Haemonetics Corp (HAE) 2003 Q3 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 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 10K.

Sir Stuart Burgess, Haemonetics' chairman of the board, will moderate this call. Sir, you may begin.

Good morning and welcome to Haemonetics' conference call on our Q3 results.

Let me start with Jim Peterson's retirement. As you will have seen from today's press release, Jim Peterson intends to retire as CEO in March, at the end of this fiscal year. Jim has been with Haemonetics for over 20 years and in that time, he has made a considerable contribution to our growth and success, first in building our international business, which continues to be one of the major assets of the company and then over the last five years, as CEO. He led the turnaround of the company in 1999 and he has been the architect of our improved performance and enhanced growth prospects. We all wish him well in his eventual retirement. Ron Machacaria (ph), my designated successor, is leading the search for a new CEO and Jim will remain available after the end of March to help with the new CEO through his transition period.

Now let me turn to our Q3 results. I'm pleased to say that total sales and profits are both in line with expectations and give us confidence that we will finish the year with revenue growth in the mid to high single digits and earnings per share in the range $1.15 to $1.20, matching our current guidance.

Let me hand you over to Jim to give you the details.

Thank you, Stuart.

Today I have with me Ron Ryan, of course, our chief financial officer; Lisa Lopez (ph), senior vice president and general counsel; and Jessica Dumphee (ph), our director of investor relations. During today's conference call, I will comment on the recent results and after that of course, Ron Ryan will offer some additional financial insight and describe expectations for the year, then I will return with some added information on the business. There are three key points that should be taken from today's call. One is that both the OrthoPAT and red cell customer acceptance continues strong. Two is that our operating profits continue to grow in the 20% range, although obscured this year by the effect of foreign exchange. And the third important point is over the longer term, transfusion industry dynamics have never been more positive for Haemonetics' new products.

As you have seen from the release, top line sales growth for the third quarter was 4% and constant currency for the year sales will finish in the mid to upper single digit growth range. Now I would like to ask you to take a look at the product line performance as appears on the sales analysis page, one of the financials attached to the earnings release. Please look at the column on the right labeled increase, decrease, percent and constant currency. Let's start with surgical disposables, you see these were flat for the quarter. As you know, the OrthoPAT will be an important driver for the growth of this business.

On October 7th, we announced a product performance and quality enhancement program that has the effect of flattening Haemonetics' total shipments for the rest of the year that was mentioned at that time. But more importantly, if we go to see what's happening at the customer level, as you know, we have one large key distributor, Zimmer (ph), that is between us and our customer. Now, at the Zimmer level, current sales do not, of course -- are not of course flat, but instead they have been continuing at a 50% year-to-year growth rate. So they see the OrthoPAT continuing to grow, continuing to strengthen. Meanwhile, as Haemonetics work our way through our product improvement program trying to get our best products in customer hands -- that is not reflected at our level -- but in the quarters ahead, the OrthoPAT as reflected at the Haemonetics level will be back on track pushing a strong total surgical product line growth.

Now let's move to blood bank disposables, although the large and important platelet business for us was flat, blood bank disposables in total were down 2.5%, due solely to a large order last year for the automated cell processor ACP 215 that was not reported this year. Going forward in general, the blood bank disposables will continue flatish. Next is red cells, red cells grew 46% for the quarter. We seem to be pushing a consistent growth in this range, although in the important U.S. market, Q3, sales were up, in fact, by an exceptional 110%.

So we have a picture here -- while the U.S. market grows briskly, the European market is growing less than expected, which when combined with what seems to be the natural ability for our customers to absorb change is giving us this 46% growth range we saw in Q3. Now, 40-50% growth range is not bad. We have been working hard to accelerate beyond this, and continue to be optimistic, however this is the growth range we are exhibiting at the moment.

In Q3, we had several new account wins for places we've never done business before, and in fact, one was our first test of nose-to-nose competition with the other people out there and I'm happy to report that we won that competition, clearly. And as you know also, we started expansion in Q3 with the biggest single blood collector in the United States, the ARC. This is all good news that insures a continued important growth momentum in the future.

Let's look at plasma disposables, they were up 3% for the quarter. All of the growth was from procedure growth in Europe, Japan and Asia markets. For the year, we expect to finish showing mid-single digit growth in the plasma business. Equipment sales were down, but you may note up 34% year-to-date, which highlights the fact that equipment sales are lumpy from quarter-to-quarter, but they have shown nice strength from the year-to-date. Miscellaneous and service growth was up 93%. Now, this shows the impact of the Fifth Dimension donor management products included in this year's sales, whereas last year, as you may recall, the acquisition had not yet been consummated.

Something else that is worth noting and that is our business in the Far East. And here I'm telling you about Asia, less Japan. This business has been quietly growing along at a very nice clip and is having another excellent year, driven largely by China, although Taiwan and Korea are also important contributors. China itself is trending to become the size of our total business in Germany somewhat down the road ,and in fact, is one-third of the way there. The total Far East business will finish with a 20% plus growth over last year and the outlook appears similarly strong.

Now let us get more detail on this from Ron Ryan.

Thanks, Jim and good morning.

Today I will discuss the results of the third quarter and the year-to-date and the outlook for the fourth quarter and the full year. First addressing the third quarter, in comparable foreign exchange terms we leveraged the sales increase over last year's quarter with a gross margin 90 basis points improvement and flat operating expenses into an operating income improvement of 24% in comparable terms. The operating income gained before currency effects produced a contribution to earnings growth of 6 cents per share, which, in fact, was most of the 7 cent increase in reported earnings. The quarter included a favorable 6 cents of earnings when compared with last year's quarter from an anticipated income tax benefit and 8 cents per share compared with a 31% tax rate in Q1 and Q2.

