Haemonetics Corp (HAE) 2004 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Haemonetics fiscal year end conference call. At this time, all participants have been placed on a listen-only mode and the floor will be opened for your questions following the presentation.

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 materially from the anticipated results. Additional information concerning factors that could cause actual results to differ materially is available in the Company's press release and 10k.

Brad Nutter, Haemonetics' President and CEO, will moderate this call, but let me first give you to Lisa Lopez, Vice President and General Counsel, for some opening remarks.

Good morning. Thank you for joining us on Haemonetics' year-end conference call. As you have seen from the numbers we released last night, we had a strong year-end finish, indeed stronger than we had expected. For this reason, we wanted to communicate with you as soon as the numbers were final. That is, we were through with the close of the full year-end audit and through the audit committee review and approval that is now required by Sarbanes. Our audit committee approved the numbers yesterday, which is why we released them last night and why we moved this conference call up from Thursday, when it was previously scheduled, to this morning. Thank you for rearranging your schedules to be with us today.

Now, let me introduce Brad Nutter, President and CEO, to begin our presentation.

Thank you, Lisa. Good morning. In addition to Lisa, today I'm joined by Ron Ryan, our CFO, and Julie Fallon, our Director of IR. Our comments today will cover three things. I will comment on key events, trends and significant accomplishments; Ron Ryan will review fourth-quarter and full-year operating results; and I will review '05 guidance in detail.

Let me begin by stating that we said this would be a transition year, as we repositioned the business for future increased growth. We've made good progress. We began the year by setting realistic guidance, given our current markets and products. Let me share with you our actual results versus that guidance. We said we would achieve high single digit revenue growth; we achieved revenue of 364 million, up 8 percent, or $27 million, over FY '03. We said gross profit margins would be in the mid to high 40'; we closed the year with gross profit margin of 47 percent. We said we would modestly improve operating margin; in fact, FY '04 operating margin grew to 12.6 percent, 150 basis points over FY '03. We said EPS would be in the $1.13 range; GAAP EPS was $1.19, above our expectations. Sales performance late in the quarter exceeded our projections. I'm pleased that we exceeded our commitments.

Before I highlight Haemonetics' accomplishments for FY '04, it's important to give some perspective on why, throughout the year, we refer to this as a year in transition. In the second quarter, we successfully reorganized our business. That reorganization was a first step in positioning the business for future growth. It resulted in some expense reductions but more significantly, gave the organization a better focus on our customer. We defined our customer base as two global product families, donor and patient. As a result, we can more nimbly and aggressively approach our markets.

We strengthened our team in two ways. First, we added senior managers Brian Concannon, Pete Allen and Will Still (ph). Second, we promoted 43 existing employees into new or different assignments. In short, the reorganization enabled structural and cultural changes that were necessary to align our business to better serve our customers and, as a result, enhance shareholder value.

It was important, during this transition year, to review our business. We have now implemented processes that are the foundations for the long-term growth of your company. This is a work in progress because there's certainly more to do, but I'm pleased with our efforts so far.

During the year, we overcame significant challenges. I described our volatile plasma market on several phone calls. Please let me recap the key pressures we experienced this year and how these pressures will affect us, going forward. We lost our largest plasma customer, Alpha, when it was purchased by a competitor. This cost us $7 million in sales, or 12 cents a share, for the year. There remains a significant glut of plasma in the market, which results in a softening of plasma collections. Now, this effects Haemonetics sales. We know the demand for the plasma derived drug IVIG, continues to increase, but it may take plasma fractionators more than a year to work through excess plasma and end-product inventories. We expect our customers to maintain lower levels of plasma collection during this time.

Now, it's important to remember that the plasma market is a global market. The impact of this oversupply has predominantly been in the United States, but Europe is now being affected. I will talk more about this later.

Historically, the plasma market has always rebounded. We expect that the current cycle will eventually be followed by a cycle of increased plasma collections.

Now, let me return to the past year. The loss of the Alpha business and the instability in the plasma market combined to affect significant impact to revenue, gross profit and earnings dollars. However, we were still able to achieve our committed guidance. Now, three factors enabled us to do this. First, for three consecutive quarters, we gained market share in our traditional business. Many of our markets are mature, or low-growth, and we are growing for exploiting underpenetrated regions and converting competitive accounts.

The second important contributor to revenue was meaningful growth in our newer product lines, OrthoPAT and red cells.

