Haemonetics Corp (HAE) 2005 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Haemonetics second quarter fiscal year 2005 conference call.

At this time all participants have been placed in a listen-only mode. And the floor will be open 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 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.

Brad Nutter, Haemonetics President and Chief Executive Officer, will moderate this call. Mr. Nutter?

Thank you, operator.

Good morning. Today I am joined Ron Ryan, our CFO, Lisa Lopez, General Counsel and VP of Administration, and Julie Fallon, Director of Investor Relations. Our comments today will cover three things. First, I will comment on our results for the quarter and guidance for the year. Second, Ron will provide details of our quarterly and year-to-date operating results. And, finally, I'll return to discuss our performance against Q2 priorities and describe the completion of our core competency review process. So let me begin.

As a reminder our annual guidance is mid single-digit revenue growth, gross profit margins in the high 40s, operating income growing more than 20%, and earnings per share in the range of $1.38 to $1.43. For the second quarter revenue was 91 million, 4% over Q2 FY '04. Year-to-date revenue is 186 million, 5.5% over the first half of last fiscal year. Gross margin for the quarter and year-to-date is 50%. Operating income grew 52% in the quarter and 64% year-to-date. Now Ron will cover this in more detail but we are on track to achieve revenue, gross margin, operating income guidance for the full year.

Earnings per share was 43 cents for the quarter, up 48% over Q2 FY '04 and 73 cents year-to-date, up 70% over prior prior year. So year-to-date we have over-achieved our plan versus our full year guidance goal for earnings. I'm specifically highlighting these results because, given this performance, we believe our EPS results will be toward the top end of our range for the year.

Now let me turn the call over to Ron for details on our very strong quarterly and year-to-date performance. Ron.

Thanks, Brad, and good morning.

I am pleased to report on another quarter of solid performance against our goals. Consistent with our communications over the past year, all numbers are as reported. Foreign exchange did have a positive impact on the P&L this quarter. If you want to drill down into this will you fine a detailed P&L break out and operating cash flow metric with and without FX on our Web site.

Now Brad already reviewed our total revenues. So let me break down revenue by product line for disposable sales since disposables continue to be the best indicator of how our business is doing. First I'll review our donor product family which consists of plasma, blood bank and red cell product lines. Miscellaneous and services are also included in this section. In the plasma business, disposables revenue was $24 million for the quarter, down 21% and 50 million year-to-date, down 18%. These revenues continue to be impacted by consolidation of the plasma industry.

The acquisition of Alpha Therapeutic, by our only competitor last year, had a significant negative impact representing a loss of $4 million in sales in the quarter. Because Alpha was acquired in the third quarter of the last fiscal year, Q3 of this fiscal year will be the last time we report revenue loss comparisons due to the Alpha business. However, for the second half of the year we expect the plasma collection business will continue to decline versus last year for three reasons. First, more U.S. collection centers have closed in the past 18 months to bring supply into alignment with demands. Second, our customers in Europe and Asia tells they are temporarily collecting less. And, third, globally, our customers indicate they are still working through about nine to 12 months of excessive plasma inventory.

Now turning to the blood bank business, which consists of platelets and cell processing, disposables revenue is 33 million for the quarter, up 25% and $64 million year-to-date, up 22%. The extent of our platelet growth this year has been a real surprise and we are extremely pleased with these results. Now, as I said in the past, most of our blood bank revenue is from platelet sets in international markets. So this product line had a favorable currency impact in the quarter. However, most of the 22% year-to-date growth came from two factors. First, we are sustaining market share gains made in Japan in the second half of last year. Second, Japan recently lifted its product mix to higher priced, filtered platelet sets from non-filtered sets. So we've seen very strong blood bank sales in the first half of the year. While we are delighted with this, it was beyond our projection. We expect comparisons for the second half of the year will be more modest.

