter. We see more sales of our filtration product than in the past and that's an important ASP difference and this, of course, is the double unit collection set plus a filter to filter out the white cells of those two units of disposable. It's an important value added and basically all new customers that are starting are starting immediate with filtration which adds an important weight to the ASP. And we have new accounts, we have customers we haven't had before that are signing up and coming online. When we add them all together these give us confidence that Q3 and Q4 will look different than Q1 and Q2.

And in terms of those additional filtration revenues, are any of your key existing accounts like UBS switching over to filtration any time soon?

Yes, they are. There's switch going on also with the current customer base. But it's rather interesting. And it's a reflection of our market in that this is a big manufacturing regulated process in the hands of the blood collectors of the world. So someone who is already collecting, not using filtration, the work they have to go through to add filtration is just as much as all the initial work to even get into the -- any collection modality. So for this reason, it's easier for new customers just to start with filtration, whereas the customers we currently have had to go through a whole 'nother step again which was as complex as the first step they take just to incorporate filtration into their sets. So they're coming on stream but the fact is they're coming on stream more slowly than the customers that are absolutely new to us.

That's very interesting. Thank you very much and I'll jump back in queue.

Thank you.

Our next question is coming from Sanjiv Arora of UBS Warburg.

I wanted to push you a little bit further on two issues. The first is dealing with OrthoPAT. It's specifically trying to nail down the quality issues involved ere. And what I want to talk about is really the steps needed to resolve those issues in your mind and whether or not they need regulatory approvals to get those done and also if this results in any significant removal of devices currently in the field.

Okay. I'll get to your second question first, no, the changes that needed to be made to the machines can be done in the field. They're minor changes and so there will be no equipment coming back associated with this, number one.

Number two, the end happens it's that enhance meant that we went through, I reported I think on October 7, there are 12 different unique enhancements. They are the sort of thing that one starts to identify, once you have high volume in manufacturing a product. When you're starting with your first several thousand units you have one experience, when you get to the tens, and 20s and 30 thousands of a unit you have quite a different experience and one has to learn from this quickly and put those product changes and enhancements back into the manufacturing cycle. This is very much a manufacturing robustness question, and so we in the case of the OrthoPAT know that the OrthoPAD is more sensitive to these issues than any other product we've ever had out there. In cardiovascular, auto transfusion, there is an operator that is nearby. Operator may be running two or three machines but there is an operator. In the case of orthopedics we're sitting in the recovery room with the I.V. pump in a circulating nurse environment. And so only when an alarm goes off in the middle of the night or whenever it is, does a circulating nurse come to that bed and see what has to be taken care of. And so we know it's very sensitive to minimizing the number of times the nurse has to be called to the bedside for any adjustment or any attendance to the machine that may be need. So we know successful experiences will continue to drive the growth of this product, and so we decided to take all of these product enhancements, all smaller things that all add up to a good experience.

We decided just to ram them through, all the products that will be flowing into the field as quickly as possible. And any scrapping or anything else we had to do to make that possible we just stepped up and did it. That was really an investment in the future of this product.

So it's not one thing, it's a total product robustness step that we took, but it will be very important to continue to grow or continue to push this growth forward and earlier there was reference to the -- what Zimmer is reporting with the product. They were really enthusiastic about it and have shown terrific growth results and we want to make sure that the quality of the product will be there to sustain the momentum that they see in the business.

Okay. And Zimmer also mentioned that they have had roughly a $10 million run rate with that product. Any idea in terms of how many procedures that entails?

Well, no, I think you'd be best to talk to them.

Okay.

On that question. That'd be the best -- We know what they're running in procedures, but, of course, we're not at liberty to publicize that.

Sure.

I imagine you could probably call one of their customers and find out what they're paying for a disposable and divide and you'd be there. It's clear that it is growing. We are at 50% growth range, in a product that already has base of some substance so that I think one can probably triangulate in on that.

Is there any concern that as you delay the ramp up of this product that given the fact that you're using a distributor-based sales force, i.e. Zimmer, that as you pull back and need to be revamped that there may be a delay in that ramp up time.