Non-operating factors with foreign exchange netted to a 1 cent favorable, and those are the tax rate benefit, 4 cents per share favorable from lower shares outstanding, negative 1 cent from the lower interest rate environment and negative 8 cents a share of foreign currency comparison. As a result, the 20% increase in reported earnings was almost entirely from real sales growth and operational effectiveness. Our Customer Oriented Redesign for Excellence or CORE program generated $900,000 of savings, bringing the year-to-date, $2.4 million of cost reduction. Our TQM target this year is north of $3 million.

The year-to-date P&L shows broad operational gains over last year. In constant currency, sales have grown 8%, gross margin is 30 basis points over last year. Operating expenses have increased at about half the rate of sales growth. These operating results have combined to yield a 22% increase in operating income with currency held constant, equivalent to 15 cents a share of earnings. As shown in the press release financials, the constant currency operating margin is up 140 basis points over last year. But then negative interest rate related comparisons and currency partly offset by the favorable tax rate and lower shares outstanding together caused negative 29 cents per share of non-operating declines that brought the nine-month reported earnings per share to 95 cents per share, which is 12% below last year, as reported, but 11% higher in constant currency.

Moving to cash flow, operating cash flow in the quarter was $9 million, provided by $6 million of net income after adjustment for future receipt of the tax benefit, plus $1 million from working capital reduction and a $1.5 million excess of depreciation over capital expenditures. Working capital generated cash because of flat receivables and $2.5 million of lower inventory. Accounts receivable, representing 78 days outstanding, the same as last quarter. International DSO reduced from 94 days to 89 days, reflecting equal reductions in Europe and Japan. Domestic DSO increased five days because large customer payments were received just after the end of the quarter. Disposables finished goods inventory turns were 4.9, improved from 4.7 in Q2 and 4.4 in last Q4. Equipment inventory has declined $2 million.

Overall, the business generated $9 million of total cash flow, which is a change in net debt before currency translation, reflecting the cash from operations. This $4 million of share repurchases were offset by other sources. During the quarter, the company purchased 185,000 shares for $3.9 million, for nine months, the buy back is 1.6 million shares for $46 million. And of the current $50 million authorization, we have purchased $19 million worth of stock and can therefore spend another $31 million to buy back shares.

Our balance sheet remains strong. Cash and short-term investments were $50 million, up from $44 million in Q2. And the quarter debt is $77 million, compared with $79 million in Q2, and net debt was $27 million, down $8 million from Q 2 reflecting the cash increase and the debt reduction.

Turning to the fourth quarter and full year, we continue to target full year earnings to be within a range of $1.15 to $1.20 per share on mid to high single digit revenue growth. The FY 'O3 earnings range target represents a low double digit to mid-teen constant currency percent increase from FY '02. We anticipate the foreign exchange will negatively affect the year by approximately 33 cents a share. For Q4, we are targeting a mid-single digit revenue increase on a reported and constant currency basis. We project the constant currency operating income in Q4 will grow in the 30% range on the strength of the revenue increase, manufacturing effectiveness and operating expenses continuing at about the Q3 run rate and again growing slower than sales. We expect a negative Q4 currency comparison of up to 10 cents per share.

As a final note, Baxter International has announced their intention to acquire, subject to regulatory approval, the plasma collection operations of Alpha Therapeutic Corporation during the first half of calendar 2003. During the first nine months of our FY 'O3, our sales to Alpha were approximately $15 million. Sales of disposables to these centers are under a multiyear contract with Haemonetics, expiring in 2005. Due to uncertainties about the future of the Alpha collection centers, we are unable to estimate the impact on future operating results.

Finally, as for FY 'O4, in October we communicated our preliminary targets for FY 'O4 and we're now fully engaged in the planning process and plan to provide more information about our operational outlook at the time of our Q4 call. The two things I can say about FY 'O4 are, first of all, the foreign exchange impact of currency rates prevailed that exist right now will be approximately 10 cents per share favorable and as previously reported, our income tax rate is expected to be approximately 36% next year.

Now I will return the discussion to Jim.

Thank you, Ron.

As you have seen in Q3, we were matching up against an 18% growth in Q3 last year, so top line Q3 growth was never expected to be a growth record setter. And as you know, the quarter was antagonized by the OrthoPAT quality enhancement program. With all that, year-to-date before currency sales were up 8%, as Ron had mentioned, and operating profits 22%, which leaves us to the key points I mentioned earlier. The first addresses both the OrthoPAT, as you may recall, and red cell business, where customer acceptance continues strong. Customer level OrthoPAT sales, as I mentioned, continued to grow in the 50% range, red cells continue to have important new customer wins and this quarter saw the launch of the implementation of this technology, as I have mentioned in the biggest single blood collector in the U.S., the ARC.

The second important point is when stripping away currency impact as Ron had walked you through, that Haemonetics has a consistent operating profit growth in the 20% plus range, both for Q3 and the year, our people, products and processes can continue to deliver certain profit growth beyond sales growth for some time going forward. And the third point finally, the transfusion industry dynamics have never been more encouraging for the products, especially our new products.

The demand for safer and available blood continues to ratchet up, year by year with no end of this trend in sight. Examples of this - just going back to last week, as one scans through what is happening in the blood supply situation, here in this country, we saw elective surgeries being canceled in Norfolk, Virginia and Houston, Texas, due to blood shortages. Rationing the blood was announced in Pensacola; St. Petersburg, Florida; New York; Newark, New Jersey; San Francisco; Los Angeles; San Diego; San Jose; Detroit; Philadelphia; Washington; all of North and South Carolina; Akron, Ohio; et cetera, we could not have said anything like this last year at this time. This is an important dynamic that shows no indication of reversing, and as you know, there is only one way to get more blood from fewer donors and that's with technology, and Haemonetics' double red cell technology does that. And in fact, Haemonetics' auto transfusion technology, where we are the clear marked leader and have this new opportunity in orthopedics, using the patient as his own donor is the other technology lever to get more blood into the system. So, in total, Haemonetics is really in the right place with the right products at the right time.

Now we invite your questions. Hello, operator, did you -

Thank you, ladies and gentlemen, the floor is now open for questions. If you do have a question or a comment, you can press 1 followed by 4 on your touch-tone phone at this time. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. Once again, that is 1 followed by 4 on your touch-tone phone at this time.