Turning to the red cell business, disposables revenue was $7 million for the quarter, up 31 percent, and $13 million year-to-date, up 36%. In the U.S. we grew red cell disposables revenue 27% in the quarter. It is important to note that red cells growth varies on a quarter to quarter basis. U.S. blood collectors saw declining blood donations overall this summer for a variety of reasons but we are still on track to see 35 to 40% growth in our red cell business for the year.

For the quarter we remain focused on converting accounts to higher priced filtered disposable sets and we've been successful here. United Blood Services, which is our largest red cell customer and the second largest blood collector in the United States, is now using our filtered leuko reduction disposables in 13 of its 16 regional blood centers. We also continue to focus on service and training in order to grow collections at existing accounts. Let me give you an idea of how these efforts are succeeding. The American Red Cross regions using our equipment, began the year using our devices to collect 3% of their red cells. By the end of the second quarter, these Red Cross regions were collecting 4.1% of the red cells with our devices. In fact during the last six months, we did as many red cell collections at Red Cross accounts as we have done there in all of FY '04.

Now as we've reported in the past, collections by United Blood Services are at about 30% penetration. This means that almost one out of every three units of red cells collected by UBS is collected using Haemonetics technology. So if an early adopter, such as UBS, can reach 30% penetration with our automated technology we are confident that there is a large opportunity for growth at newer accounts which are at significantly lower penetration rates today.

Let me take an extra few minutes to address the red cell market. There are 15 million units of red cells transfused each year in the United States. Although we don't expect full penetration this is a significant market. In the past year we've increased device placement in the field by 25% going from 600 to 740 devices now in use. We've rapidly achieved strong utilization on these devices. Early adopters of our technology who's contracts are expiring are choosing to renew the contract. We have significant first mover advantage with a system that has collected roughly 2 million units of red cells around the world. We are proven in quality and service and in mobility.

Moving on to the miscellaneous and service line in the P&L, revenue was $4 million for the quarter, down 17%, and $9 million year-to-date, down 17%. Revenue for our Fifth Dimension subsidiary is reported on this line. Fifth dimension sells mainly to plasma customers, and its sales also have been negatively impacted by the plasma industry consolidation.

Now let me review revenues from our patient product family which includes the Cell Saver and OrthoPAT brand. For our total patient business, that is both product lines combined, revenue was up 18% to $20 million for the quarter. Year-to-date revenue was $41 million, up 16% over prior year. Cell Saver disposables revenue for the quarter was $16 million. This product line sales grew 9% in the quarter over last year in a flat market. Revenue year-to-date is $32 million, 6.5% over prior year. Price improvement and product mix changes are driving revenue growth. Additionally, as Brad mentioned several quarters ago, we were focused on some under-penetrated markets. As a result we saw strong growth in several emerging markets.

OrthoPAT disposables revenue for the quarter was $4 million, up 71%. Revenue year-to-date is $9 million, up 71% over prior year. Zimmer distributes this product in the U.S. where we've seen consistent, strong device placement over the past year and this product is now delivering over 10% of the Zimmer Olst(ph) S. P. division sales. Utilization on these devices continues to strengthen. We are also seeing excellent growth in international markets, particularly in Europe where we sell direct.

Before I go into detail on other parts of the P&L, I want to comment that this is the fourth consecutive quarter of positive drop-through. For the quarter, we leveraged 4% sales growth into 10% gross profit growth and a 52% increase in operating income. This performance was affected by currency, but more importantly, it is a direct result of strong operating expense management and discipline in our pricing strategies.

Now I'll review our P&L. For the quarter gross profit was $46 million, gross margin was 50%, up 250 basis points over Q2 '04. Year-to-date, gross profit is $93 million, up 14 percent, and gross margin is 50%, up 360 basis points over prior year. Gross profit was positively affected by foreign exchange, a change in the mix of products being sold, pricing improvement and manufacturing efficiencies.

Our CORE program, which stands for Customer-Oriented Redesign for Excellence, generated more than $1 million of operational cost savings this quarter. Operating expenses were $32 million, down 3 percent, from Q2 '04. Year-to-date operating expenses are $64 million, level with the prior year. I want to emphasize spending for the year is structured so that we have the flexibility to protect our financial targets through prudent expense management. As you know we don't give quarterly guidance, but I want to point out that you will see an increase in operating expenses in the third and fourth quarters relative to the first half of the year. The increased spending will allow to us adequately support new product launchings.

