Haemonetics Corp (HAE) 2005 Q3 法說會逐字稿

Good morning ladies and gentlemen. Welcome to the Haemonetics third quarter fiscal year 2005 conference call. (OPERATOR INSTRUCTIONS). Please note that during the course of this call, Haemonetics may make statements that can be characterized as forward-looking, and actual results may materially differ from anticipated results. Additional information concerning factors that could cause actual results to differ materially is available on the Company's press release and 10-K. Brad Nutter, Haemonetics President and CEO, will moderate this call. Mr. Nutter?

Good morning. Today, I'm joined by Ron Ryan, our CFO; Lisa Lopez, General Counsel and VP of Administration; Brian Concannon, President of the Patient Division, and Julie Fallon, Director of Investor Relations. Our comments today will cover four things. First, I will comment on the results for the quarter and guidance for the year. Second, Ron Ryan will provide details on our quarterly and year-to-date operating results. Third, Brian Concannon will discuss progress on strengthening the patient division product portfolio. More specifically, Brian will give you an update on our preparations to launch the cardioPAT and Blood Stream product line and finally, I will return to discuss the strengthening of our product portfolio to marketing partnerships, and our success in executing our corporate strategies.

So let me begin by reminding you that our annual guidance is mid-single digit revenue growth, operating income growth of more than 20 percent and improved operating margin. We remain on track to achieve our revenue, operating income, and operating margin guidance for the full year. We also raised our annual EPS guidance, and I will touch on that in a few minutes.

Let me give you some of our specific numbers. For the third quarter, revenue was 98 million, up 8 percent over Q3 FY '04. Year-to-date revenue is 284 million, up 6 percent over prior year. Gross margin for the quarter is 53 percent and year-to-date, 51 percent. At the beginning of the year, we shared with you our commitment to improved margins. We continued to perform well in this area. Year-to-date on a 6 percent revenue growth, gross margin -- excuse me -- gross profit is up 16 percent, and operating income is up 38 percent. Our year-to-date operating income as a percent to net sales is 15.6 percent versus 12 percent in the prior year. We've accomplished these results by disciplined management of our product mix, pricing, expenses, and through our structural cost reduction program.

Now a few words about our outlook for the remainder of the fiscal year with regards to earnings. As you will recall, our guidance for earnings per share was that we would be in the $1.38 to $1.43 range by year end. At the end of Q2, we shared that we are tracking to the high-end of that guidance. Based on several variables which I will describe it in a moment, we are raising our range to $1.43 to $1.48 earnings per share. This quarter, we took a $1.7 million impairment charge, which translates to 4 cents per share. Despite this charge, our earnings results are strong. Earnings per share were at 42 cents for the quarter, up 11 percent over prior year. Earnings per share for the year year-to-date is $1.15, up 42 cents -- 42 percent over prior year.

Now there are several factors fueling our strong operating earnings. First, revenue growth year-to-date is at the high-end of our annual guidance as our blood bank and Cell Saver revenues have outperformed our expectations. Next, we've been disciplined regarding price, mix and operating costs, leading to a gross margin in the 50 percent range. We've also been disciplined regarding expense management. Finally, we've managed to lower than planned year-to-date tax rate. So based on these variables, we are raising our annual EPS guidance to the range of $1.43 to $1.48.

So let me summarize. Our performance to date gives us a high degree of confidence that we will meet the previously announced high-end of the $1.43 earnings per share. Indeed, if we hit on all cylinders, if our sales remained at the high end of the guidance, and if we maintained expense discipline, then we could reach the high-end of our new range for the year. For these reasons, we felt it was appropriate at this time to adjust our guidance. Now let me introduce Ron Ryan, our CFO.

Thanks, Brian, and good morning. I'm 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. As stated in our press release, our improved tax rate, as well as foreign exchange, had a positive impact in the P&L this quarter. If you want to drill down into our results with and without the impact of foreign exchange, you'll find a detailed P&L breakout and operating cash flow metric on our website.

Brad reviewed our total revenues. I will break down revenue by product lines for disposable sales since disposables continue to be the best indicator of our business strength. First, I will review our donor product family, which consists of the plasma, blood bank and red cell product lines. I'll include miscellaneous and service in this section.

In the plasma business, disposables revenue was $24 million for the quarter, down 9.4 percent and $74 million year-to-date, down 15.1 percent. In the U.S., collections at our customers' sites are outperforming the market. Also, our U.S. customers report that inventory levels of source plasma should return to normal within 6 to 9 months so our inventory reduction estimates remain on track. The inventory reduction timeframe is significant because once supply is aligned with demand, we would expect that the U.S. collection market would return to moderate growth.