Our first question comes from Stan Main (ph) of Brawny (ph) Investments. Your line is live.

Yes. Thought I would be last in line. I have a question on the stock buyback and my question is why not a Dutch auction or a quicker way of - or acceleration of a buyback? Seems like it is going very slowly.

This is Ron. We are always looking at different ways to return value to our shareholders and certainly, that is a proposition that comes up from time to time. We haven't entertained it recently.

Second question is on foreign exchange. Seems that the other companies with larger foreign business have dramatically more positive foreign exchange effects. We seem to always be on the negative side. Can someone speak to it clearly?

This is Ron. I will try to speak to it clearly. We deal with foreign exchange in two ways. Of course, 60% of our business is foreign and 80% of that is done in foreign currencies mainly yen and Euro. The first thing we do is an internal hedge, or a natural hedge, is that we have local operations increasingly, we are sourcing five (inaudible), we have a factory in the UK, we are sourcing more product for customers in Japan, which is denominated in yen. But after the natural hedges are in place, we still have an exposed position in currency.

Our practice has been to sell forward for one year our anticipated disposables revenue stream and we do that not to avoid volatility, because volatility is inherent in the spot markets, but rather to give us a window of productivity so that we can do a better job of planing our resource allocations, particularly behind new products. Do a better job perhaps in communicating the impact on a head's up basis to others, and also we believe that because foreign exchange also represents cash flow it's prudent in our cash flow planning to know ahead of time about cash fluctuations going forward.

As Ron did mention, next year, he did say that we will have a 10 cents per share positive impact on the currency, so this has been a tough year for us because we hedged a year ago. However, right now, as you know, the Euro and yen is in the process of strengthening dramatically and we will be seeing that start to come into next year. So, that will be some of the -- we will be talking more positively about it in the year ahead.

A quick comment on returning shareholder value and buy back, Haemonetics is not without important opportunities to use the balance sheet to continue to build the company. As you know, two recent examples of that -- one is we used our balance sheet to become a player in pathogen and activation in our platelet business, so really it is only Haemonetics and Baxter that are out there using the benefit of the Cirrus (ph) technology to take -- to create safer platelet products in this world, so that is one example. Another is our acquisition of Fifth Dimension, which is a very important platform in the highly regulated world of data, management and exchange. As you know, they have an absolute unique product, a unique product position and this will be leveraging into our business in coming years. As we mentioned before, the level of that business is currently in the $5 million range, growing rapidly, but that is an example again of using the balance sheet to continue to grow this business, both wider and deeper, and so we want to make sure we preserve that capability as we go forward.

Thank you.

Thank you. Our next question from Roberto Morales (ph) of UBS Warburg. Your line is live.

Thank you. The first question that I have is regarding OrthoPAT. Could you give us a little more sort of color on what is expected going on and when do you expect to have it back to market? That is the first question. And then the second one, what - did Zimmer (inaudible)

Okay. Thank you. It was a little broken up there, but as you know, first of all, the OrthoPAT is the only product in the orthopedic market that can collect surgical orthopedic blood, wash it and return it to the patient. Completely unique opportunity and one that has been taken up strongly by orthopedic surgeons throughout the world and especially here in the United States. As you also -- as we also should reflect on the fact that in October, I believe it was that we announced that we were doing a quality enhancement program.

The product had been in the field for about a year or so and we had identified a list of enhancements, including computer software upgrades to eliminate false alarms, manufacturing and QC enhancements to reduce disposable components. Part issues we had had. And the OrthoPAT stayed in the market all this time and is in the market. But we have been aggressively going through a process of replacing product in the whole pipeline with the best product we have. At the point we made that decision, we said we had to move as quickly as possible to get the best that we possibly can in the hands of all of our customers, because the fact is what is going to drive and what is driving growth for this product is the day-to-day experience that the staff is having.

The OrthoPAT does not have an intensive user, it sits on an IV pole next to the hip -- new hip replacement or the new knee replacement and it is just like an IV pump, circulating, nurses look after it. And so we felt as though it was very important to have our absolute best product in the field and in the customer's hands, and at that time, we did announce that as we traced product moving in and out, back and forth, through our whole distribution system into the customers, that in fact it would result in weak OrthoPAT sales in Q3 and -- or Q2 it was and Q3 of this year and then in Q4 starting to move out of that and having the OrthoPAT impact our sales growth as it is, in fact, during this process still impacting Zimmer's sales growth.

So, there is two parts to the story. One is great success in the field, continuing to grow in this 50% range. But we at the supplier and manufacturer are taking our lumps right now to make sure that the customer experience continues to be the best that they can possibly have.

So it's correct to say that the replacement portion (inaudible)

Well, we are right on the edge, yes, of having pretty much wrapped it up.

Another question, this is regarding the red cells. What would be an achievable penetration rate within ARC for fiscal year '04?

Well, that's -- for fiscal year '04. Well, we know the long-term. We know we have big blood systems out there that collect 30% of their red cells this way currently and there is no reason why on a nationwide basis that this will not go to 30% and there are people that are beyond that. So, how far is up? As you know, we have all been surprised with, in fact, how -- the success we have been having with this product. Yes, we are not drawing as fast as we would like to, but the success we are having when you talk with customers is far beyond what we could have, in fact, imagined two years ago. So we have -- we know how successful a product can be. We know there are important blood systems that are very short of red cells. We have talked about that -- I mentioned it earlier. I just listed the places that reported rationing of blood. And so, those are the market dynamics, those are the forces that are working and then the market will behave as it behaves.

So, we have a -- you know, we have an - our outlook for the big blood systems where ever they be. We tend to now think conservatively about it, as I mentioned in my 40-50% comments earlier, but we continue to know that the upside is, in fact -- continues to be substantiated as being very, very large and along the way, we know that there is a natural ability of our customers to absorb change and so that's what we see happening in the slow growth, and that will happen in the ARC, too. There are some, if you look at -- we have one part of the ARC where they are using this technology on their mobiles and collecting, in fact, 10% of all of their red cells that are collected on mobiles with the technology. So, we will -- we are optimistic on one hand but yet conservative when it comes to our financial planning.

