Haemonetics Corp (HAE) 2003 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Haemonetics conference call. Please note that during the portion of this call Haemonetics may make statements that could be characterized as forward-looking and actual results may materially differ from the anticipated results. Additional information concerning factors that could cause actual results to differ materially is available in the company's press release and 10-K. Mr. Brad Nutter, Haemonetics President and Chief Executive Officer will moderate this call, here is Mr. Nutter.

Thank you, operator. Good morning. I'm Brad Nutter, the new CEO of Haemonetics. We want to thank you for joining our call today.

Today, I am joined by our CFO, Ron Ryan and our Executive Vice President of World Wide Sales and Marketing, Steve Swenson. The three of us will be available to answer your questions once we conclude our opening remarks. Our comments today will expand on our press release of last night. I have recently spoken with many of you and appreciate your constructive input, we'll try to make our comments clear, concise and easy to understand.

Beginning today, our communications will focus on reported numbers; although, we will continue to include updates effecting our business such as the effects of currency on our profitability when we think this will be helpful to you. That information will also be available on our website.

All of Haemonetics is disappointed in our Q4 and fiscal '03 performance. The company experienced some unforeseen challenges, and frankly, over promised and under delivered on our financial results. So today, we are going to do three things: First, Ron Ryan will discuss our fourth quarter and full year results, second, we'll give you our outlook for this year, fiscal '04, and market trends we are seeing. And last, I'll share my observations of Haemonetics and why I joined this company and what I expect our preliminary objectives to be for the future. Now I'll turn it over to Ron.

Thanks, Brad, and good morning.

As Brad just stated, I'm going to discuss three subjects; first fourth quarter results, second, year end financials, and, third, fiscal year '04 plan. As Brad also stated our routine communications will focus on reported growth and on our corporate website we'll have information regarding the impact of foreign exchange reconciled to our GAAP financials for those of you interested in this review. Some of you have asked for this change and we hope this approach better meets your needs.

Now, let's talk about Haemonetics fourth quarter performance, we reported revenue of $81 million which is growth of 2%. This was below our expectation of 6% growth for the quarter and there are two reasons for this. First, anticipated growth in the plasma business did not materialize. In the plasma industry, the markets currently have very high inventories of IBIG, one of the plasma derived pharmaceuticals that has been driving plasma collections. Fractionators are working through that inventory and this resulted in lower than expected plasma collections both in the U.S. and Japan.

Second, the growth of our surgical business was disappointing. Lower than expected surgical growth reflects a number of dynamics including inventory adjustments by some of our traditional self average customers, as well as a modest market share loss in the U.S..

Growth in our OrthoPAT product, which is the new surgical product targeting orthopedic procedures, was flat as well but was consistent with our expectations as we complete the product enhancement program that improves that product's quality and reliability that we reported in our last call. This sets the stage for a resumption of OrthPAT sales growth in FY '04.

Outside of the plasma surgical businesses, we were very pleased with our red cell performance. We continued to grow this new red cell business an average of 40-50% per quarter and this quarter was no exception.

Now, let's move to the gross profit line on the P&L. This quarter's gross margin was 44.8%. Last year's gross margin was 47.4%. The reason for the 260 basis point difference this quarter was entirely due to the negative impact of foreign exchange. Operating income, which is gross margin less operating expenses, was $6 million for the quarter versus $11 million last year, again the change was due mainly to the adverse impact of foreign exchange.

Our earnings per share for the quarter were 18 cents versus prior year of 29 cents per share, of the 11 cent difference, 2 cents was due to operations and 9 cents was due to below the line items, mostly foreign exchange and taxes.

Looking at FY '03 as a whole, we had revenue growth of 5% or $337 million. Several factors contributed to this growth. First, as I mentioned the plasma business has grown more slowly particularly when compared to the tremendous market growth we saw in the prior year. This market has now returned to historic growth rates in the low single digits.

Second, surgical disposable revenue slowed to 2%, however, it is important to note that use of our OrthoPAT system for orthopedic cases continues to grow at the end user level in the range of 50%. Third, red cell growth through the year was strong at 46%, however, this result was far short of our aggressive plan to grow 70% or more. Fourth, equipment grew 20% caused by increases in the plasma and blood bank product line. And finally, service revenues which includes software from our fifth dimension division grew more than 50%.