There is a pause certainly from Haemonetics shipping to shipping to the final distributor. And the final distributor also there's been a pause in going to new accounts when we try make sure that the current accounts are taken care of because once you establish an orthopedic practice that starts to use the product there's a lot of growth potential right there. You don't have to go to a new account and so the strategy really is then to do a terrific job for the people that already are committed to this program and somewhat delay opening up new accounts. So there will be that ripple that will flow through the system, however, the guidance we have given you I think on that fully takes that into account. As far as our surgical growth rate you may recall we are seeing it getting back into the total surgical business, getting back into the teen growth range starting in fiscal year '04.

The second question really [inaudible] on the red cell business, and you had mentioned earlier that not only are you seeing increased usage which is indicated with your index, red cell index, but you're starting to penetrate new accounts. Can you talk about how many accounts actually started fiscal year '03 and how many you have today as you went through the first two quarters of the year?

Well, I can talk to the fact that we are adding some very important new accounts as we speak. These are people that had not been Haemonetics customers in the past, had basically been with our competition for other products and there are people who made the conscious decision knowing even if there are competitive products out there, made the conscious decision to become Haemonetics customers. I probably can't give any names right now because we haven't, you know, cleared with them this area, but one thing I can say is we have had some new very high profile names join the team. So we're growing past BSI, UBS's of this world and this will, this is an important part of our growth going forward.

We have several growth, as we refer to them as silos, our ASP is going up as we I know corporate filtration into our elections collections. Growth with our current accounts and we had a new account initiative that is paying off very nicely. Those are, for example, three different growth silos that will continue to build the business. The good news is we have had new competitive accounts that really were in the competitive arena of signing up and they're doing that.

They're doing that because they have to solve this problem of blood shortages. For those of of you who dial into the American Blood Center website from time to time to check, they report every week what is happening out there with blood supply in their membership and basically this is all the non-Red Cross part of the United States. And Tuesday this week they were reporting 38% of all of their centers had less than two days' supply of red cells and 15% had less than one day. Now one day is absolutely critical. If you're less than one day and you have an accident of magnitude amongst your hospitals you're just flat out of blood. And so this is the -- you know, this is a situation with the market out there driving dynamic and this is reasons that probably the primary driver that has pushed customers where we did not normally do business to start to sign up and move these programs forward.

Great. Last question, what is the status of the product development cycle with regards to taking advantage of the Serous [ph] launch?

Talking about platelet inactivation?

Exactly.

The platelet inactivation process is starting in Europe. As you know, the Serous [ph] Baxter model, they do have approval CE for a good part of their system. We are part of filing with them to get approval for their inactivation system with our blood collection technology. It's moving along well and we fully anticipate to be in business there in fiscal year '04 in a couple major important countries starting early in that year and building throughout the year. We're not there yet. None of us are completely-we're not taking purchase orders here in October yet but certainly we'd anticipate early in our fiscal year next year to be in a position to start to take to purchase orders and ship product.

Thank you.

Our next question is coming from Robert Goldman from Buckingham Research.

Got a few financial questions. First your guidance is still 1.15 to $1.20 for this fiscal year; is that correct?

That's right, Bob.

Does that include 8 cents per share tax benefits?

It does.

Near as I can tell on the October 7 release when you also mentioned a $1.15 to $1.20, I didn't see any reference to the tax benefit.

We didn't refer to the benefit in that release. You may recall our tax rate last year was 28%. This year's projection is 27%. So it's just a question of timing, the first two quarters of this year, we're at 31%.

What changed the last two weeks to compel you to speak of this tax benefit in the second half of the fiscal year?

The purpose of the call on October 7 was primarily to talk about our early operational expectations for Q2 and also to give new information about our expectations for the balance of the year and to talk directionally about our plan for '04.

Couple questions on sales. It's hard for me to really tell from your income statement in the second quarter, but did currency help or hurt your revenues this quarter?

Currency was about a 1% factor on revenue in the quarter.

But it helps or -- there's a number here of 2 million 724.

Go to the press release where we show for the second quarter, the increase reported was 8%.

And I see that, I'm-

The currency was 9%.

What does this 2 million 724 foreign exchange impact on sales in your income statement?