Thank you very much.

Thank you. Our next question is from John Harlow (ph) of Barrow Hanley (ph). Your line is live.

Yes. At your analyst meeting you talked about that there may be a change in foreign tax credits on the legislative plate. Maybe, maybe not and today's comment about the tax rate next year being at 36% implies that there is some change or some visibility to that, that we didn't get before. Am I reading that correctly?

Yes, John, let me -- this is Ron -- just comment on the tax rate. First of all, the tax legislation that benefits exporters like Haemonetics has been proposed in various legislation to be eliminated as a -- in WTO negotiations, but that legislation doesn't seem to be moving forward at this point. Our tax rate next year does contemplate at least one more year of benefiting from export credits.

Well, then it wouldn't be 36%, would it?

Yes, next year will be 36%, which probably has 2 or 3 percentage points of benefit from the export tax legislation, because if it were appealed, we would not anticipate it would affect next year.

Can I have a follow-up question?

Yes.

Your comments about OrthoPAT and Zimmer confused me -- it seems like -- it implies that you must have sold a lot of equipment to Zimmer several quarters ago, and they continue to sell it well while -- as you make a model changeover, or what have you, there is nothing currently being sold to Zimmer?

Yes, this is Jim here. The business model is such that the equipment in fact, is placed at no cost and ends up being on the Haemonetics balance sheet, and so what we are really looking at here is the real live consumption of disposables, which consequently, those are growing, as I mentioned, at a 50% customer level for Zimmer. Meanwhile, we are back purging Zimmer inventory and customer inventories to try to - to make sure that we are getting our absolute best product out there in the field and that purging process we are going through is what we have seen in Q2 and Q3. And -- of course, the OrthoPAT is our growth engine there for that surgical business and so we have had a short-term effect where it has not been producing its growth (inaudible). But we feel as though we are pretty much through that period and certainly as it goes forward in fiscal year '04, that will all be behind us.

Thanks a lot.

Thank you. Our next question from Robert Goldman of Buckingham Research. Your line is live.

Thanks. A couple of financial questions. On currency, I must have missed it, but what was the currency impact on earnings per share in the third quarter as well as year-to-date? Then I have got a couple of follow-up questions.

Yes, Bob, this is Ron. The impact against last year was 8 cents in the quarter, the first quarter was also 8 cents, the second quarter 8 cents, and as I mentioned just to finish off the year, we are looking at negative 10 cents, in that range, for the fourth quarter.

Just picking through the math to make sure I have got it right, but you reported the 42 cents, the tax rate benefit helped by 6, which would bring it to 36 and then the currency hurt by the 8 cents, which means it would have been 44 cents currency adjustment.

Yes, let me just walk through the earnings per share bridge once again. Our earnings per share contribution against last year's 35 cents just from operations, operating income changed, constant currency was 6 cents. We had about 1 or 2 cents of other income and expense due to mainly lower interest rates. The tax adjustment was a favorable 6 cents. Our shares outstanding were favorable, about 4 cents. And as we discussed, foreign exchange, negative 8 cents, so that should bridge the 35 to 42 cents a share.

And what about the R&D, because that was down and therefore, a benefit year-over-year. Is there some timing issues on those expenses?

Yes, let me address that the -- our research and development, in fact, does move around from quarter to quarter. A good example of that is a quarter where we build a lot of prototypes. We expense those prototypes at that point in time. So some quarters were we build, for example, we just built a large number of red cell collectors. As you know, the red cell collector will be introduced in the European market in the coming months, or certainly we'll - in fiscal year '04, we'll be pulling in business there and -- so those prototypes as they are built by - they were built in Q2, in fact, had a one-time heavy expense in that quarter. So it does move around.

We do target, in general, 6% of sales at the R&D expenditure level. I believe year-to-date, we are at 5.7, so we are just about there and that model will continue forward for us. I might also mention that from an expenditure viewpoint that, of course, there is -- we are biasing a lot of the company's expenditures to introducing our new products into the field. So we are in that respect, spending a lot more than the percent of sales in the opportunities of red cells, for example, opportunities of OrthoPAT than we are in some of the other products. So - and the magnitude of the opportunity is so big that, in fact, we see a bulge in our internal spending being somewhat in the marketing and sales area rather than in the R&D. But we don't look at R&D as having a decrease, in fact, in Q3.

And then, the one final question if I could, but just sort of putting it together and thinking through the fourth quarter, based on the guidance you gave for the year and what we know happened in the first nine months, it looks like the fourth quarter is between 20 to 25 cents. Then you mentioned that the currency is going to hurt you by a dime, which means currency adjusted is 30 to 35 cents compared to 29 cents last year. Is that sort of on a local currency basis, that kind of growth is -- that is the right number we should be focusing on, is that sort of a proxy for growth rate for the next fiscal year on a local currency basis?

One way to look at the fourth quarter is maybe in comparison to the third quarter, because we have good visibility there. And I would comment on Q4, a number of points. First of all, the fourth quarter seems to be seasonally lower than the third quarter. Secondly, we expect our gross margin and operating margin to range where they were in Q1, Q2 and Q3. That operating expense is generally in line with the first three quarters and then we will have the higher tax rate in Q4, so sequentially, the foreign exchange, as I mentioned is probably 2 cents negative in Q4 versus Q3. The higher tax rate, even excluding the 6 cents that benefit in Q3 would be about 3 cents negative and the balance of the change would be operational, just based on the revenue growth as we project Q4 versus a comparable quarter last year.

The operating profit level would be a pattern similar to what we have seen for the last several quarters, as far as our continued growth.

Okay, thank you.

Thank you. Our next question from Steve Hamill of RBC Capital Markets. Your line is live.

Thank you and good morning.