Now let me turn to the gross margin line. Gross margin for the year was 45.9% compared with last year's gross margin of 48.4%. The only factor contributing to the change was the negative impact of foreign exchange as with the fourth quarter, we maintained gross margin in real terms.

Operating income was $37 million for the year versus $46 million last year, again the difference was due only to the impact of foreign exchange. As you know the currency swing from FY '02 to FY '03 was large and negative. For additional analysis on the affect of foreign currency translation, please see our corporate website.

Finally, earnings per share were $1.13 lower than the $1.15 to $1.20 we expected because of the revenue short fall explained a moment ago. EPS fell below last year's $1.37 because operational gains were more than offset by foreign exchange and other factors that I just mentioned.

Turning to the balance sheet and cash flow. We ended the year with $50 million of cash and $71 million of total debt. The net debt of $21 million was reduced by $6 million in Q3. During the year we generated $25 million of operating cash flow.

In Q4, we purchased 242,000 shares of the company's stock for $5.2 million. As explained in the press release, our FY '03 total repurchases were 1.85 million shares for a total of $50 million. We have decided to terminate the 10-B-51 plan under which automatic share repurchases were made. The Board authorization, with $26 million remaining is still in effect, however, our focus now is to conserve our capital so that we can invest in business development opportunities to build the business which we believe offers greater potential for enhancing shareholder value. Now I'll turn the discussion back to Brad for a few comments.

As we talked about this year, let me first say that our Board of Directors has just adopted a policy regarding financial guidance which is posted on our website.

Beginning today, we're going to provide guidance only on anticipated full year results. As many of you have stated, and I and our Board agree, given the quarterly volatility of our market and given our interest in running Haemonetics on a long-term strategic basis, we believe this is a step towards aligning shareholder interest and investor interest with those of us who are charged with managing and overseeing the business.

To be clear, to be very clear, we do not intend to provide less information to the street, on the contrary, we'll be providing more information throughout the year on the markets we serve both on a product basis and geographic basis and on regulatory and other factors that contribute to the dynamics of our performance. Ron, would you please walk us through our '04 targets?

Yes, I intend to address five key financial factors in the FY '04 plan which was summarized as follows: First, revenue growth in the high single digit range. Second, a gross margin percentage in the mid-to high 40s. Third, a modest increase of our operating margin from fiscal '03 levels. Fourth, inclusion of a 53rd fiscal week and fifth, a flat earnings per share comparison.

Anticipated earnings per share reflects three favorable and two unfavorable factors. The favorable factors are operating leverage from higher sales, 5 to 10 cents of positive foreign exchange and the inclusion of a 53rd week in our manufacturing calendar. The unfavorable factors are lower interest rates and a 36% tax rate, up from 26.5% in FY '03.

Let me give you revenue specifics of the FY '04 plan broken out by blood bank, plasma, red cell and the surgical businesses. On blood bank, we believe blood bank disposable sales will be continue to be flat. Our blood bank business is stable and Haemonetics has the largest world wide market share, we will continue to lead this market.

Moving to red cells, we experienced red cell disposables growth in the 40 to 50% range in the recent past and expect to repeat that growth in FY '04. Haemonetics is creating this market as world innovator and market leader. Our technology is used to collect 3% of all red cells collected in the United States last year and we anticipate increasing our penetration to 4% this year.

Our expansion within the American Red Cross is an important contributor to FY '04 growth prospects. Eight of the total 35 Red Cros regions are now collecting red cells on our systems and we expect two more Red Cross regions to get in Q1 and of many nonRed Cross customer accounts, we have become the standard of collection. Over a period of just more than two years, the second-largest blood collector in the U.S., UBS, has expanded use of our systems to collect more than 20% of their total red cells by automation. That means we are fully integrated into their operations, a strategy we are extending to other customers.

We expect plasma disposables growth to be relatively flat. This is a result of planned double digit growth in Europe and low single digit declines in the Japan and U.S. As you know, the plasma market is quite volatile.

Three developments have affected our business. Number one is vertical integration in which pharmaceuticals fractionators acquired U.S. plasma collectors. Number two, is the slow down of plasma collections due to a short-term glut of IBIG on the market that was caused by the re-entry of manufacturers that had been sidelined for regulatory reasons. Number three, is a reduction of plasma collection targets in Japan, or specifically in the U.S., which is half of our plasma business, we are using reasonable assumptions about collections by the centers being sold by Alpha, our largest customer.