For the quarter, operating income was $14 million, up 52% over Q2 FY '04. Year-to-date operating income is $29 million, up 64% over prior year. The operating income increase is the drop-through from gross profit improvements and a decrease in operating expenses as a percent of total revenue. This resulted in operating margin of 15% for the quarter, up 490 basis points over Q2 '04. And nearly 16% year-to-date, up 560 basis points over the prior year. The increased spending for the second half of the year that I just mentioned will have some impact here as well, but we will still grow operating income as planned which is greater than 20% for the year.

The numbers I just reviewed are reported results. Let me remind you that we took a $2.6 million restructuring charge in the second quarter of last year. But even if we exclude the effects of the restructuring charge we have managed the business to deliver positive drop-through. On an adjusted basis our 4% revenue increase is leveraged to a 10% gross profit growth and 20% increase in operating income.

Our tax rate for the quarter was just under 36% and slightly below Q2 FY '04. This includes a small local tax benefit that is reflected in the quarter's tax rate. The tax rate for the remaining quarters in FY '05 is projected to be approximately 36%.

For the year, earnings per share were 34 cents, up 48%, over Q2 '04. Year-to-date EPS, 73 cents, up 70% over prior year.

We maintain a strong balance sheet producing $16 million of operating cash flow which we define as free cash after working capital and capital expenditures . We are managing capital expenditures below depreciation expense. Beyond cash from operations, we generated $4 million from stock option exercises in the quarter and $7 million year-to-date. We now have $144 million of invested cash, and 53 million of short and long term debt.

All in all it's a strong quarter. Another quarter where we've been successful in our strategy to leverage the core business and we've remained on track to deliver on our full year commitments. Now I will turn the discussion back to Brad.

Thanks, Ron.

We are pleased with our consistent strong financial performance and let me thank all Haemonetics employees for their fine efforts. During the last call I identified three priorities for this quarter. They were -- number one, continue our R&D programs to enhance our MCS platelet collection platform and to prepare to introduce the CardioPAT blood salvage system; two, continue to focus on leveraging the core business; and, three, complete an independent, external review of our potential core competencies. Let me give you an update.

Beginning with the first priority, internal R&D. In the second quarter we remained on track and on budget. For the MCS enhancements we expect they will be ready for clinical trials by the ends of the fiscal year. For CardioPAT, we have begun limited market release with customer acceptance trials in the U.K. We expect to initiate trials at two other European sites by the ends of this calendar year. In the United States we are still in the regulatory review process and expect limited market release will probably begin early next fiscal year.

Now let me turn to our second priority, that is leveraging the core business. Improving profitability is a discipline that I believe strongly in. Now Ron just said that this is the fourth consecutive quarter in which we've seen extensive positive drop-through on the P&L, and we are proud of that. While we may not be able to generate positive drop,through every quarter, I do believe that our momentum is sustainable over the long-term. So you can expect to see improved profitability as goal for us each fiscal year.

Now let me share with you why I am so confident in this statement. First let's look at revenue, both current and future. If you back out effects of foreign exchange and the changes in the plasma market from our revenue line, our organic growth year-to-date is 15% over prior year. Once the plasma market rebounds, and it will rebound eventually, this will be good news for us. But the questions are two-fold and they are related. The first is, what can we do to increase our top line growth rate? And the second is, can we continue to improve gross profit? I have two answers for this. First, for the near term, we intend to increase revenues by improving product pricing and mix management. And, second, we will improve gross profits by continuing to effectively manage manufacturing costs. We have proven value to our customers. Delivering improved margins through both pricing and products mix on a year-to-date basis.