Yeah, what we try to do is restate the revenues that are reported at the rates that are used to translate the profit and loss statement which are the current rates every quarter. To be helpful, we restate those two revenues that have been recalculated at an exchange rate which is using a [inaudible] of currencies for the yen and euro particularly. And that's how you can see the difference between the reported numbers which have some currency fluctuation in there. That's the 7.8% change and the constant currency comparison which have been restated, last year's restated as is this year as what we call plant rates and that's 8.6% change.

I want to make sure I'm understanding this properly because every other company that I follow and we want to wants to figure out, for instance, exchange impact we take the currency impact and divide that by the reported sales of the prior year. So in this case we'd be 27, 24 divided by the prior year total sales of $80 million 704 which would be about 3%.

Yeah, I think for us you can't really do it that way, Bob, because among other things we have the impact of our hedge gains and losses also reported on the sales line. So the way we look at it internally and the way we report it for comparability is to use a basket of currencies which today is small basket of really two currencies to restate both the current year and the prior year for comparability.

The final question on that then, if we take out your hedging which I guess I didn't realize was part of revenue if we take that out, did currency help you or hurt you in the quarter?

We don't break out impact of hedging. I can tell you with the effect of FAS 33 last year we're required to reports our hedge gains and losses on the revenue line and because they have no cost or expenses associated with them, the hedge gains or losses appear on the sales line on the gross profit line and on the operating income line with the same amount. And so sales comparisons between two years include a comparison of the relative gains and losses in the current year compared to the comparable gains and losses in the prior year.

Okay. Thank you.

Our next question is coming from Stan Mann of Brawny Investments.

Gentlemen, I think you know me I've been on the call many times. I guess I don't fully understand the numbers over the years. And I have a basic question that needs to be resolved. Gross profit just doesn't seem to grow even though your volume has grown and your efficiencies have grown and all of these core savings have grown. And we always seem to be on the back edge of either hedge or currency losses.

So can somebody explain why our gross margins have not improved above 50% where I would have expected them to be now? Have we have no price increases. Can somebody give me a simple answer rather than, you know, a 12-part answer? Something doesn't seem to be correct here. We have core savings, all these savings every year and it kind of lays there. Jim, could you speak to it so I can understand it.

I'll have to address that. The first thing I would say is that the if you go to the trade weighted dollar which is recently published in the "New York Times," the dollar has been strengthening against the trading partner's currencies, particularly Japan and Europe since 1995. And so accordingly the currencies in which we deal have been incrementally weakening over that period. We'll all recall back in a periods in FY '96, 97 where the company's gross margins were north of 50% and certainly we're doing everything we can to get those margins back to where they were. The things that we do do to deal with our margins exclusive of currency, are first of all, we do have the core program as we've alluded this your is looking to 3.5 to $4 million of benefits. Last year it was close to $4 million. Every year since FY '99, -- When the plan was initiated it was $6 million benefit.

The currency factor over the last year has been kind of flat from the chart that I look at so, have you had any price increases the last three years? In the product lines?

Yes, we certainly have we've had good price increases this year, in fact. So pricing has not been the --

When do you expect gross margins to start leveraging up, simple question?

Well, there are two key assumptions there, number one that exchange rates would move back in the direction that they started seven years ago, that would be a big factor but the factor that we work on and the factor we can control is, as you you say, pricing and cost reduction and so those are the things that we work on every day when we come to the office.

I'd like to mention one other element, over time we have moved more after our production cost into local currency to match constant revenues. We certainly have done that in Japan. Where every year we've had a larger portion of our total product cost in yen as opposed to dollars. We have a manufacturing facility in Europe that is a very important supplier into the European market and that is also provided, been part of trying to position ourselves for the inevitable currency movements. So we are a multinational company. We do have 60% of our business roughly outside of the United States or 50%, a bit more, and we are doing the best job we can in as you know, we have an important hedging program to provide some sort of stability and predictability in that environment. And we're placing our manufacturing where we can to provide us again an opportunity to be coupled with this but the fact is currencies do move and currency does have an impact on the Company.