In addition, our plans reflect no sales to Seratec which was bought by Baxter and stayed out of our revenue base in FY '03. Aside from these factors, U.S., plasma growth is anticipated to approximate FY '03, lower to midsingle digits and units. Our acquisition of Fifth Dimension Information Systems, the leading provider of IT systems to the plasma market, gives us a real opportunity to help customers simplify their businesses and help us win plasma market share.

Now, let us turn to our surgical business. Haemonetics systems are used by hospitals to recycle and conserve a patients own blood. We plan to grow this business in double digits. Two dynamics will support the growth.

First the cardiovascular surgical market is stable and we own a large percentage of that market. Although our market share in this business may have slipped modestly in the recent past, we have put into place marketing, compensation and technology programs to win back market share. Secondly, OrthoPAT is the only auto transfusion product in the orthopedic market, in FY '03, end customer usage of OrthoPAT increased by more than 50%. We are completing or manufacturing and quality enhancements in early FY '04 and expect our OrthoPAT growth to begin to mirror that of our distributor Zimmer, now that supply chain issues are getting resolved.

To recap for FY '04, we are expecting strong OrthoPAT growth to combine with modest cardiovascular surgical growth for overall surgical disposables growth rate in the double digits. To again summarize, FY '04 earnings will be affected by five key factors. First, high single digit revenue growth, second, a growth gross margin percentage in the mid-to high 40s, third operating margin modestly higher than last year, fourth, fiscal year '04 includes a 53rd week based on manufacturing calendar, the inclusion of this additional week has the effect of adding 2% more billing days.

Finally flat EPS is caused by a tax rate increase from 26.5 to 36% and by reduced interest and other income as partially offset by positive foreign exchange benefits. Now, I'll turn it back over to Brad.

Thanks, Ron. Having been in the industry for 25 years, I've known Haemonetics and this business for a long time, going back to its days when it was part of American Hospital Supply.

I think it's important to put my perspective on this company and why I joined it. This is a good company and I'm convinced that we have a very bright future. The reasons I think so are that we have a very great brand name and we have a global product reach.

Haemonetics has been an innovator in the markets that we have created. We're not a division of a larger company, this company is focused, focused solely on blood markets with no internal competition for resources.

We have a stable core business which generates a strong balance sheet. Our quality culture, underpinned by PQM and Six Sigma and our outstanding reputation for manufacturing high quality products, plus our outstanding service has allowed us to consistently serve our customer's needs. For 25 years, this company has been a leader and I expect will continue to be a leader.

Many of you have inquired about our vision for the future. We have tried in this conference call to be direct in our communications so let me be direct, again. After three weeks on the job, I'm not prepared to give a lot of detail as to our future strategies. However, I believe our '04 plan is realistic and our Board believes our '04 plan is achievable. The plan may not be what you've modeled but I heard from all of you that it needs to be realistic and I'm pleased to report, most importantly, that this team is committed to making this plan in '04.

We'll be developing a new vision and strategy for this business that might include expansion of organic growth as well as new business opportunities. We'll place additional emphasis on being a market driven company that understands exactly what our customers want.

As a new CEO and with a new Chairman of the Board, who together have had many successful redesigning business experiences, and also increased shareholder value, I believe our future is very bright. I look forward to working with you actively in the future and importantly clearly communicating our success as this year progresses. Now, I'd like to open up the floor for your questions.

Thank you. I will now coordinate the question and answer session. If you have a question, please indicate so by pressing the number 1 followed by 4 on your touch tone telephone. Kindly limit yourself to one. You are welcome to return to the queue if you have additional questions.

Once again that is 1 followed by 4 at this time. The question line is now open. Our first question is coming from Mike Marionacki with Rigonari Capital. Please go ahead with your question.

Hi, Brad. Just want to make two quick ones. Can you explain the big increase in the DSO year over year and also what was in the other income number that seemed to contribute a bit this quarter?

Yeah, Mike. Let me have Ron take a first crack at that.

The questions, first of all, were DSO and secondly other income?