The third important contributor to revenue was a renewed emphasis on partnering. This year, we significantly strengthened our business through key partnerships. Early in the year, we signed an agreement with Arizant to market its Patient Warming System in Japan. In January, we signed an early renewal of our OrthoPAT distribution agreement with Zimmer for an additional five years. We are very pleased to the terms of this new agreement. In the fourth quarter, we announced new Canadian distributors for some of our patient and donor products. In February, we completed our agreement with Hemosystem to market its bacterial-detection technologies.

Now, several of these partnerships had an immediate and very positive impact on the Company. Together, they added nearly 5 cents per share to full-year earnings. I'm very confident in the strength of these strategies, going forward.

Folks, this was a solid year for Haemonetics but let me put that statement into some historical perspective. I see a meaningful change when I compare the reported financial results of this year to the financial results of the previous six years. For example, if you take FY '97 and compare that to FY '03, sales grew, in that timeframe, $33 million. Gross profit, operating income, net income and earnings per share were either flat or declined.

In comparison, this year, we grew revenues more than $27 million. Gross profit grew more than $17 million and operating income grew $8 million. Earnings grew 5 percent. Our cash position improved dramatically. We remain focused on improved profitability. On these measures, we achieved more this year than the previous six years.

Now, this is worth repeating; FY '04 arrested the underwhelming results of the prior six years and registered significant progress in the opposite direction. That was the goal of FY '04, as we began our transition.

During the year, Haemonetics' leadership made some very tough decisions. We focused our energies on better serving our customer. Many of our competitors were significantly challenged in this volatile market, but we stayed the course. Our results indicate that we've made a good start. Today, Haemonetics finds itself a stronger organization.

With that, let me turn our call over to Ron Ryan for comments on Q4 and the year. Ron?

Thanks, Brad, and good morning, everyone. Today, I'm going to share our fourth-quarter and fiscal-year 2004 financial results and give an operational update. I'm pleased to report on a year of solid performance against our goals. As you saw, we overachieved our Q4 expectations and thus accomplished or beat the guidance that we set earlier in the fiscal year.

Total revenue for the quarter was $98 million, up 20.8 percent. Foreign exchange represents a little less than half of this growth. Revenue for the year was $364 million, up 8.1 percent. Foreign exchange contributed about 5 percent to this growth.

As you know, disposable sales represent nearly 90 percent of our revenues and are the best indicator of how our business is doing. Let me break down our disposables results by product line. I will first address results in our Donor product family, which is made up of the plasma, blood bank and red cell product lines. I will include miscellaneous and services in this section, since most of the revenue there comes from the donor product line. These products combined represent 75 percent of our businesses.

In the plasma business, disposable revenue was $27 million for the quarter, up 4.4 percent. For the year, plasma revenue was 114 million, level with FY '03. These revenues were significantly impacted by the loss of our largest plasma customer, Alfa Therapeutics, when it was acquired by our competitor last October. The loss of Alfa resulted in a loss of $7 million of sales for the year. Despite this, we maintained sales level with last year because we were able to outpace market growth. We have strengthened our customer relationships.

Now, turning to the blood bank business, which consists of platelets and cell-processing, disposables revenue was $30 million for the quarter, up 21.7 percent. Blood bank revenue for the year was $112 million, up 12.3 percent over FY '03. As you know, the platelet collection segment of the blood bank market is mature. We enjoy about 45 percent of this worldwide market. More than 90 percent of our platelet sales are in Europe and Japan, so there was a positive impact from foreign exchange for this product line. Additionally, though, we saw some market share gains in both Europe and Japan, which positively affected revenue.

We plan to continue this trend with a focus on the U.S. market. Here, there's more growth opportunity because our share is currently less than 10 percent. As shared with you last quarter -- that is platelet supply has declined with the onset of mandatory bacterial detection -- we expected customers to consider mobile platelet collections as one strategy to increase supplies. This means bringing our machines into the community instead of requiring platelet donors to donate at the blood Center. We have, in fact, now signed contracts with two customers who intend to use our technology on their mobile blood drives.

We announced, last month, U.S. approval for a bacterial detection blood-sampling system for use with our platelet disposables or as a stand-alone product. This will make it easier for customers to use our systems on mobile blood drives.

In Europe, we've begun to market a bacterial screening technology in partnership with Hemosystem. Again, this is part of our strategy to capitalize on the trend towards bacterial detection and leverage our worldwide strength in the platelet market.