We have also been successful taking structural costs out of our business with a target of $5 million from manufacturing this year. To further leverage gross profit dollar growth to the operating income line, Q2 expenses are below prior year. And this is the second reason why I believe leveraging our P&L year to year is sustainable. We use one rule in managing the most controllable line on our P&L and that is it's expense line. That rule is that operating expenses will grow at 50% of the rate of incremental gross profit dollar growth. So this discipline ensures that operating income will always grow faster than gross profit. As Rob said, will you see the operating expenses in the second half of the year increase and this increase is based on our plan to launch new products. However, we will still meet the formula that I just described regarding annual expense management. So to summarize this point, many of you have asked how we achieve such great leverage on our P&L? And to do this we work very hard on manufacturing cost, price, product mix and operating expense discipline and this gives me confidence that we will achieve the high-end of our annual EPS guidance by year end.

Now turning to our third priority for the quarter, we said we would complete the independent external review phase of the core competency review process. The external review was the final stage of the process to determine how we can strategically position our business for future growth. So let me take the rest of this call and given you an update on the process, what we have learned and from here, what strategies we will use to grow this business. First, as many of you know, last October we surveyed all employees and asked them what they did that brought value to either our company or to our customers. 85% of our work force responded with over 3,000 data points of things we think we do well. We announced in May that we had identified three possible core competencies from our internal process. The first was our ability to do an outstanding job of sales support and service to our customer. The second was outstanding manufacturing process management. And the third competency was the ability to develop IT products that would benefit our customers.

Now having validated our possible core competencies internally, last quarter we set out to validate them externally. Specifically, we wanted to know if outside parties saw Haemonetics as having compelling strengths in these areas. Just as important, we need to do determine whether these strengths were something that we could leverage to a competitive advantage so that we could grow our business.

For the external review we hired an outside consulting firm and that firm conducted extensive interviews to see if these competency were in fact significant. Last week we presented the finds to our Board of Directors, and I would like to share with you some of what we communicated to the Board. We do in fact have three core competencies -- customers, customers perceive these as very important. And site them as strong reasons as to why they do business with us. Now, the first two I mentioned earlier regarding sales support as well as manufacturing process management, stood the test of external scrutiny. Clearly our global market shares are very strong indicators that is customers value these two assets. For the third, the use of information technology, well, this was revealed to be more of a strength than a true core competency. We are good at this but there are other companies that have significant competitive advantages in the developing of IT software for the application in the medical device markets.

So do we have a third core competency? Yes, we do. And it probably won't surprise you. Our customers believe that we are market innovators. And when you think about it Haemonetics has created every market we serve today. We had first mover advantage in all these markets because of our strong competencies in sales and service we continue to have leading market share today. This discovery really highlights why it was important for us to externally validate our thinking. When you ask 1400 people what they do well, the idea of being technology or market innovators was such a broad concept that it may have been taken for granted, yet this competency was abundantly clear to our customers.

So today we have three core competencies at Haemonetics. One, sales support. Two, manufacturing process management. And, three, marketing innovation and creation.

So let me review. We've been operating under one broad strategy to leverage the core business. So far we've done a pretty good job at executing this strategy. And as I said we believe this leverage is sustainable. Now that we've completed our core competency review process we have learned that we are really fortunate. This bring me back to the point I raised earlier about the opportunities we foresee in terms of increasing revenues over the long-term. As a matter of fact, our recent announcement regarding Arryx is a direct result of our core competencies which are leveragable as they are clearly recognized by our partners. I will come back in a minute.

We believe by leveraging our core competencies we will deliver new products or enter new therapeutic classes and expand our business. Now to execute on this second strategy, expanding our business, we have three tactics. First we will grow by continuing to develop marketing partnerships for new and different technologies with companies that expect us to help them develop markets. We can leverage our strong customer relationships. Importantly we can create value for our customers through marketing partnerships and expand our product offerings. Now, examples are the three recent marketing partnerships we have already concluded. Can Hema Systems, Hema Metrics and Arazen(ph), the market potential for these products is more than $80 million. It's now our job to create and penetrate these markets. In other words, we must do what we've done well and that is execute.