Or the interest income. The two numbers combined were a lot higher than the analysts were looking for.

DSO for the quarter was 80 compared to 73 last year because of our fiscal calendar we received a large payment from Japan on the 31st of March. Without that, we would have been 75 days versus 73 last year.

How much was that payment?

That was about 1.5 million. As far as other income and interest income, we received a payment in exchange for extinguishing a sales contract in an OEM business that we support. As far as other interest income, we had some interest related to tax refunds that we anticipate.

How much were those separately?

Half a million range each.

For each? Okay.

Does that get your question answered?

Yeah, that does. Thank you.

Thank you.

Our next question is from Sanjeeb Aurora from Warburg.

A couple of follow-ups. When you looked at the inventory levels of OrthoPAT and basically I'm trying to get what you saw in end user sales of OrthoPAT they were pretty high but basic sales were low. How much inventory has Zimmer held in the past and do you know what their current inventory levels are?

Zimmer has been holding roughly about something over 100 days of inventory on hand which is less than their corporate average, they have a very high corporate average of corporate inventory. As we work through the inventory or the supply chain issues related to moving higher quality disposables into that, into that inventory and moving the older inventory out, we've been working on this now for about the last six months.

As a result, our sales to Zimmer have been flat during this time. However, as Ron mentioned, the end user demand, end user usage as reported by Zimmer in their briefings has been in the 50% range. We expect that now we worked through our supply chain issues, we will track end user demand.

What is your role in terms of market development as it relates to OrthoPAT compared to Zimmer?

Zimmer is our channel partner, just briefly, they have 450 sales reps. They've also invested in more than 40 application specialists that are OrthoPAT specialists to help develop this market.

During the year we've also invested in an organization to help train sales reps, help train application specialists so we have our own market development team that is working hand in hand with Zimmer to help them develop this market. This is a big increase from where we were a year ago and a reason for optimism next year.

Just a last follow-up on OrthoPAT, as you look at the performance, kind of the indications that you have for leakage in the past, can you give us an idea where that stands to date?

Are you asking a question about the quality? Yes, we had disposable issues and equipment issues with OrthoPAT. Equipment issues were software related, more ended use, error messages that were confusing those types of things but nothing that really affected the use of the product.

On the other hand, disposable quality issues had to do with leaks in the equipment, and although this was low percentage, you know, in the 1% range, our standards with the self saver was a magnitude higher than that. We are achieving these higher levels now. We've gotten the complaint rate on OrthoPAT disposables down to just a fraction where it was. We have confidence of the Zimmer sales organization and are end use customers now.

And one last question, Brad, if I can and I'll get back in queue. Strategically as you look at this business, you've really got 60-65% of your business that's flat. Do you think this is a platform that can drive double digit growth on a long-term basis?

Sanjeeb, I do. I think this business is -- it's a great business from the perspective of having great market share and a great brand name. I look at the market share we have, for example, in Japan. I look at the presence we have 50% market share in the plasma business. I'll be visiting customers over the next two weeks to get a feel for how they perceive our business.

In doing due diligence in coming to this company, I believe this business can continue that growth rate. What really excites me about this business is the kinds of things we can think about in terms of adding customer focus, to adding a more market driven approach to this business.

And I think if we really sit down with our customers and understand what their needs are on a go forward basis and think about something as exciting as the 5-D acquisition this business made and helping the customer find a way to make it easier and more efficient to do business, I believe there are some great growth vehicles in the future.

Thank you.

The next question is from Steve Hammill from RBC Capital Markets. please go ahead with your question.

Good morning. If I can start with the information on the website, Ron, that you've given regarding the effect of foreign currency.

As a clarification, in terms of the column where you talk about differences between constant plan and actual translation rates and then it shows how you get to a constant currency figure, is this basically to give us an apples to apples comparison of the current year number to prior year number, is that the sole purpose of that adjustment?

Yes, that's the sole purpose just to get additional information for those of you who haven't had a chance to look at our website. Although, we are not featuring as prominently constant currency comparisons that are earnings releases and comments, we are providing that information on the website.

And to further explain this, we've broken up on the website the impact of our hedges, the gains and losses of our hedges and what their impact is on our margins as well as the reported numbers exclusive of those hedges. Finally as you point out, we are translating just as we do internally our revenues, our P&L at a planned rate and a standard rate so we can see what the real local currency rate in the P&L and reported changes.