In the red cell business, disposable revenue was $7 million for the quarter, up 54.1 percent. For the year, red cell revenue was $22 million, up 43.6 percent over FY '03. In the U.S., we grew red cell revenues 54 percent for the year.

This year had some exciting highlights in the red cell product line. We gained 15 new customers, including 12 more Red Cross regions, more than double the goal we set for ourselves. Haemonetics technology is now installed at more than half of the 36 Red Cross regions. These regions combined collect about 4 million units of red cells annually in the United States, which is almost one-third of the U.S. blood supply.

In addition to gaining new customers, 30 percent of our U.S. customers were using our white blood cell filter technology by the end of the year, versus 14 percent at the end of FY '03. Filtration supports customers' good manufacturing practices, reduces manual processing steps and increases profitability for them and for us.

Finally, services revenue was $7 million for the quarter, up 52.9 percent. For the year, service revenue was $22 million, up 19.9 percent over FY '03. Our Fifth Dimension Information Systems subsidiary was a significant contributor to our sales successes here.

Now, let me turn to our patient products, which is captured by the surgical line on the P&L. Disposable revenue for the quarter was $22 million, up 24.5 percent. For the year, patient revenue was $77 million, up 12.2 percent over FY '03. Patient product family sales include revenue from the traditional Cell Saver product and from the newer OrthoPAT. We continue to gain new Cell Saver customers and penetrate the market in underdeveloped or low-share regions. Despite lost sales opportunities due to declines in open heart surgeries, the Cell Saver line posted a solid 5 percent growth for the year. OrthoPAT sales continue to drive more substantial growth, with revenue up 67 percent for the year.

Now, I will discuss our P&L. Before I go into the details, I want to highlight that we have been very successful at generating positive drop-through this fiscal year as a result of continued focus on financial disciplines. For the quarter, we leveraged 21 percent sales growth and a 33 percent profit growth and a 139 percent increase in operating income. For the full year, we leveraged 8 percent sales growth into 11 percent gross profit growth and a 22 percent increase in operating income. This performance is a direct result of structural manufacturing cost reductions and operating expense restraint.

Now, let me review the details of our P&L. Please note that we have again posted a detailed P&L breakout and operating cash flow metric on our Web site. Four factors affected the P&L this year. The first factor affecting the P&L is our policy for determining fiscal year end. In Q4 and thus the year, we had an extra week. The second factor affecting the P&L is that foreign exchange contributed 9 cents per share for the year. The third factor affecting the P&L is that the income tax rate increased to 36 percent from 26.5 percent last year because of a $4 million anticipated refund. This represents a negative 16 cents a share. The fourth factor affecting the P&L is that, in this year's second quarter, the Company took a reorganization charge of $2.6 million, or negative 7 cents a share.

Now, let me go through the P&L. Gross profit was $48 million for the quarter, up 32.6 percent. For the year, gross profit was $172 million, up 11.3 percent over FY '03. Gross margin was 49.2 percent for the quarter, up 440 basis points. For the year, gross margin was 47.3 percent, up 140 basis points over FY '03. Operating expenses were $33 million for the quarter, up 10.9 percent. For the year, operating expenses were $126 million, up 7.7 percent over FY '03. If you exclude the reorganization costs, fiscal year expenses were below last year in local currency.

Operating income was $15 million for the quarter, up 139.3 percent. For the year, operating income was $46 million, up 22.4 percent over FY '03. Operating margin was 15 percent for the quarter, 740 basis points above Q4, '03. For the year, operating margin was 12.6 percent, 150 basis points over FY '03.

Earnings per share were 37 cents for the quarter, up 105.6 percent over the 18 cents in Q4, '03. For the year, earnings per share were $1.19, up 5.3 percent over the $1.13 in FY '03. Our customer-oriented redesign for excellence, or CORE, program generated more than $5 million of operational cost reduction this year. This is one of our best performances since the beginning of the program in 1999.

We closed out the year with a stronger balance sheet. We produced $69 million of operating cash flow, which is free cash after working capital and capital expenditures. In fact, we achieved several cash flow milestones. First, we increased disposable finished goods inventory turns from 4.6 to 5.7 and reduced inventories by $14 million. Second, since the beginning of the year, Accounts Receivable days outstanding were reduced to 76 days from 80 days. Third, we managed Capital Expenditures below depreciation expense. Finally, we received the $4 million of income tax refund that we accrued in FY '03.