Morning, Steve.

First, in terms of your red cell revenue here this quarter, as you noted, it was up almost 50% year-over-year but most noticeably to me was up significantly on a sequential basis. And I was wondering if you could characterize, you know, how much of that was attributed to volume versus price improvements, given the fact that you're starting to roll out the leuko (ph) reduction filter?

Yes, Steve, my sense is it was driven by volume. The -- our red cell filtration take-up has again been -- again we have seen that first of all, customers where we have done business historically, that they continue to have more trouble changing to a leuko-depletion than the new customers. Our new whims that we had in this quarter start right away with leuko-depleted products. So we have had an ASP increase, although not at the rate that we have anticipated because our large customers were already doing business and their natural ability to absorb change was slower than we had anticipated. So, the short answer, I believe is it was primarily volume driven, but there is an ASP element to it also.

Okay. Then with regard to your blood bank products, as you commented, it was down year-over-year, but in this case was up quite a bit from first half of '03 levels -- I'm wondering, is this significantly attributable to foreign currency or was there something more organic going on there?

The -- our blood bank products, as I mentioned will continue forward, somewhat flatish. The blood bank products, of course, are primarily, the foundation is dominated by the platelet market, as you know that 3 million collections a year where we represent about 40% of market share. As you know, there are two things going on there. One is that more and more customers are collecting what is called doubles, that means one disposable set to get twice as many platelets. So that has for the whole industry somewhat of a depressing effect on what's used, but that is being offset by a certain amount of growth so that net effect has been somewhat of a flat market. We're a 40% player in that market, a very important one, so we will reflect the market growth there I think net-net as we go forward.

Inside of that, the ASP 215 has its quarters were of extremely strong business and quarters were of less strong business. As you know historically, we have seen good orders off and on from the military and as you may recall last year we had a large order from the American Red Cross and that disposable usage on those will start to kind of feather in as we go forward. So we have those two things going on, net, net, net, one should think of -- pretty much of a flatish business, profitable business important to us and a little further down the road, pathogen and activation for platelets will start to come in and be a meaningful number. As you know, as you may have seen the Cirrus press release on Europe, that they just started in their first couple of centers, using their technology and we anticipate as we get into next year that certainly pathogen and activation, we will also be having some value added in the platelet business in that respect. And that will start to show up in the number, not in '04, but maybe '05, '06 we'll start to see that meaningful uplift, in fact, from pathogen and activation products.

And my understanding is that they have to get a separate CE market approval for use of the Intercept system, specifically with the MCS, is that correct? And do you have an idea when that might be coming?

We have two steps there -- the first step is already taken, and that is that we have a transition disposable set that we have received CE mark on, just over the last few weeks, which means that Haemonetics platelets go into a transition set and then that transition set goes into the inactivation process. In the coming few months, we are looking forward to our next CE approval, which will be that transition set integrated basically into our disposable set. So the fact is that we are out there today in the selling process for products that we can deliver today.

Okay. And in terms of -- there is a lot of talk right now about a desire to move towards a 7-day platelet and whether or not pathogen activation could offer that potential. How big a threat do you think that could be to the platelet market given the fact we don't necessarily see shortages there today? I would have to think a platelet with a longer life span would reduce inventory requirements.

That will all have to play its way out. We feel, actually in one respect, quite good about that because it is documented out here in the literature that the Haemonetics' platelet, as it comes off of our process, in fact, lives longer than other technologies. So we know we have a very high quality product, so when we get to the point of stretching the envelope as far as the qualification for shelf life of platelets, we believe it is -- we are going to have a competitive advantage.

And one last question for you. Ron, with regard to your comments earlier about the benefit potential for currency and what it could do for your earnings in fiscal '04, I would assume that, that 10-cent estimate is assuming that rates remain constant where they are, is that correct?

Yes, because we do hedge one year in advance, we have, of course, three quarters of hedges in place and we would be working on Q4 at the appropriate time. So the uncertainty is with respect to this quarter. Of course, rates right now are appreciably higher than they were earlier in the year last year.

Right. But wouldn't there be, if the Euro and yen were to appreciate significantly from current levels, would that not potentially reduce that 10 cents because of the impact on your translation of operating expenses?

Well, when we do our hedging, we factor in our expenses and production costs abroad, as well as revenues and so it is our net position that we hedge and then once locked in, any gains or losses in the hedges are offset by losses and gains in translation. So, there tends to be less uncertainty overall once we have locked in.

The important point here, of course, is we will be moving into a new era where this yoke we have had on currency and interest rate comparables this year is being lifted and we will be looking at the other side of this equation -- certainly if we take current market rates as we get into '04 fully and '05.

Okay. Thank you.

Thank you. Our next question comes from Scott Laura (ph) of Laura Architectural. Your line is live.

I have no questions.

Our next question is coming from Dana Walker (ph) of Calmar (ph) Investments. Your line is live.

Thank you, good morning.

Morning, Dana.

In the past when Baxter has acquired collectors, have they honored these contractual arrangements to the letter?

Yes, absolutely. We have had two cases that -- one is several years ago, when they acquired Immuno (ph), in Austria, we were the collector of plasma in Austria and they honored all the contracts (inaudible), and over time it was phased over to their technology. That goes back a few years. We have recently seen that, of course, happen in the case of Surrytech (ph), where the Surrytech transaction took place, I don't recall, some time ago and they have honored the contracts and we are pretty much through all of that conversion. We went through it this year. So I mean our business is still growing nicely, even though we had to go through this Surrytech conversion, which means that obviously we have been winning a lot of other things on the other side to compensate for that loss we went through on Surrytech, but it was unrolled in an orderly fashion and we would anticipate in the Alpha case that similarly, contracts will be honored. And as you know, they run through into '05, calendar year '05 and so we have -- there is a lot of time ahead of us before things get sorted out, but we're counting on the fact that those contracts will be honored as they have so in the past.

I'll ask a quibbly question -- is that early '05, late '05?

January, '05.