Now turning to the blood bank business, which consists of platelets and cell processing, disposables revenue was $34 million for the quarter, up 14.8 percent and $98 million year-to-date, up 19.2 percent. We're extremely pleased with our blood bank business growth year-to-date. There are several factors contributing to our success -- unit volume increases, market penetration, and a shift to higher priced platelet collection sets in Japan and an increase in revenue from solutions that we produce in our South Carolina facilities.

Turning to the red cell business, disposables revenue was $7 million for the quarter, up 29.5 percent, and 20 million year-to-date, up 33.6 percent. In the U.S., we grew red cell disposables revenue 32 percent in the quarter. For the quarter, we remain focused on converting accounts to higher priced filter disposable sets, and this certainly has contributed to our sales success year-to-date. 40 percent of all red cell collections with Haemonetics technology are now down on filtered sets, up from 30 percent in FY '04. We've been successful here because our filter sets provide an economic way for customers to meet their hospital needs for safe, filtered red cells. We plan to continue this conversion in FY '06, and indeed, the American Red Cross has agreed to pilot automated red cell filtration at one or more of its regions in the upcoming months.

It's also worth knowing that we're beginning to see collection milestones being achieved by many American Red Cross regions. For example, the New England region, which includes Maine, New Hampshire, Vermont and Massachusetts, had a five-year high with every location doing 50 procedures per month per machine. The Greater Chesapeake and Potomac region, which began collections in November, averaged 4 turns per machine per day, in its first two weeks with the device. For those of you newer to the Haemonetics story, this is incredibly fast as a ramp-up, which we attribute to the new agreement we signed in July.

Moving on to the miscellaneous and service line, revenue was $5 million for the quarter, up 4.2 percent and $14 million year-to-date, down 10.4 percent. Revenue for our Fifth Dimension, or 5D subsidiary, is reported on this line. Five D sells primarily to plasma customers and its sales have been significantly impacted by the plasma industry consolidation. However in the quarter, 5D saw revenue gains from new contracts for its blood bank management software.

Let me review revenues from our patient product family, which includes Cell Saver and OrthoPAT brands. Cell Saver disposables revenue for the quarter was $17 million. This product lines sales increased 4.7 percent over last year. Cell Saver revenue year-to-date is $49 million, up 5.9 percent over FY '04. OrthoPAT disposables revenue for the quarter was $6 million, up 61 percent. OrthoPAT revenue year-to-date was $14 million, up 66.9 percent over prior year. OrthoPAT revenues benefited from volume increases as well as price improvement. This emerging product line has really grown to a point where it's having a significant impact on the business.

Now I will review a few areas of the P&L where I'd like to add some color. First, I will highlight our gross margin performance. For the quarter, gross margin was 52.8 percent, 500 basis points over Q3 FY '04. The result is significant because the last time we reported quarterly gross margin exceeding 52 percent was in Q2 of FY '97. Year-to-date, gross margin is 50.9 percent, up 410 basis points over prior year. Gross margins are a real success story. Our core program continues to take out manufacturing costs, we've improved pricing and we're making good progress on improving our mix.

One of the most frequent questions I'm asked is how high can Haemonetics go with regard to gross and operating margins? Our goal is to improve margins every year. Obviously, currency will affect us, but setting aside currency, we will focus on the factors that we can control. First, to improve margins, we will continue to look to ways to increase manufacturing efficiencies. The core program has been successful for 7 years now, delivering annual cost savings ranging from $3 to $5 million. We expect the program will continue to generate savings in this range in the years to come.

Second, to improve margins, we will finish rationalizing our product lines to ensure appropriate margin levels are attained for all products. For example, three years ago, we had 118 disposable list numbers in our patient-based business. Today, we have 58 list numbers, a reduction of almost 50 percent. In the next three months, this number will be reduced even further to 51. This product rationalization allows us to continue to meet customers' needs while reducing costs and increasing margins on existing product. We're managing a similar program for our blood bank products.

Third, to improve margins, we will manage a pricing strategy that allows for periodic price improvement to consider Haemonetics' high level of quality and service. Pricing is a fairly new discipline for us, but one that we now manage quarterly.

Fourth, to improve margins, when considering new business development opportunities, we will expect margin levels on new products or marketing partnerships that are accretive to current operating margins.

Now I will review operating expenses, which were $36 million for the quarter, up 25.7 percent over Q3 FY '04. Year-to-date, operating expenses are $100 million, up 7.9 percent over prior year. We shared on the last conference call that we planned expenses to increase in the second half of the year. Let me break down the key contributors to the quarter's increase. $1 million dollars supports Sarbanes-Oxley 404 compliance and legal costs, $1.7 million represents a reserve for the Bio Fluids patents, which is an R&D asset that we do not expect to employ as originally intended and $2.5 million of additional expenses support 5 new product launches next 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. Our philosophy is that on annual basis, expenses will only increase at half the rate of our incremental gross profit growth. Year-to-date, we've been favorable due to this key discipline.