Beyond the cash from operations, we generated $17 million in stock option exercises. We now have $118 million of invested cash and 58 million of short and long-term debt. We've worked hard over the past year to improve our cash position and have shown excellent results.

A few final thoughts on the year -- I'm delighted with the positive drop-through we've accomplished through this year. We are leveraging our P&L and our core business. This is important in the future growth of our core business and a discipline that we intend to apply in all parts of our organization.

I'd like to thank our employees for their hard work over the past year. They've remained focused on and dedicated to a successful transition. The results this year showed that they've delivered.

Now, I will turn the discussion back to Brad.

Thanks, Ron. As noted in our press release, our FY '05 guidance is mid single digit revenue growth, gross profit margin in the high 40s, operating income growing more than 25 percent and improved operating margin, and EPS in the $1.38 to $1.43 range.

Now, I'll fill in some of the details that support that guidance. We expect revenue growth in the mid single digits. Currency is again, in this year, expected to impact us favorably. Revenue growth is more modest than FY '04, as we expect plasma revenues will decline in the high single digits. The loss of the Alpha business will result in a $9 million deficit in U.S. revenue.

In addition to that, the worldwide glut of plasma will continue to impact us. In FY '05, this will have a particular impact on our European business. This will result in an incremental revenue decline of about $3 million.

So, we are starting FY '05 with a revenue gap from U.S. and European plasma sales totaling $12 million. Now, we plan to offset this with OrthoPAT growth in the 50 percent range and red cell growth in the 40 percent range. Combined, this represents incremental revenue of more than $14 million. Our cell Saver and blood bank markets are mature and not growing, yet we will continue our strategy of taking market share and growing in markets that we can exploit. I'm confident in our ability to do this, based on our FY '04 results. I expect we will achieve growth in both of these product lines in the low double digits, including the benefits of currency.

Turning to gross margin, this year, we expect to see gross margin in the high 40s. Now, this is consistent with last year's trend of quarterly improvements when gross profit margin went from 45 percent in Q1 to 49 percent in Q4. New partnership agreements and pricing discipline should generate about 1.5 million in incremental gross profit dollars and allow us to leverage margins throughout FY '05.

Now, let's talk about operating margins. For the past 12 months, we've done a good job of leveraging our P&L to improve operating margin. Operating margin increased every quarter, from 9 percent in Q1 to 15 percent in Q4. For FY '05, we will continue to see positive drop-through. We plan to leverage mid single digit sales growth into more than a 20 percent increase in operating income. As I noted earlier, FY '05 earnings per share are expected to be in the range of $1.38 to $1.43 and should include more than 20 cents favorable impact from currency.

Several of the strategies and expectations I just mentioned are similar to '04. So, what's different about this year? Last year, we leveraged operating expenses to fill some of the revenue gap caused by the plasma sales pressure. We will continue to be prudent on operating expenses, but we have the financial strength to make targeted investments in our business, so we will do this. These investments will allow us to increase internal efficiency. We can also capitalize on market trends and instability among our competitors. This will grow the business in the long-term.

So, let me give you some detail here so that you get some more insight into our strategy. We have two new product platforms that we are focusing on for FY '05. The first is an innovative new blood salvage device for the cardiovascular market. We are scheduled to have this in limited market release in the second half of the year. The second is an enhanced MCS platform for platelet collection. We are scheduled to have this in clinical trials by year-end. Spending on the development of new products will give us growth opportunities while protecting our high marketshares. The truth is, we've not brought enough new products to the market in the last two years, so R&D investments make sense.

We will also invest in Information Technology. The Board has approved the implementation of a product life cycle management system. This system will convert our manual R&D and manufacturing documentation and design systems into one fully integrated software system. These efficiency improvements will liberate our engineers to spend more time on new product initiatives. The system will also deliver substantial return on investments almost immediately.

Now, a quick word on expenses -- in FY '04, in constant currency, our expenses were equal to FY '03. Last year, our reorganization had a positive impact of $4 million. In FY '05, we're going to use that $4 million in savings and invest it in additional R&D -- (technical difficulty) -- build the product pipeline we just talked about. In FY '05, our non-FX operating expenses will increase approximately 4 million. That is made up of merit increases and the higher costs of doing business these days as a publicly traded company. This includes things like higher audit and insurance costs.