You have talked about in the past how some of the other folks who are integrated might not want to be helping out a competitor who competes in the biological market. To what degree is this or prior decisions taken by Baxter accelerated the sourcing that helps you with the other players?

Well, I think we're at - in fact, we're at more of a watershed point than we've been in the past. In the past there is been a much more -- gradual here and there, an isolated situation, now we believe we are getting to a more watershed situation. We know when their contracts expire with other people and - so we are out there in the field actively competing.

Very well. You have talked about how adoption in Europe particularly with red cells has been slow. Your red cell collector is on the verge of being available in Europe. To what degree does that color your view with uptake of that there and other thing you have going on?

As we look at Europe, of course, as the United States, although it is more so - well, no, it is similarly, that most red cells - almost all red cells are collected in a mobile environment. Historically, from a regulatory viewpoint, our current MCS technology has been regulated more into a center based machine, and so it's very hard for them from a regulatory view point to produce all the material to suddenly take that into the mobile environment. The red cell collector, as you know is battery powered, it is 20-some pounds of an elegant, easy-to-move around machine, a whole new paradigm of technology. And so, we feel as though it will be a spark because we do have an answer to the fact that they cannot take current technology mobile, but this one will be and is being positioned to do that.

So we are optimistic about the impact it will have on Europe and -- but meanwhile, a very important point, as it is going through FDA here in the United States, we are going to be gaining very, very important experience and momentum, both at the point the FDA approval is received in the U.S., that we will have our - we'll already be doing a reasonable volume of business, we'll have our act together and that roll-out would be much faster than it would have been otherwise.

As a refresh, the red cell collector is the dynamic disk-based next generation of red cell technology?

Yes. Yes it is the dynamic disk technology. As you know, it's the disposable that is about the size of a plastic lid on the top of a 1-pound coffee can as opposed to our current technology, which is more of a voluminous bowl. And so that makes it possible to have a whole new generation of light weight portable, the OrthoPAT, for example, IV pole mounted, and in the case of mobile blood collection, something that you can put under your arm and take out into the field with a battery. Now, a derivation on that of course longer term will be the chair-side separator and the chair side separator is not collecting (inaudible) red cells, but only red cells and plasma and that is another important move to completely remaking the face of blood transfusion.

I mentioned two weeks ago we had a users group in here on using total apheresis (ph) for collecting their blood components, and the people that were doubters a year or two ago, you see them standing up in front of us and saying that this is changing the field or the whole look and landscape of blood collection technology. So the red cell collector plus the chair-side separators that comes will be important players in continuing that revolution.

Ron, perhaps you would have this statistic. What was the sequential growth in red cells in North America?

Q2 to Q3?

Correct.

Yes, let's see, it would be in the - in our -- I know -- there was one. We are sorry - we are seeing sequential quarter to quarter growth right now of consistent, fairly consistent - we're just pulling a number up for you. About 20%.

Twenty percent quarter-to-quarter.

And I presume that benefited very little from some of the additional uptake going on in ARC?

Yes, we are just -- as you know, it was just January that we started Oakland and then Peoria, so that is in this quarter, wasn't in the last quarter.

So everything else being equal, we ought to see reasonable sequential growth in the March quarter versus December in the U.S.?

Yes. Yes, we should be. You know, we have to be in a quarter sequential growth and that is what we are looking at certainly.

Let me ask one question and then I will get back into line. Perhaps, Jim, or Stuart, Sir Stuart, you might elaborate on the CEO announcements. To what degree is this fresh thinking within the company? What are you going to be seeking in terms of a new individual?

Yes, happy to respond to that. I think it is fair to say that we -- Jim stayed on beyond what I think he originally planned to do. He was looking to retire last year in July when he reached 60, but the board asked him to stay on at least until the end of the fiscal year. And it is his wish, obviously that he should retire at the end of March.

We have started to look for a new CEO and, of course, in an ideal situation, we would have liked to have made the announcement at the same time as announcing Jim's -- announced a replacement, a replacement, the same time we announced Jim's retirement, but we felt in fairness to Jim, we had to agree on a firm date and we possibly did that yesterday and, hence, today's announcement. Ron Machacari is leading the search for Jim's successor and we are looking - we obviously want an absolutely outstanding individual to carry on the good work that Jim has been doing over the last five years. We are encouraged by the fact that quite a number of excellent candidates have been identified and we expect that we will make a very successful appointment by the end of this fiscal year.

It sounds like you are seeking an outsider though?

We are looking wisely at candidates. We are obviously also looking at internal candidates, but the aim here is to get the best possible person we can, and that is why we are casting the net very wide.

Maybe not fair to conjecture in a public forum, but what are the odds that Ron ends up as your CEO?

Yes. I think you're absolutely right -- it would be most unfair to conjecture that in the public forum.

Can we rule that out or is that a possibility?

I don't think you can rule anything out. We are looking for the best candidate we can find.

I will get back into queue. Thank you.

Thank you. The next question is coming from Stan Main of Brawny Investment.

Yes, Jim, China, any news or anything you can speak to in China?

Yes, there is. I believe we have been through in the past years, through the period of -- the volatile period of uncertainties, of great plans, great sales and - but yet a very difficult complex market that kept moving around on us. With that period behind us -- and the reason it is, is because over the time, we have built a very strong local Chinese organization with strong, competent local leadership and they have been able to take that business and get it into the area where, in fact, now it is predictable, it is growing nicely from quarter to quarter.

I mentioned the Far East in total this year, looking at a growth well above 20% and China was above that for us. And as I mentioned also, that China today is one-third of the size of our most important other country, which is Germany -- however, growing at two to three times the rate that Germany is growing. So, we are going to see a successful, profitable business there unfolding over the coming -- over the coming years, it's something we are very proud of in fact, and is starting to make - we're starting to make a nice impact on the overall performance of the company.

Second question. The OrthoPAT, do you see its use in other surgeries where there is a tremendous amount of blood loss, transplants, etc?