The second tactic in our strategy to expand our business is to continue to be innovative in developing new products through our internal R&D. We are going to do this by continuing to focus our internal R&D efforts. As I said earlier, we are planning to launch two new products, the CardioPAT and the enhanced MCS platform in FY '06. These products provide us market size of more than $400 million. We have also identified other exciting opportunities to pursue through our own internal R&D. Continued focus on targeted R&D efforts will ensure that we innovate our marketplace in advance of our competition. Innovation differentiates differentiates Haemonetics, it has in the past and it will in the future.

The third and final tactic to expand our business will be acquisitions or equity investments in new technologies. In August, we announced the purchase of assets of the blood screen product line from Harvest Technologies. This is a $375 million market opportunity that allows us to expands further in surgical patient management. One of the products, the SmartSuction device is used to remove blood and debris from a surgical wound during surgery. SmartSuction can be used as part of the surgical blood salvage process, but more importantly, it can also be used in standing alone in surgeries where blood salvage is not possible. Now this acquisition is an example of leveraging two of our core competencies. One, sales support in that we can use our strong sales and service capability to market the product. And, two, our manufacturing process management as we are retooling the product line to meet our high quality manufacturing requirements and standards. We expect an FY '06 launch on this product.

So the three tactical growth areas that I just commented on, which are marketing partnerships, internal R&D, and acquisitions, create an $800 million market opportunity for us today. Penetrating these markets provides strong growth vehicles in the short term.

Finally, we just announced an equity position in Arryx corporation. We also signed a licensing agreement with Arryx which gives Haemonetics access to technology that could potentially be used in blood processing. As we return to our roots as innovators, this is clearly a significant early stage research initiative that could deliver future long-term opportunities for our business. This equity position with Arryx is an excellent example of leveraging our core competencies in two ways. First, Arryx believes our ability to create markets was the very compelling reason for them to choose Haemonetics versus anyone else. And, second, we see their technology as potentially disruptive technology for existing markets but more importantly, leveragable to new growth markets. So now the fun begins. Our next step is to move to proof of concept phase which should take about six months and we will update you on our progress each quarter.

So let me summarize. We've completed a lengthy process to determine our competencies, to give us future growth platforms. We are very fortunate to have identified three. We believe we can leverage these into new marketplaces or therapeutic classes with business partners or through acquisitions or by pursuing internal R&D. And we are doing all three. Our competencies now give us a blueprint to help guide our expansion decisions going forward with the objective of changing the growth profile of your company.

At this point let me turn the call over to the operator for questions.

(Operator Instructions)

Your first question is coming from Jim Sidoti of Sidoti & Company.

Good morning.

Good morning, Jim.

Can you update us on the number of Red Cross centers that are currently using the automated technology for double red cells?

More than half of all the regions in the Red Cross, and it's a centralized blood collection system, have now the capability and are rolling out the technology in both fixed sites as well as mobile collection sites.

Now is that up from a quarter ago?

Yes.

You know, Jim, this is Brad. One comment that Ron made that I think is pretty impactful. During the last six months we did as many red cell collections at Red Cross accounts as we had done there in all of last year. So we really think we are gaining some momentum here.

Thank you. Your next question is coming from Steve Hamill of Piper Jaffray.

Yes, I was wondering if you could comment a little bit about the competitive environment in Japan, specifically on the blood bank side. You obviously posted a nice quarter but so did your competitor Gambro. And they, in particular, talked about Japan becoming their second largest market.

Sure, Steve. We did have a strong quarter in that segment of our business, we are really pleased with it. In Japan what we see is a competitive marketplace changing rapidly. About 18 months ago when I first joined the company we had somewhere around 70, 71% market share with our projected growth rate this year we think be we will finish somewhere around 79% market share. So we've been taking market share at the expense of one competitor. That competitor has been Baxter. Gambro has also been take market share at the expense of that same competitor so both companies continue to grow rapidly. I would also say we have done very well in Europe on the platelet area. So growth has been balanced for us. Clearly a little bit more in Japan than Europe but we also have seen good growth in Europe.