Now, folks, we've taken market share in each of the last three quarters. Investment in two new products that we plan to launch in '06 plus a recovering plasma market should make it clear that we are investing prudently as we prepare for '06. Given to the competitive landscape, now is not the time to become timid in our market share or R&D goals. Now, that covers our financial guidance.

I also want to note another important goal for FY '05. In addition to meeting our financial commitments to you, our priority is to complete our core competency review process and refine our strategic plan. These were projects begun in FY '04. So, let me describe our progress.

In the third quarter, we began reviewing our strengths to identify the few things that we do best-in-class. Once we identified these, we said we would look at ways to leverage these strengths to grow the business. We call this the core competency review process, and we've made good progress. To date, we've surveyed over 1,300 employees and received more than 3,000 data points identifying potential corporate strengths. We've tested, reviewed and qualified this data.

Finally, we are able to refine the data down to 25 strengths that merited serious investigation. Both internal and external validations reduced that list further. We now have three possible core competencies from which Haemonetics can develop strategies to expand our business. These include a superior level of customer service and support, a rigorous manufacturing process management, and a robust software development program for medical-device applications.

Now, the third competency, software development, is not a competency we expected, so we're really going to test it. But let me give you color that explains our current thoughts about the other two competencies. I'll start with why we believe that superior customer service is a core competency for Haemonetics. Folks, years ago, Haemonetics was spun out of a large healthcare company. Since then, we have retained and gained tremendous market share in our markets, despite competing against multibillion dollar corporations. We've been able to do this because we do a great job of servicing our customer. In fact, for the fourth consecutive year, we've won the NorthFace Scoreboard Award. Our customers have cited us as having world-class service. We are partners who enable our customers success. Our customers reward us with enduring relationships. Clearly, our market share gains this year prove that point.

As I said, we also believe that rigorous manufacturing process management is a core competency. This was demonstrated when we implemented a strategy to move old manufacturing closer to our Japanese customers. This strategy made sense from a customer service and operational perspective. However, there were concerns about transferring operations without sacrificing superior quality levels. Using process management, the team transferred operations quite smoothly. In fact, I just returned from Japan, where I visited the Japanese Red Cross and the Ministry of Health. I can confirm today, several years after this manufacturing transfer, that Haemonetics' reputation for quality in this area of the world is absolutely unsurpassed. This is a significant advantage for us in a geography that places a premium on service and quality.

We continue to use similar process-management tools today in manufacturing. We have a workforce particularly skilled in their application to problem solving. We are using Six Sigma and total quality management principles throughout the business. This is a sustainable competency that we believe distinguishes us from the competition and it delivers a real competitive advantage.

Now, the core competency review process dissected our business with great specificity. We now need to determine if these core competencies can be leveraged; that is, the competency must be scalable so that it can realistically grow our business. This growth must also deliver profitable dollars, so we will not exploit our core competency if it's not profitable, or if it cannot be leveraged.

So, that's where we are today. We expected this next phase to take 6 to 12 months to complete. Milestones we will reach during this time include customer validation, benchmarking and assessing potential growth areas. Plus, we will identify opportunities that fit with these competencies.

Now, let me turn to our strategic plan. For FY '04, we had two strategies; first, leverage the core business and second, prepare to expand the business using the core competency review process. In essence, we've been operating to this strategic direction already. But as I shared with you on previous calls, we've begun working diligently on a more comprehensive five-year strategic plan. We presented a draft of this plan to our Board. The Board has given us great feedback that we are using to refine the plan further. As you know, strategic planning is not a one-shot deal; we will continually work from and update this plan as needed.

As we fine-tune the plan, we will simultaneously move forward with some of our key strategies. We will continue to protect and grow our core business, that engine that generates significant cash. Each product family has identified critical initiatives to achieve short and long-term goals. For the patient products, these include increasing market share, expanding product offerings and leveraging our sales channels. For donor products, these include accelerating red cell growth, leveraging Information Technology and providing services for our customers. They will also complete late-stage R&D projects to regain our technology edge.

Now, we've being very careful in the planning of this effort. I'm comfortable that we have excellent processes in place to identify thoughtful and responsible future opportunities for expansion.

In summary, we have some incredible challenges this year and we are clearly still in transition but overall, I'm pleased with the progress we have made. In that sense, it was a good year. I'm very confident in the core competency review process and excited about our strategic plan.