And then if I look at the size of the hedge loss here this quarter at $3.1 million, can you give us a sense how that compares to the hedge losses you experienced in the prior couple of quarters?

I can. I think it would be getting in the more information than we had time to address right now. Maybe we could break out and I would be happy to discuss that with you and any other investors or analysts.

I think the reason I was asking and maybe you could elaborate it without getting into the numbers, I was surprised by the magnitude of the gross margin drop here and I waswondering if it was attributable to this feature.

Clearly you've had currency negatively impacting your gross margin in both the September and December quarters and yet we didn't see, you know, this low of a gross margin for you guys until now.

That is right, the foreign exchange negative compared to last year was 11cents in the quarter which was higher than the negative has been running in previous quarters and certainly is reflected in the gross margin and operating margins comparison.

Okay. I guess the bigger question in my mind this quarter because, quite frankly, I wasn't all that surprised by the revenue was the increase in SG&A, it was up, in particular, on a sequential basis. Which, even if you had been assuming a 6% growth rate in revenue, I would have thought would have been at least flat to down given the fact you had revenue, would have been down sequentially.

So, can you talk about what was in the SG&A this quarter that was extraordinary or was there just a conscious decision to increase your spending level?

Yes, there are two factors that resulted in about a million dollar increase in operating expense compared to previous quarters.

Number one, we incurred some transitional costs such as recruiting, as you can imagine, as a result of the changes in the company and secondly we provided for revenue related taxes such as use taxes and value added and those two factors accounted for the change.

Okay. I guess the vat tax issue, is that a continuing issue or just one time in nature?

Well, it's continuing as a cost that we incur, but this was an unusually sizable provision we don't expect to incur in the next few quarters.

That leads me to my final question. It seems that if you are forecasting high single digit revenue growth and some gross margin improvement, that you've got to be assuming some pretty substantial growth in - SG&A for us to end up with no earnings per share benefit. I'm just curious if these items this quarter were one time in nature, what is it that's driving much higher SG&A than I would have expected in fiscal '04?

We foresee SG&A and operating expenses growing at the rate of sales. There are a couple of factors that contribute to the SG&A growth.

The first factor is that we are increasing our sales force behind the products that we currently sell to get the best possible representation of the market of those products. Secondly, we are increasing the level being spent on clinical trials.

If I can jump in one second here, as I look at this business coming in new, I believe we're under invested on the sales customer interfacing side of our business, number of sales people and I think we need to position ourselves for success and growing the top line in the future.

Secondly, in terms of the clinical trial aspect of our business, that's investing in our future and that's an important part of what we need to do. The clinical trials and the expenses this year to position us going forward are important for '05 and beyond.

Can you give us a hint in terms of what these trials are, trials for existing products or the pipeline we are already aware of?

They are both. Rather than getting too much into the clinical trial, what I would like to do is as we move forward throughout the year give you more specifics as to how the clinical trials are going versus today in this conference call, okay?

Okay, thanks.

Our next question is coming from the line of Gegory Lecosco from Lord Abbott. Please go ahead with your question

Yes, could you--you mentioned toward the end of the call that the Board and new Chairman were involved in the operations and strategy, could you elaborate, are they -- did they help write the strategy for the company or involved in that strategy you are planning to develop?

Thanks for the question, Greg. Number one, this company has a planning process that goes back some time. Independent of me joining the company, Jim Peterson and the team are looking at our growth rates and the kinds of things that we can do for fiscal year '04, so, that process was ongoing as I came to the company.

As joining the company new, I wanted to quickly look at that plan and understand what the drivers were of it and felt it was very important that I present to the Board my conviction as to the plan and its ability to be implemented and so we have presented that to the Board for their input and support, which they gave us last week.

So, I'm comfortable with that process. It's a process that I've used before and I think it gets our best thinking and preparations on a go forward basis.

The second part of your question, Greg, involves strategy. And at this point in time what I would like to do is take a look at where we positioned this business. As I said, after three weeks and as I saw you down in New York last week, I'm not prepared to say exactly what our new strategy would be other than taking a real market focus approach to this business.

I've indicated to the Board that my objection is to work on the vision and strategy go forward with the time frame of midsummer to be able to articulate what that looks like and share it with you guys and share it with our Board and the total management team.