Our tax rate for the quarter was 29.5 percent, down from 36 percent in Q3 FY '04. This quarter's tax rate benefited from a combination of additional export tax benefits, higher tax-exempt interest income and an adjustment of reserves. The tax rate year-to-date is 32 percent. We maintained a strong balance sheet, producing $16 million of operating cash flow, which we define as free cash after working capital and capital expenditures. We're managing capital expenditures below depreciation expense. Beyond cash from operations, we generated $12 million from stock option exercises in the quarter and $19 million year-to-date. We now have $160 million of invested cash and $49 million of short and long-term debt.

Now as we enter the last quarter of the fiscal year, let me remind you who are doing modeling of a couple of items. First, this year's fourth quarter will have 13 sales weeks. The fourth quarter of last year had 14 sales weeks as we adjusted our fiscal calendar. The 14th week added $4.5 million in revenue to last year's sales.

Second, fourth quarter sales will increase versus Q4 FY '04 as well as versus the first two quarters of this fiscal year for the reasons I previously mentioned. We're prudently investing in new products and our future growth.

Let me close by saying that this is the seventh consecutive quarter where we've been consistent in our strong leverage of the P&L. With three quarters done in the fiscal year, we remain on track to deliver on our full year commitment and now we believe we can achieve earnings in the range of $1.43 to $1.48.

Now let me introduce Brian Concannon, President of our Patient Division. Brian has been with the Company for about 18 months. He joined us after successful careers at American Hospital Supply, Baxter, Alegant (ph) and Cardinal Health. There's some exciting things happening in Brian's division, so let me turn the call over to him for details on our very strong progress in the patient division.

Good morning, everyone. As you saw from the press release earlier today, the patient division had another strong sales quarter, leading to year-to-date growth of 16 percent. In addition to our sales results, we've made excellent progress this year implementing some critical parts of our strategic plan. Today, I will give you more insight into how the patient division has capitalized on some key new business opportunities and executed on several tactics that will pay off in FY '06 and beyond. First, I will review the patient division strategy then I'm going to talk more specifically about new products.

Last May, we shared with the investment community that the patient division had a strategy that would position us for increased growth. That strategy was to expand our business division into adjacent markets to enhance our value proposition to our customers. To do that, we had to look at ourselves a little bit differently. So rather than thinking of ourselves as a company solely focused on the large cell salvage, we began to think of ourselves more broadly as a surgical patient management company. Surgical patient management will really open up opportunities for us. But in the near term, we're focused on blood management as a subset of this and a starting point for our strategy.

As a result, we've looked at three important ways to manage blood loss from surgical patients. The first, automated washed salvaging of blood; second, enhancing surgical transfusions and third, minimizing blood loss. Let me explain these further. First, surgeons can salvage blood lost by a patient during surgery, clean it and make it available for transfusion back to that patient. Haemonetics has traditionally served this market with the Cell Saver and OrthoPAT brands, automated devices that wash the blood recovered from the surgical wound site. Just recently, we added the CardioPAT device to our blood salvage offerings.

Another segment of our broader market includes products that enhance surgical patient transfusions. This market includes products like suction devices, blood reservoirs, and fluid delivery systems. We've begun to penetrate this market through a marketing partnership with Arazant (ph) in Japan and through last quarter's acquisition of the Blood Stream family of products. The third segment we looked at was the market for blood conservation products that minimize or prevent blood loss, including platelet gels and fiber (inaudible). This continues to be an area of interest for us, although we currently do not have a specific product offering. A review and diagram of this the thought process has been posted in slides on our website.

So to recap the patient division strategy, we want to expand our product portfolio beyond large cell salvage, to look to our near-term future as a blood management company, and a long-term future as a surgical patient management company. We've begun our expansion by leveraging our current sales channels and offering new products that enhance the value proposition for our existing customers.

Now let me highlight two new product offerings -- the cardioPAT brand Blood Salvage System, and the Blood Stream products -- in order to give you a better understanding of how these opportunities fit into our strategy. The cardioPAT is a new product from our internal R&D efforts and the Blood Stream products where (inaudible). Both product lines will be launched in FY '06. I will start with the cardioPAT system, which is a surgical blood salvage device initially targeting the beating heart surgery market.

We believe that about 20 percent with a coronary artery bypass graft, or CABG surgery, is done annually, use an off-pump surgical technique that is uniquely suited for the cardioPAT. We believe this represents a market opportunity for us of $100 to $120 million, and this is a growing market. So the market for our flagship Cell Saver brand is declining, and the market for the cardioPAT is growing.