I want to thank you, our shareholders, for all of your support during this year. I especially want to thank our employees for a strong start. We remain committed to building a company that delivers long-term shareholder value.

With that, I will open up the call to your questions. Operator?

Thank you. The floor is now open for questions. (OPERATOR INSTRUCTIONS). Steve Hamill of Piper Jaffray.

Good morning. I was wondering if you could talk a little bit about SG&A in particular. It was up significantly from what we had expected during the quarter, and it was particular surprising after it had dropped so dramatically in December. I was wondering if you could describe a little bit more what happened in SG&A and what your thoughts are for SG&A in 2005?

Sure. Thanks, Steve. SG&A for the quarter -- a third of it was the 53rd week, Steve, okay, so you have to factor that in. A third of SG&A was FX. Then a third was other, which was about 1.5 million, for a total SG&A of about 4.3 million for the quarter. So, in terms of how it's broken out, it was those three component parts.

As we are going forward, if you look at our numbers for '05, we have about $4 million of OpEx that are in constant currencies that are going to be spread between merit increase, insurance, audit costs and so forth. So, that's how we are spreading that part of it. Does that help answer the question?

I though you had said earlier it was going to be 5 million. It is 4 million?

It's 4.

So that basically all hits the SG&A line?

Correct.

Correct, okay. So, it sounds like we should not be assuming that the progress that you showed in December is going to continue into fiscal year '05 I guess is what I'm hearing. I don't know if, based on the math here, if it sounds like all of that is just related to this incremental expenses you're talking about or if there is more to it than that?

Let me try to explain. In FY '04, our expenses, in constant currency, were equal and slightly less than prior-year. As we look at cost reductions through the reorganization that were $4 million, we are taking that $4 million, Steve, and putting it into incremental R&D that will generate opportunities for us to grow our business with the cardio path product line and the MCS+, plus the Information Technology platform, which we call PLM. So that money is being moved over to invest in our business.

I really believe, if you look at our competitive landscape and the fact that we've been taking market share and the fact that we've not really developed any new products or launched new product lines in the last five or six years, that now is the time, with our financial strength and the position our business is in, to absolutely focus on delivering, for the first time in a long time, two new products into the marketplace so that we bolster FY '06.

Now, the remainder of $4 million or so, as I indicated, will be used on merit increases and generally running the business. But I think it's important to focus on FY '06 one step further, past '05. What are these investments going to give us? Well, as I indicated, a couple of new products which are desperately needed. But when we take a look at the '06 numbers, we are seeing plasma, as I talked about over several calls, having a glut in the marketplace. We believe that, in talking with some of our customers -- and this is their expectation, not ours -- that plasma glut looks to be waning over the 12 to 18 months period. Recently, they're looking more like 12 months.

So, with our market share gains, with us being able to invest to have a couple of new products that will hit through '05 and into '06, with the plasma market recovering and with continued growth of red cell and OrthoPAT, we believe we're positioning the business very well for FY '06 growth, using this year as the benchmark to do that.

Jim Sidoti of Sidoti & Company.

Good morning. Just a follow-up from Steve -- that $4 million -- and that included the increases in SG&A and R&D spending?

It was SG&A.

Okay, so it's $4 million in incremental SG&A and then you'll have the additional investment in R&D in fiscal '05?

That's correct, in those new product platforms. That's correct, Jim.

Okay. You didn't mention anything about the negotiations with Baxter regarding the settlement of the Alfa contracts.

Let me have Lisa comment on that, as she is right in the middle of that.

Basically, Jim, at soon as we are in a position to report something to you, we will. As you can well understand, it's just not -- it's not responsible of us to detail what the litigation process is. I don't even want a call like this.

A follow-up coming from the Steve Hamill of Piper Jaffray.

I have a feeling I'm going to be back in queue a couple of times here.

Not a problem, Steve.

Just to clarify on my previous question then, I'm still not sure. Are you telling us, Brad, that R&D is going to go up maybe as a percent of revenue from '04 to '05, or are you talking about reshuffling R&D dollars from prior projects to these projects?

We're going to see it go up, Steve.

Okay, great. Then can you talk a little bit more about both of these new products? In particular, I'm most curious about the enhancement to the MCS. You know, your technology is basically the foundation of that market, but it's starting to get somewhat dated. How much do you think you can catch up to your Number One competitor in my mind, which would be Gambro in terms of technology with this new enhancement?