We hope that keeping our current rates as we move into fiscal year '04 we see favorable signs that'll become less, certainly less than an element that it's been this year, I mean this year it's cost us a comparable year to year of 32 cents a share, we do not see that next year. We see some things to the contrary so that is one of the things that shows up in that gross profit line and the fact is the biggest driver of the movement.

Second question, is core applied to SG&A and R&D?

Core is a program that runs delight the whole company. And so we're continuously leaning and continuously improving the quality and the effectiveness of our services using the same set of tools so yes, that does show up everywhere.

Why is SG&A up disproportionally had year versus last?

We're trying to build some new businesses out there in addition, this is not about shrinking SG&A and R&D for the bottom line. The cost of bringing new products to market in this industry is high for everybody. It's high for all our competitors and for us and so SG&A is only growing to the extent that we're investing in the future markets and the future opportunities of the company.

Last question, how many shares, Ron, have we repurchased this year? The company?

$41 million.

How many shares?

Q1, I'll have to dig that out. Q2 is as I indicated in the call.

I think it's about a million four.

A million four, thank you.

Our next question is coming from Dana Walker from Calmar Investments.

Good morning.

Good morning, Dana.

If we were to take the 8-cent tax benefits and subtract that from the 62 to 67 cents guidance for the second half, and we were then to compare that, what appears to be 54 to 59 cents the back half guidance to the Q2 quarterly pace, it would seem to suggest that on higher revenue, your EPS will be or perhaps your operating income might be lower than the second half -- pardon me than it's second quarter level once we add back the OrthoPAT. Is that a factual statement or is that not the correct way to look at it?

Just to once again to break down the second half of the year, aside from the foreign exchange impact which we project is eight cents in the quarter, first of all, the second half will have mid single-digit top-line growth, will have better manufacturing efficiencies, will be constraining our operating expense growth to a growth rate less than our revenue growth and because we're looking at year on year comparisons, Q4 -- Q3 is generally seasonally stronger than Q4. So if you factor all those things together, on that 54 to 59 cents, that's the basis that we said that in that 54 to 59 range we're looking at Q3 to be somewhat stronger than Q4 and then adding back the eight cents.

If we add back the OrthoPAT provision to Q2 you reported something like a 29 or 30 cent quarter, correct?

That's right.

Are you expecting operating income per quarter in the second half to be higher than that adjusted level in Q2? Because revenue was higher, manufacturing efficiencies are better and operating expenses are constrained, it would seem to me that some of that would flow through to the bottom line, everything else being equal?

We're expecting our operating income and constant currency to grow approximately 30% each quarter over last year's quarter.

I'm trying to compare --

I don't have the sequential breakdown in front of me, but that's our year and year comparisons.

Is there some nuance related to currency or mix that would mean that Q3 would not compare advantageously to Q2 even if you don't have it in front of you?

No.

Well, perhaps I'll follow this up online or off-line.

Okay.

Second item, as we look towards your preliminary guidance towards next year and what you said in the earlier call in October, I presume that in your guidance then you knew that the tax rate would likely be meaningfully higher next year than it will turn out to be this year when you put together a 20% type growth objective for next year.

Yes, we did.

Because just doing very simplistic math that would suggest that the support of 20% scenario would -- you would require something like 34% pretax income growth, not getting too deeply into how many shares are outstanding and how that might change over the next 12 months.

The primary factors in the FY '04 projections are first of all, the double digit top-line growth where we broke that down by product in the last call. Secondly a continuation of operating leverage that will affect the year including operating expense constraints such as that operating expenses grow significantly less than the top line along with core cost improvements. Another factor is the change in the tax rate and a final factor is the benefit of currency should foreign exchange rates continue in the next year as they're currently running Remind us, Ron, your present assumption as to what your reported operating margin will be like for this year on the recomputed number?

South of 13%.

And yet on a constant currency basis that number is 14 to 15%, correct? Or 14% plus?

Well, against last year's, yeah, constant currency margin.

And you're of the mind that you are constant currency margin will progress nicely next year leveraging revenue growth and mix?

Yes.

Final, I guess that's it for me right now, thank you.

Thanks.

Our next question is coming from Steve Hamill of RBC Capital Markets.