In terms of the Japanese growth, how do you think about that a year from now? Do you feel confident as at some point here Baxter's share having probably been divvied up between yourselves and Gambro, can you hold off Gambro at that point?

Yeah, the intelligence that we have in that market indicates that with our about 79% market share we believe that Gambro will end up somewhere at about 5% market share, so they've picked up a little market share. That we believe is a number that's sustainable as we go into FY '06. I think the other biggest thing to consider here is that we've spent an awful lot of time evaluating and understanding that market. And as you know, Steve, one of the things that the Japanese Red Cross and many people in Japan hold very dear to them is product quality. And I think the reason that we've been able to have high market share and capitalize on high market share has been the fact that our quality, as perceived by them, is at a very, very high standard. I don't know what standards other people have but I think that customer certainly has been has been voting with their purchasing dollars and rewarding us with our high, high quality standards. And so we expect that that's leveragable and sustainable.

That you. Your next question is coming from David Zimbalist of Natexis Bleichroeder.

I was wondering if you could talk about price and mix in the Cell Saver business? And, in particular, how you can explain that positive move as well as the move to expand in emerging markets? Can you talk about what that does to your pricing overall in that business?

Sure. Thanks, David. I'm particularly pleased with the leadership Brian Concannon and his team in the patient business have done with the Cell Saver product line. We announced that on a year-to-date basis we are up 6.5% over prior year with Cell Saver. I remind you that that's a marketplace that's in decline, growing less than about negative 1 to 2%. So we've been able to take market share do well.

In terms of pricing mix, Brian and his team have done a couple of things. They have really focused in on looking at the number of disposable sets that we sell there and rationalizing some of the product line. And that has really been forcing our mix there and improving our growth substantially providing more value to the customer. They have also done a pretty good job of raising price. So we believe that the job they have done in a non-growth market to grow at that rate in Q2 of 9% and year-to-date over 6% is outstanding. So that should give you a little flavor. Ron, do you have any additional comments?

Yeah, I would just like to add that pricing at a higher level across the company was -- we are very satisfied with the results both in the quarter and the first half, in the second quarter of pricing improvements represented about 25% of our gross profit growth.

And we think that this relates back to the first of the core competencies that Brad cited, and that is sales support. When we have established a continuing reputation for superior sales support, frankly that translates to value that we can include in our pricing.

And second, the follow-up, could you talk a little bit about the clinical progress of the symbol instrument? It was on display at the AABB and seemed pretty interesting.

We were delighted with the AABB. Pete Allen and the donor leadership team had a particularly good show. The Symbol we highlighted at that show. And, boy, I'll tell you, folks were knee deep looking through that product line. Now this is one where we believe that will be a late '06 or early '07 launch. So we've been doing work on that for some time now. And we thought it was time since we have CE mark in Europe, that it was time to introduce it here in the United States. But we are using a very targeted approach and we think we are in pretty good shape. For those of you who don't know, Symbol is the new name for the old red cell collector. That's the brand name that we are going to introduce to the marketplace. And it's an exciting new product line to bring into the red cell marketplace.

Once again, (Operator Instructions). Next question, Steve Hamill of Piper Jaffray.

I was wondering if you can talk a little bit more about plasma? And, in particular in terms of dollars, plasma continued to go down this quarter. And I'm wondering if the fourth quarter - not the fourth quarter, the December quarter which is usually your seasonally strongest quarter we should start to see that turn or if it's too early to the expect that?

Yes, Steve, this is Brad. You remember the anniversary time frame of Alpha Therapeutics purchase by our competitor was in our Q3 which we are coming into. So year to year comparisons we will see a little bit more, perhaps $1 million of impact in Q3. And then that anniversary date will be over. So that's part of the answer from a comparative standpoint.

Secondly, our customers are telling us that they are beginning to see the trough develop, and they have better visibility at this than we do. And we think this glut of plasma is beginning to come down. And that's according to our customers that we try to stay very close to. So we are beginning to see that work down over time.