Let me get both of them, if I might. First, let me start with the CardioPAT This is a $25 million market; it's a similar device to our OrthoPAT product line, so it's portable. We believe it has, similar to OrthoPAT, no competition in terms of a predecessor to the marketplace. We're excited about that one. That will be the first product that we will launch of the two. The second is the MCS+. You know, our technology has, as you indicate, really been a workforce and we believe that the enhancements on this will provide additional value to our customers. We think the technology improvements, through engineering and some of the things we've been looking at, will position us well against not only Gambro but Baxter.

We are particularly interested in improving speed and collection efficiency.

(OPERATOR INSTRUCTIONS). Our next question is a follow-up coming from Steve Hamill of Piper Jaffray.

All right, okay. Can we talk a little bit about the guidance for FY '05 in terms of revenue? When I look at this quarter, I was, quite frankly, stunned by the level of organic growth in the quarter. I guess I would love to get more detail on a few segments in particular -- plasma, which didn't show the hit that we would have expected, and then equipment, which shot up as well and wasn't discussed in your earlier remarks.

Then, as my follow-up, why does it seem like your organic growth assumptions for fiscal year '05 really don't reflect the kind of success you showed here in Q4?

I'll ask Ron Ryan to take the first part of it for you, Steve.

Steve, just to talk about plasma, we had a strong finish in plasma pretty much across all geographies. Also, equipment was higher than our expectations, even in Europe. As you know, equipment sales are up and down on a quarter-by-quarter basis.

Ron, any sense as to why plasma finished so strong in all geographies?

I think there are a couple of reasons. Certainly, in the U.S., we have a customer base where, on a comparable center basis, utilization is higher than the rest of the market and so we are showing strength in the U.S. compared to the market itself or the competition. Secondly, we had a good finish in both Japan and Europe.

I will take that one step further, Steve. We did a heck of a job of servicing the customer. The marketplace is in turmoil. We have one other plasma global competitor, and we've done a very good job in servicing the market. When you look at the market share growth that we've experienced through the last three quarters, we've consistently continued to do that. So that's part of the answer and explanation for additional feedback from Ron.

In terms of '06, let me talk about the topline. As I tried to outline in the first part of the call, we have a significant number to offset. You remember, as Alfa had $9 million of negative impact this year and then $3 million in terms of Europe, there's a $14 million hole right out of the get-go that we've got to fill. Now, fortunately for us, we see OrthoPAT and red cells at a scale now where they are consistent; 40 percent-plus growth rate for the last couple of years is going to be able to offset that by about $14 million. So still, at the end of the day, that offset and growth of those two product lines, which have been growth vehicles for us this past year, are doing nothing more than offsetting our plasma growth. So, that's exactly where we are.

Now, we will hope to be able to continue to grow in other areas, but it's going to be more of a mid single digit revenue growth. That's the one difference from last year, is offsetting that plasma hole.

Okay, so I guess the one thing that I am still left somewhat in a quandary about is your basic business is, though, of plasma and platelets. It seems like you're telling us that you had unusual strength in Q4 in plasma and that you were taking share from Baxter, and yet you don't seem to be expecting that to continue in fiscal '05.

Then on platelets, I don't know what's going on in platelets. It looks like we have just got a broad market acceleration in platelets based on your numbers and your competitors numbers and yet again, on platelets, you really haven't assumed that that trend continues in '05. Are you guys just being conservative, or do you see reasons why you think you will lose share or see market slowdowns in those two categories?

On the platelet side, let me step in here, Steve. The market has not grown in any material way. The gains that we posted this year were really from taking share. But you know, we already have significant share in that market. Therefore, going forward, although we believe that we're going to maintain that share, we don't look forward to duplicating the significant gains in market share that we had this year, necessarily.

We have no more questions. Here's Mr. Nutter with closing comments.

Thank you very much, operator. Folks, we accomplished exactly what we set out to do 12 months ago; we met our overall financial guidance and exceeded our earnings guidance. We are pleased with these results. More importantly, we made great strides at the beginning of this transition that will make us a stronger company. We remain absolutely committed to that objective. Our plan for '05 is to invest in our business. We believe it's the prudent thing to do, given the market conditions that we find ourselves in today.

I look forward to visiting with you at the end of Q1. Thanks very much for your call. Take care.