There is - there certainly is a lot of thinking right now that is trying to take the OrthoPAT into other areas where, in fact, blood loss -- as you know, the OrthoPAT is a slower blood loss over a longer period of time. There are other opportunities that are being identified, worked on and our hope is that the OrthoPAT will -- the technology in the category of having more uses for the same product will, in fact, be showing up in other important applications, you know, as we go forward. Of course, right now, we have our hands full with the orthopedic opportunity, the 1.1 million procedures a year that are done out there and the rapid growth rate, and great acceptance we are seeing. And so that is absorbing a lot of our energy, but we do see over the horizon and beyond that, that it will have other applications. There is no reason that the OrthoPAT business down the road will not be the size of our total surgical business today.

Okay. Question three, have you had a price increase in any of your businesses in 2003 fiscal?

Yes, we have. We have continuously and conscientiously worked hard to solidify and move our pricing forward and in general, we have been successful by that, especially in the surgical business, where -- if -- so we are in an environment where no -- in net, net, net, our prices are moving forward.

Does that mean we can expect a gross profit picture starting to increase? I'm aware of the foreign exchange effect, but I mean, getting toward 50 and over 50% and similarly, my question on SG&A is going up, when can we see some improvements in both areas?

Well, SG&A, as you may recall is only up 4%. There is no question that SG&A does have leverage on the bottom line, that is one of the reasons why our operating profits -- we are in a business of scale and that is that as you grow bigger, you do not have to increase your operating profit total expenditures to accommodate the additional business. In the blood transfusion business, we have a limited number of customers and we can intensively cover them without having to grow SG&A at the same rate as the top line. Now, as far as our gross margins are concerned, our gross profits are concerned, you've seen nice movement forward in this year and that is right in the heart of where our CORE program has been contributing so much over the past years. And as you pointed out, currency obscures that in quite a dramatic way.

Ron, would you like to add something to that?

I would just add that at the analyst meeting we did a retrospective on our gross margins going back a number of years and when you put our gross margin, which you mentioned was north of 50% back in the mid-'90s, and you put that against the weighed exchange rates in which we were dealing, there is a very significant relationship between the general tendency over that period of the dollar to strengthen and our margins to have weakened. A strong dollar means weakening foreign currency. However, that foreign exchange movement obscures the actual strengthening of our margins in the business due to a number of factors -- number one, as our revenue growth has started to accelerate, without the benefit, as we mentioned, particularly in Q3.

We are getting the benefit of leverage, as long as our sales are growing faster than our fixed expenses and SG&A is mostly fixed. And secondly, our CORE program, our Customer Redesigned for Excellence (inaudible) program continues to take cost out of our business. And then thirdly, our manufacturing organization has been able to offset the inevitable inflationary cost pressures through just day to day continuous improvements that we have not incorporated into our CORE (inaudible) sales.

I think in net overall as far as also the cost of our manufacturing, we believe we are the lowest cost of manufacture in our industry and we are going to continue to improve that so that we become even more and more competitive. So yes, pricing has continued to move forward to a certain degree. It has not gone backwards on us and yes, we are continuously decreasing our costs. That hasn't shown up at all because of the currency impact but we should feel good about the continued progress we can make on that line.

Thank you.

Thank you. Next question is coming from Roberto Morales of UBS Warburg.

Thank you. Just a couple of follow-ups. Could you repeat what was (inaudible)

I believe the question was, went back to the Alpha dynamic, potential dynamic -

Can you hear me better now?

Yes. Thank you.

Thank you.

(inaudible) looking to (inaudible)

Here today we've had $15 million in sales with Alpha Therapeutics, we are their exclusive contractor of plasma disposable, that contract is in place through January, 2005.

Okay. Okay. And then another question, the collector, can you give us an update when you are going to launch that in the U.S.? Or how the regulatory process is going?

The red cell collector?

Yes.

The red cell collectors I mentioned will be in the European market in the -- in a couple months, we're going to start with a very limited rollout. We're still in the process of getting our 5-10K filing together, and so we are looking at the red cell collector having material sales impact in the United States. We are looking 18 months, let's say.

Okay.

The important thing though that I would like to mention on that is that we have been quite open with our customers on our next generation of technology, so as our customers commit to us today, they know that we are not their vendor just for today, but they know that we have this technology coming, and so they will be taken care of in the long-term. And this is an important factor in several of the decisions that were made in Q3 to commit to Haemonetics as opposed to the other options that we're being presented to us.

Okay. And just refresh my memory, does that include leuko-reduction?

Yes. We will have a - on the machine pump, leuko-reduction capacity.

Okay. A little bit of a broader question with regards to pathogen and activation. So far, you've -- I know your relationship with -- what are your thoughts going forward? Are you still going to (inaudible) the same way you have, or would you expect to get further involved in terms of red cells?

Yes. Well, we are, as you know, our technology is in technology partnership with Vitex (ph), they are in activation process uses the Haemonetics products down in the engine room to wash the red cells, so not only do you have an inactivated red cell but you have a washed red cell which has all sorts of other advantages to it. So we are partners from a technology viewpoint. We are working very hard to make this successful together in that sense and that is where our focus is, and that is where our aspirations for the future are, to be there in the engine room so every time a unit of red cells is inactivated with their technology that the Haemonetics disposable will be involved.

Okay. And thank you. And just one last question, Ron. Regarding the tax rate, I was expecting sort of like a 27%, I don't remember if you gave guidance. It appears that the (inaudible) much more beneficial than we were all expecting. Is there any specific reason for that?

Yes, the role of the tax rate was 31% in Q1 and Q2, and then we said we would have a one-time benefit.

Okay.

In the third quarter and then the fourth quarter would become 36%. And when you roll those together that gives us for the year, a 27% tax rate.

Okay. Well, thank you very much.

Yes, thank you.

Thank you, our next question is coming from Robert Goldman of Buckingham Research.