And secondarily, would you talk about -- you mentioned an OEM customer, there was a payment, et cetera, extinguishment of an OEM contract, could you be more elaborate on that?

Sure, Ron?

We have, as maybe you're aware, a solutions, an injectable solutions plant in Union, South Carolina. From time to time we enter into contracts such as veterinary customers to provide solutions for them. This was a contract for a customer acquired by Baxter. They, therefore, bought out of that contract.

I see. Thank you very much.

Thanks, Greg.

Our next question is from Dana Walker of Palmer Investments. Please go ahead with your question.

Good morning.

Good morning.

Could you talk about the share loss that you described that was experienced in your self saver line in North America, why that came to be and what are you going to do to turn that in the other direction?

Let me turn that over to Steve Swenson, Steve?

We saw a downturn in our U.S. surgical business in the fourth quarter.

When we investigated this, there were two components. One is that we have a number of large customers that we're balancing their supply chain and basically purchased that lower than their historical purchase rates but this is a temporary phenomenon coming back.

The other thing we discovered was in doing this process is because of this that we discovered this that we have been systematically losing some market share primarily with smaller hospital customers in the U.S. This has to do with sales coverage in trying to cover all of the hospitals in the U.S., the smaller hospitals are harder for us to get to.

What we've done we've responded, we have dedicated an inside sales organization to focus on these customers, we have promotional programs and we've implemented this in the last month and expect that this will turn the situation around.

Did that answer your question?

It most certainly did. Brad, as you look at this business returning to a question that was asked earlier where some two-thirds of it is expected to be slow or no growth, how do you look at the cost structure and how do you look at the present operating margins structure and whether it's appropriate recognizing you are trying to strike a balance?

I believe in operating leverage on a P&L, I believed that for 25 years, I think we have to get to that point. I think this business might have been conscious of driving operating expenses to some extent at the expense of serving the customer topline growth, part of our plan recognizes that this year.

Generally speaking to answer the question directly, I believe in operating leverage and I believe in operating leverage through operating income and that's the kind of plans I would look to put forward in future years and getting that discipline throughout the entire organization is something we'll be working on.

Another question, you talked about putting resources into clinical trials, would it be far fetched to believe that you might try to broaden the market for your two unit products with activities to better demonstrate to the marketplace safety and efficacy and such? Is that outside of your program?

Steve?

Well, the experience we're having in the double red cell market right now, I think the inhibitors in the market aren't safety and efficacy right now. It's, I think we've reached a point, especially in the U.S., where people are accepting this as the better way to do business and the issues relate to the time and effort it takes to implement programs at the customer site because they have to change their SOPs, they have to get licensure, they have to train their employees and it is the effort in helping them through this change process is how we're growing the business, but not related to clinicals.

The clinical work we are doing has to do with some of our newer products that, including the red cell collector which is the next generation double red cell product, and this is something that we plan to introduce in Europe in the next year, so the clinical question that you are asking really relates to new products and not expansion of existing double red cell technology.

Just amplifying on Steve's comments, I think the RCC has allowed us to provide technical leadership in the market. The next generation submissions are on track and on time. The clinical placements we are looking at the Q1-Q2 time frame to give more specifics there, and I think our technology is in a fixed and mobile environment. With more than 1 million red cell procedures, there was a learning curve for customers here and we've gotten through a lot of that this year and hopefully we anticipate it will be moving forward more rapidly next year.

I was ambiguous in my question. I suppose I was directing that to broadening the weight guidelines that now govern who can use the two units.

Well, I think the novagram, of who can use the two units, we don't anticipate that changing right now. That allows us to focus on roughly 50-60% of eligible donors.

On the other hand, in many of our sites they are adopting what we call a total automation approach so the remaining 40-50% of donors instead of donating a double red cell, donate a red cell plasma which is also valuable and creates a valuable product. We have sites now where 100% of the presenting donors are eligible to donate on Haemonetics automated equipment. And in fact, this is the most efficient business model that we have with our customers.

Let me pose one last question then I'll get back in line. The gross margin improvement that you envisioned in '04, to what degree would you say is that structural rather than currency driven?

The gain in both gross margin and operating margin is structural, partly due to the leverage of higher sales and partly due to cost reduction.