Yes, just a couple of follow-up questions for you. With regard to the blood bank business that was down fairly significantly here as the quarter and the press release does talk about increased collections of double platelets in Europe, that would seem like a trend that probably is going to be with us for quite some time. So is this at all a change to your outlook for the blood bank business long term that it may actually continue too decline going forward?

Yeah. I guess the question would be at what, what is the rate of change then, what is the limit to which two unit collections replacing one limit can go and, of course, what we're talking about here is donors that have high platelet counts first of all, in other words, it's a discreet set of donors, can go on these machines and within their 90 minutes, within their normal time that they would be on a machine, that they can, in fact, the technology, today's technology can, in fact, get twice as many platelets as you could previously.

The first important point is it's limited to a particular set of donors and so that does limit the extent to which two units can replace one unit. And our sense is that we probably been through most of this already. There's probably a little bit of that change still ahead of us but that the worst is not ahead, it's pretty much behind us here. So going forward in the platelet area I think in the number of collections we're going to be somewhat stable in the number on the positive side. We have more and more white cell filters that are playing an important role in collecting those platelets.

In other words, every time a white cell filter is added to one of our disposable sets our ASP goes up and secondly, on the positive side, that there're going to be only two [inaudible] manufacturers in the world that are going to have packages in activation as a value added for their products; one is Haemonetics and the other of course is Baxter and there are many markets internationally where we just are the largest supplier in that field and so pathogen activation with our current market position in fact will make us stronger. Yes, the business is somewhat flat, within that flatish business we have these different things happening. One going to doubles but on the other side increase in ASP's through filtration and eventually value added for pathogen inactivation.

Is it safe to say that you expect to start generating revenue off of the intercept system for platelets in fiscal '04 that at some point in fiscal '04 the blood bank business turns around, perhaps moves into a positive growth phase.

We have two things happening there. Yes, the pathogen inactivation value added and in addition of course the ACP 215 will continue to show strength within that as we get through our new regulatory approvals because it is part of that total number. So longer term we would hope to see, and our goal would be to see a strengthening. And a longer term growth trend albeit not like the short of thing we're going to see in surgical growth and red cell disposable growth, certainly.

And my next question is, in terms of the Super Light which I'm assuming is probably a pretty big contributor to the [inaudible] showing in the equipment line here this quarter. Are you already getting disposable revenue off that? Is that already flowing into the plasma business line?

Yes, it. You have to remember though the Super Light, what it does is it makes us more competitive in a market where we're already pretty will established. You may recall that those 18 million plasma collections a year worldwide, we bleed slightly over half of those, so we have a 50% plus market share. What the Super Light does is it makes us even more competitive and so as those -- as that market grows, as there are incremental people collecting plasma that we believe we have the best product out there for that. The Japan market has bounced bad. It's shown some nice growth here over the last twelve months. And so we believe that we're in the position to certainly without question be the vendor of choice because of the Super Light. Now the Super Light is a new platform and after Japan we will start to see that we emerge in our parts of our plasma business again giving us a competitive advantage there.

Part of also the plasma business in a broader sense we have to remember that we are also in the data management part of plasma collection. Again another reason, another way that we get more value added for each collection. The fifth dimension product line is really the only -- come to the United States here, is the only fully FDA approved patient data management system on the marketplace. It's at a time when the collectors are under a lot of pressure, regulatory pressure, [inaudible] errors, not have to have [inaudible] spreadsheets and have annual [inaudible] of national processes, and so we believe that in this field, we have a new technology platform on the front end, but in another level, it is not about the machine, it's about being able to supply a complete package. And our Fifth Dimension product in this area is a very important part of our being highly competitive in the automated plasma field. And getting more [inaudible] in every selling per procedure, per donor, and per unit in the plasma collection.

And then the last question for you, in the working capital ratios this quarter, looks like they deteriorated just marginally from the prior year and for prior quarter, is this because of a bit of a slow down in terms of revenue or it is more attributable to currency?