But, in addition what we've said previously about IVIG, that is the end product for that plasma-derived medicine, continuing to grow and expand, driving market growth eventually when that glut of plasma is used up, that remains the case.

With regard to a recovery in this market, I've got to imagine it's going be sometime before we see new plasma centers opening back up again. What can your customers do to increase volumes once they feel like we've passed through this trough period?

I will take that in two parts, Steve. We believe that there will not be additional plasma collection centers out there. I think that's a very safe statement. In terms what have they can do to increase plasma collections, I think they are just going to get back to what the real demand issue is for plasma. So I don't have great visibility on exactly, by customer, what they are going to do or what their needs are going to be in terms of the amount of plasma they will use as this trough works out. I wish I had visibility to that but we don't have a lot of specifics on that yet by customer base.

Steve, we are being told, however, that although there may not be a net/net increase in the number of plasma centers when the plasma market recovers nevertheless we are going to see change in that collection industry by numbers of centers optimizing. That is less profitable centers will close and more profitable centers will continue to expand their collections. We think frankly this is going to be good for us.

Thank you. Your next question is coming from David Zimbalist of Natexis Bleichroeder.

Thanks. I wanted to follow up with a question about the Japanese platelet market. From what I understand they moved to universal leuko filtering on platelets well within the last several quarters. Can you explain a little bit about what's happening there in terms of product mix when the year over year comparisons there even out?

Well, you are correct that Japan moved to what is called Universal Leuko Reduction, meaning that its platelet collection procedures are increasingly ones that remove leukocytes or white cells during the course of the platelet collection. We are seeing a gradual and accelerated move in that part of the business to a platelet collection procedure with that capability. As to when those comparisons will even out. Ron?

Yeah, we had instituted that technology at the beginning of this fiscal year so we will start seeing it drop out of our comparisons in Q1 of '06.

Okay, and then the follow-up. When you did your core competency survey of your customers did you get any insight as to where you are differentiated specifically versus your competitors as opposed to just a general issue of where you stand out -- what Haemonetics stands for to the customers?

Yeah, it's a good question. We saw more and more commentary by our customers on the outstanding ability to service their needs with high quality products. That was overwhelming, David , in terms of what customers had to say. And it wasn't just the United States. It was throughout the world. We were pleased with that consistency to hear it from Europe and different parts of Europe and -- as well as Japan and Asia. So it was very comprehensive but those were the two things that people really said, your ability to make a real high quality product and then our ability to service people, people talk about our 24 hour hot-line and things like that which are really a pluses for our customers. So those were the two thrusts.

That being said the purpose of the validation had a much more of a focus on Haemonetics competencies and how Haemonetics can leverage them than it did distinguishing between Haemonetics and our competitors.

Thank you, your next question is coming from Jim Sidoti from Sidoti & Company.

Is there any update on the litigation with Baxter regarding the Alpha contract?

No update other than the arbitration is scheduled to begin, this hearing is scheduled to begin in the fourth quarter in March of '05. And we continue to aggressively litigate in favor of our position.

Then about few months back you announced the distribution agreement of with Hema Systems for their platelet detection system -- bacterial detection system for platelets. Would the sales of that material -- and can you update us on their status of getting FDA approval in the U.S.?

They haven't been substantial in Europe. We've rolled that out, Jim , in Germany with a second target to be France ongoing. So they haven't been substantial to date.

In terms of the regulatory process here in the United States, I don't have an update as to when we will see that totally completed.

Thank be you. There are no further questions. Here is Mr. Nutter with closing comments.

Thank you very much.

Let me go back and, again, thank all the folks at Haemonetics for another very strong quarter in terms of financial performance. As Ron indicated, we've been consistently producing good results as we've gone through this year and continue from our strong last year close. We've had the core competency review process completed. We believe we have opportunities to grow and leverage our business based on unique skills and strengths that this corporation has. So thank you so much for your call and we look forward to talking to you at the end of Q3.