Ron, if you have, though, a reported gross margin of 45.9 for the year and you talked about how that was lower than prior year for reasons almost solely due to currency, if you see it revert back to -- let's just pick a number, 48, that's not because of currency, that's going to be structural and the 5-10 cents minimum you hope to see benefit for currency would be reported elsewhere or it would be incremental to that at gross margin levels.

Yes, the margin benefits are basically operational next year. Maybe just to walk through, this is a good point to touch on how our earnings per share is evolving from FY '03 to FY '04 and to talk about the various factors in terms of earnings per share.

Really there are four EPS drivers in the earnings bridge next year, of course, first is the operational benefits. Just to look at operating earnings if indeed operating earnings were the only EPS driver, our EPS next year would be growing north of 10%. However against that, we have an amount approximately in that range due to the higher tax rate.

Third, we anticipate 5-10 cents of foreign exchange benefits, and finally off setting that, we anticipate a number approximately in that range of lower income from nonoperational sources and interest income. So that, we have two large factors that offset and two smaller factors that offset which gives rise to our flat EPS projection.

If I still have the floor, let me just pose one final question related to currency hedging, Brad, as you come in and try to understand the way Haemonetics does things, do you believe there's been clarity or confusion created by Haemonetics approach to currency management?

I don't think it's been as clear as I'd like to see it.

What would you hope to do differently going forward?

To work on reported numbers is step one. Step two is make sure that we provide on our website details so that you guys can have clear access and understanding of our numbers.

Let me redirect my question, I suppose I was thinking about process rather than how you describe the outcome in that the hedging which tends to roll forward twelve months to lock in an expected outcome, do you find that that's created value or hindered value creation in the stock market and at the company level?

I really don't know. After three weeks I'm beginning to try to understand that issue and how we've communicated and trying to listen to input from you guys, I haven't drawn a conclusion as to exactly where we are on that.

I hope to communicate to you that our intention is to communicate clearly regarding FX, make sure we understand the impact to our business, but I haven't drawn, after three weeks, a total conclusion about that yet.

I'll get back in line, thanks.

The next question is a follow up from Sanjeeb Aurora of UBS Warburg. Please go ahead.

Just a couple wrap-ups on the red cell marketplace. You talked about the status of the collector and the European launch the next physical year, what about the U.S. launch, where do you stand on that?

Steve?

The U.S. launch, I thinnk our focus has been on nonRed Cross sites up until this year. In December, as you heard last quarter, we finally received approval from the Red Cross to move forward from the pilot sites that we've been working with, and in this quarter now, as Ron had mentioned, we're pleased to report that eight of the Red Cross regions have begun using our technology.

Eight of 35, and a number of collections this represents 28% if you look at those eight regions that would represent 28% of Red Cross collections in the United States. We will continue to focus on additional nonRed Cross sites and Red Cross sites through the remainder of the year but clearly --

Go ahead.

That's a prime driver of this year. Now, looking forward, the red cell collector is an important new product that we will bring to market in Europe this year and this will be introducing our second generation product which we don't believe has any competition right now.

We believe that the announced product, [Allance], competes with our present MCS system in terms of size, weight and performance and the red cell collector will take this to another level. We believe we have a head start in the market and we're happy we have some competition, it helps validate the market and encourage all of our customers to view this as a standard of care and not just a niche application and I think our focus on new products will help us retain that leadership.

As you look at the Red Cross and maybe take the learning experience of the nonRed Cross centers, is there anything different you may do in terms of market development in pushing the Red Cross further?

Repeat that question again.

Basically, as you look at driving penetration within the Red Cross centers, the eight that you have targeted so far, the eight that adopted the technology and then also expanding to the rest of the 35 regions, is there factors that you've learned in the nonRed Cross united blood centers, et cetera, that you can take to the Red Cross centers as far as learning experience to drive adoption further?

Absolutely. I think that what we've learned more than anything is that it's not about the equipment, it's not about the technology, it's about the programs and it's about the process of change, and the services we can provide and that is something we have learned over the past 4-6 years.

When we go in to start up a new site now, we have honed that process to the point where it takes us a lot quicker for us to get our customers through the changes that they need to experience. They are changing the way they work and we need to help them through that process. Every time we implement a new customer, we get a little bit better and we think that's our core competency now.