Yeah. The working capital was beneficial as I mentioned in inventory and accounts payable compared to the last quarter. Our inventory turns for finished goods which is our largest controllable inventory, our turns have steadily been moving back to five turns. The primary factor for working capital in the quarter was 5 to $6 million of collections in Japan which now fall outside of our fiscal calendar. So we expect that our working capital will continue to grow with revenues with some continued improvement in inventory turning.

Okay.

Once again, if you do have a question or comments you may press 1 followed by 4 on your touch-tone phone.

Our next question is coming from John Harlow from Rowe Henley.

Can you hear me okay?. I've got an editorial to make. That is company that a couple weeks ago made an announcement that they had over estimated or overforecasted their revenues by amount $30 million. I've got a number of questions. On the conference call I think a lot of investors think were critical. One of them was just asked several ways about the tax credit of which [inaudible]. I think the answer to question we deserve in terms of clarity. So my hope going forward is in your analysts meeting with the new Chairman coming on board that you all take a more careful approach in terms of how you present the information about what the Company's progress is and a more accurate and more fully given disclosure in terms of where you think you're going. There's always a lot of optimism and then little things pop out here and there and I think today's tax credit would be one example. I'm sure the Company's out look is great, but I think if you'll listen to a replay of the call you hear a lot of frustrated investors asking questions and they're having to ask them several ways to try to get a complete answer. Thanks.

We appreciate your comment. And we are struggling with trying to be as transparent and as easy to understand as possible. We certainly do not have a intention to obscure any of these things. An example is we do report progress certainly from a sales viewpoint by product line in some detail both currency neutral and currency included. We do try to give as much as information as possible. But we realize there's a lot of room for continuous just improvement here, especially in a Company that has strong international business. Our technology has travelled very well in Japan and very well in Europe. We have we have manufacturing scattered around for $350 million Company, there is a lot of complexity there and we realize that as in everything else we do, we have to be in a continuous improvement mode. Your comment's very well taken and we look forward to addressing that more during the analysts meeting on December 6.

There are no more questions. Here is Sir Stuart with closing comments.

Thank you. I'd just like in closing to make three additional points. Firstly, I don't think you need me to tell you that we do not like to disappoint our shareholders, particularly since we have carefully built up a reputation over fourteen consecutive quarters of delivering what we promise. Our firm intent is not to get ourselves in a situation where we disappoint again. Jim as explained the reasons for this year's revised guidance and we've done our best to set out the situation as clearly as we can. I think you should note that the plate [ph] remains strong. The prospects for the new products remain bright, and it is certainly our intention to return to a more typical growth pattern next year after temporary set back.

The next two points cover corporate governance. The first of these concerns the recent recommendations in the regulations by the New York Stock Exchange and the SEC. These have placed a number of additional obligations on companies and everybody's responding to them. In our case, we've undertaken a review to determine where we stand in relation to the new requirements. Our current practice is perhaps we think somewhat ahead of some companies but clearly we have to make some changes. And you should know that we have a program in place to bring these along in timely fashion. The second corporate governance point concerns the use of company stock and long-term incentives for senior management and other key employees. We believe that it's in the interest of our shareholders to include a stock based component in the compensation of senior managment and our practice in this regard with, for example the use of stock options, has been in line with that of industry in general and our sector in particular. However, we recognize that there is increasing shareholder concern in this whole area of long term incentives. We want our compensation practice to be competitive and cost effective to align senior management's interests with those of our shareholder and of course to comply with current law and development industry practice. And accordingly we've asked Towers Perrin to review our current practice and to advise us on changes we should consider. This is an important exercise and in due course, we'll let you know the outcome.

Finally, let me give you some items for your diary. Our annual analyst meeting has been scheduled for Thursday, December 5 at the Seaport Hotel in Boston and invitations will be going out shortly and details will be available on our website. Our Q3 earnings release and conference call is scheduled for January 23 next year and then as a reminder today's call will be replayed through November 7 on telephone number area code 973-341-3080 with a pin number of 3529125 .I'll repeat those, that's area code 973-341-3080 with a pin number 3529125. And then as always, please feel free to contact the IR team here with any questions or feedback. And we look forward to seeing you as our December analyst meeting. Thank you.

Thank you, this will conclude today's teleconference, you may disconnect your lines at this time and have a wonderful day.