Just a couple more guidance questions. First again, on currency, given that you have locked it in I guess for the next four quarters -- from the fourth quarter of '03 on, I'm trying to get some sense of the improvement, if you will, in the hurt. We know it has got to hurt you 10 cents in the fourth quarter. Can you give some idea of the improvement sort of going on for the next three or four quarters?

Yes, Bob. The first quarter, we would see one more negative comparison because of the rates that were in effect the first quarter of this year, and then we would see the second quarter starting to benefit, probably offsetting the first quarter and then moving into the latter two quarters of the year, the real benefit of the currency comparisons kick in.

Okay. And then on guidance for fiscal '04 on earnings, I think you mentioned there was no change. I just want to make sure I have the current guidance. I have got $1.35 to $1.40?

Yes, we are -- Bob, as I mentioned, we are in our planning process right now and so all of the operational and non-operational factors are being very thoroughly considered and we will have more detail for you at this time when we do the Q4 call.

Okay. And then finally, on PQM, wondering if you could perhaps quantify what the earnings benefit was or is expected to be in '03 and perhaps compare that to what it might be in '04.

Yes, the TQM benefit has run in recent years at $3-$4 million. So our forecast this year is north of $3 million, which is -- which would be in the 7 or 8 cents range.

About the same for '04 or too early to say or -

We anticipate this is something that will be -- it is going to be a yearly event . We have a lot of things that we've invested in this year from a capital asset viewpoint that still won't be fully realized until '04 and that is the nature of the animal. So we're still -- we still feel very good about what can be achieved in that area. I might mention that over the last year and a half we have worked very hard to expand this into a robust (inaudible) program. We see now we are internally graduating our own 6 Sigma black belts -- another important expansion of the program and another reason why we target, we target these savings, and in fact, we have shown an ability to continue to achieve them year after year.

Okay. Thank you.

Thank you. Our next question is coming from Steve Hamill of RBC.

Yes, just two quick follow-ups. First, in terms of the OrthoPAT reserve that you took last quarter, Ron, do you have a sense as to whether or not that reserve was adequate or whether it might come in above or below?

Yes, we have it -- we haven't announced any changed expectations for the use of that reserve.

Okay. And second question, the Red Cross and America's blood centers jointly announced that they were going to quarantine quite a bit of FFP that may have been exposed to West Nile Virus. Do you see this impacting at all your plasma business going forward, potentially as a positive as people try to replace lost inventory?

Yes, our unit -- certainly our technology can be used as a way of catching up on the FFP deficit and is, in various ways. I think the important thing about this West Nile Virus catch-up is it once again illustrates how paranoid we have to be with the various issues that are out there, not yet defined and discovered, and the threat that is the safety of blood. The West Nile Virus -- alerts in trying to deal with the West Nile Virus introduced new questions to the donor question form, which has had the impact of eliminating again more donors from the pool of people that can donate. So I think the biggest impact of West Nile Virus has been another pressure on reducing the number of people eligible to donate and consequently, more thought to using Haemonetics technology to help that issue. It is another -- just another thing that just continues to shrink the donor population.

Thank you. Our next question is coming from Dana Walker of Calamar Investments.

A couple of items. Getting to double digit disposable constant currency revenue growth, where you were and where certainly would like to be again, was a huge objective for the company. Can you perhaps update us on where some of the new product programs that delayed -- had delayed effect on the back half of this fiscal year, which led you to reduce guidance stand today and how you view the opportunity to get back to double digit constant currency disposable revenue growth?

Yes, we had two areas. One is we have covered very thoroughly the OrthoPAT impact on this year, and so that was one area that aggravated our ability to achieve that sort of target. The other one, of course, we mentioned is the take-up of our red cells and the -- what seems to be the ability of our customers to absorb change. They sort of have a natural ability, which puts us 40-50% growth rate. So those are the two areas that frustrated achieving that target here in the short-term.

Now we know next year and going forward that OrthoPAT situation will change. We'll be keeping our eyes on red cells and those are the two big drivers that are going to be -- enable us to get the disposable growth rate up to where our goals have defined where we intend to go.

One last item. You talked about having a bake-off with the significant other entity in the red cell competitive picture more recently. Was there anything else other than the prospect of having the red cell collector in a reasonable timeframe that colored the candidates' view?

Absolutely, and that is the most important thing, in fact, is our capacity as an organization to help a blood center through this transition, and we have been developing this capacity over the years in the form of our field people, the people that are there to coach and to use TQM principles, in fact to take the customer through this important change in the way they do things. That is the primary thing that separated us from our competition. It is not about the box. The decision is about the company that has the technology to help them change the way they do things on a day-to-day basis that separated us from our competition.

Now we have time for maybe one more question here. I appreciate all of you staying on late like this, but if there is one more out there we can take it and then we will move back to Stuart.

Perhaps, Dana, since you came on with that last question, I think you also were the person asking the question about finding Jim's successor. Just for clarification sake, we do have lots of Rons in the company and I do want to make it quite clear it is not our intention to combine the CEO and Chairman position in Ron Machacaria.

Okay. We have time -- is there one more question?

Ladies and gentlemen, there appear to be no further questions. At this time, I would like to turn the floor back over to Stuart Burgess for any closing comments.

Okay. Let me end with just a brief final comment, I don't know whether any of you know but this month is the National Blood Donor Month, and this is obviously the time when the whole blood community is drawing attention to the increasingly difficult situation we face over blood availability. There is no question that we have a worldwide problem. And equally there is no question that Haemonetics today, as over the last 30 years is leading the technological drive to more efficient and safer blood processing. The prime example is the increasingly routine use of our two unit red cell collection procedure in many, many blood centers today.

Next month, we will be shipping out our 1 millionth disposable set for this procedure.

Thank you for being with us on the call today. If you wish to hear it again it will be available through February 6th and you should call in on 973-341-3080. Repeat that -- 973-341-3080 and using the pass code 3688859. We look forward to talking to you again on our Q4 conference call.

Thank you, ladies and gentlemen, this does conclude today's presentation. You may disconnect your lines at this time and have a great day.