And my last question is we have historically talked about red cells on the U.S. marketplace not so much the international market, as you look at Haemonetics in general, a large part of your business that is outside the U.S. What is the OUS opportunity and maybe how do you strategically approach that from a red cell perspective next year?

We are investing part of our SG&A investment is focusing on red cells in Europe which is our next area for market development. About a year ago we had approval in Italy to begin developing the double red cell market. That's where our growth has come from in Europe.

We had hoped that France could begin this process in the last fiscal year. In fact, several months ago the EFS gave approval to move forward on double red cells. But in order to officially start they needed to publish the regulations and we've been waiting for several months now for this to be published. We expect this is right around the corner and France will be the next major area that we develop in Europe.

Thank you.

Our next question is coming from Michael Delaney from Kensington Capital Management. Please go ahead. Mr. Delaney, your line is live. Our next question is coming from Steve Hammill of RBC Capital Markets, a follow-up, please go ahead.

In terms of the comments you gave earlier about the plasma business, you had made a comment about Alpha and the sale of their collection centers to Baxter, the planned sale of that, can you clarify for me, are you expecting an impact, a negative impact from that during fiscal '04, or is that still a couple of years down the horizon as was talked about on the third quarter conference call?

The Alpha deal with Baxter has not been consummated as yet. It's hard to speculate exactly what will happen, but we do have a contract that lasts through January 2005. In our planning for this year, we have taken into account the effect we think this will have in the interim and that basically results in relatively flat growth from Alpha.

The other thing I think I'd like to mention is just to put into perspective when people look at our plasma business, we have to remember that we participate in a $230 million plasma collection segment that's part of a $5 billion plasma biopharmaceutical market. Many of the changes that happen at the end product level really are dynamics that really don't affect our performance in the collection part of the market.

Okay.

Operator, we have time for one more question, please.

Today's final question is a follow-up from Dana Walker of Palmer Investments, please go ahead.

I have one more question, that is there has been frustration at the company on the investor level on the penetration of filtration into your two-unit revenue flow. I wonder if you would update us as to where that stands and where you might take that in the reasonable term?

That's a great question, and we are very frustrated, it is probably our biggest single frustration in the last year. We had analyzed this incorrectly, 70% of red cells in the United States are gluco reduced today, filtered today and our assumption was that when we introduced our filtered product, that we would have an uptake that was quick and get us up to that level fairly quickly.

What we discovered was that this was a big change for our customers. Even though our product worked properly, they had to change their licensure, they had regulatory issues, we had training issues and especially with existing customer, we found that this was a much more difficult process. We exited this year with about 20% penetration of our installed base and we have goals to ramp that another 15-25% in the coming year.

Clearly, this was one of a new product that we didn't really understand the market adoption piece of it. We do understand that right now and expect that this will be a more important part of our business in the coming year with the benefit of raising our average selling price.

I believe the bi-line of the story has been that it's easier to have new customers adopt gluco-depletion than it is your more historic customers.

That's correct. That's right. Our new customers with few exceptions have adopted filtration out of the gates. Our existing customers, because they have to change their internal processes have been slow to adopt. We're gradually getting there.

You probably don't want to be specific about customers but would that mean, theoretically, as you move into new regions with the American Red Cross that they are able to gluco deplete immediately or as you're facing issues with your more long life customers everything else being equal?

We would hope this is something that would happen but I'd rather not speculate about specific customers right now.

Very well, thank you.

In closing, I think this is a very good company. This is a disappointing year, '03, for Haemonetics and particularly Q4. For 25 years this company has been a leader, and I expect will continue to be. I think our plan is realistic for '04 and I think it's achievable.

More importantly, this team is committed to making this plan work. I'm excited about creating a new vision and with this team, a new strategy for this business. Finally, I look forward to working with all of you actively in the future and clearly communicating the successes we have as we implement this plan this year.

For expanded analysis of our financials, please see our corporate website. Operator, would you please provide information regarding replay?

This call will be replayed through May 15th. The replay can be accessed at 877-519-4471 for U.S. callers or 973-341-3080 for international callers. The pin for the replay is 368-88-63.

Also please note that there will be no May 1st conference call. This concludes the Haemonetics conference call. Have a nice day.