Let me share a little more information about this product with you. The cardioPAT system can process blood during or after the surgery just like the OrthoPAT system. Initially, we will target off-pump cardiac surgeries where the patient's heart continues to beat during the surgery. Blood loss in off-pump surgery is different than in traditional cardiac procedures. Blood is lost in small steady volumes throughout the procedure. The cardioPAT was designed with the same flexible dynamic disk used in the OrthoPAT, so it can manage varying volumes of blood loss and move easily with the patient from the operating room to recovery. The cardioPAT differs from the OrthoPAT in that it includes the specialized post-operative monitoring required for cardiovascular patience. So the cardioPAT system broadens our existing surgical blood salvage line and gives our hospital customers another option in blood salvage. The cardioPAT is currently regulatory cleared in the U.S. and Europe. We began customer acceptance trials in Europe in October, and are more than halfway through this process.

In the U.S., we just received our 510-K clearance on January 5th so we've just begun customer acceptance trials here. Once we complete these trials, we will move to limited market release and then to full market release by the end of the calendar year. To a small extent, the cardioPAT market opportunity crosses into the market served by the Cell Saver. However, the cardioPAT is an exciting new device that has the potential to penetrate some competitive market share in open heart surgeries at the same time that it penetrates the beating heart surgical market.

Now, let me move on to discuss the Blood Stream family of products, which represents a market opportunity of $375 million. This product line consists of three devices -- a surgical suction system, an unwashed blood salvage system, and a blood transfusion bank. I will go through each of these.

Smart Suction is a surgical suction system that rapidly removes blood and fluid from the surgical field without excessive suction. Adequate suction of fluid away from the surgical incision is critical in maintaining a clear view of the surgical field. Smart Suction can be used with the surgical blood salvage device like the Cell Saver or it can be used freestanding. Most suctioning today is done through a LAW (ph) unit in the operating room, but these systems can be problematic because the suction levels can vary depending on the quality of the hospital system and how many ORs are demanding suction at the same time. The Smart Suction System is dedicated to a single surgery, is portable, it has other unique characteristics that we believe will provide some clear advantages over existing systems. We estimate this market at about $300 million annually.

The next product in our Blood Stream Family is the Smart Cell. The Smart Cell is a simple surgical blood salvage technology that is particularly suited for emerging markets where transfusion risks are high, but healthcare budgets cannot support conventional autotransfusion programs. Haemonetics has not traditionally sold in these regions. We estimate that this market is about $60 million annually.

Finally, the Blood Bag product is an autotransfusion blood bag with an integral filter that is a simple, lower-cost alternative to other bags which require that a filter be added manually. The bag can be used with our Surgical Blood Salvage technology, are sold independently for use with other blood salvage technologies. We estimate this market at about $18 million annually.

Over the past six months, we've been managing the process of integrating these three products into our offerings. I expect that early in FY '06, we will enter customer acceptance trials. Our task is to penetrate these markets in the way we penetrated the Cell Saver and OrthoPAT markets, to gain a leading market share.

So to conclude, the patient business has been growing at around 15 percent for the last three quarters. During that time, we've also prepared to launch three new products. So next year's operating plan is not set. I expect that 25 percent of our growth is going to come from these new products. To be clear, the patient business has been a growth vehicle this year for Haemonetics and we're poised to be a growth vehicle for the near-term future. Now I'm going to turn the call back over to Brad.

Thanks, Brian. Remember, we've been operating on two overall strategies. The first strategy is to leverage our core business. As our operating results have continually shown, we execute well to this strategy. As I've said in the past, we believe leverage is an operating philosophy and discipline that applies throughout the business, and therefore delivering operating leverage is sustainable year-over-year. Now our second strategy is to expand our business. We can expand in three ways. First, we can expand through internal R&D; second, we can expand by gaining access to new products, through marketing partnerships and third, we can grow through acquisitions that expand our current product lines or give entry into new therapeutic classes that leverage our core competencies.

On the subject of growth by acquisition, some of you might have seen the recent Time Magazine article on innovative technologies that described Haemonetics' investment in Ericks (ph), which is a little company with great ideas about using lasers to manipulate particles, including blood. Our development schedule is on track, which is very, very interesting and innovative technology. But it's really too early to know what it will deliver. Brian already commented on some patient division marketing partnerships. I'd like to comment on some several donor division marketing partnerships.

Crib (ph) Scan is a new non-invasive device that tests donor hematocrit, meaning red cell count, prior to donation. We estimate the market for Crib Scan at $60 million and expect it will contribute at least $3 million in sales to the blood bank line next year. Now we're just completing work with our partner on some final product development issues and expect to enter customer acceptance trials early in FY '06. Customer interest in the Crib Stand is extraordinarily high because it's a device that can measure hematocrit through the skin without the painful needle stick to the finger prior to your blood donation. Many people actually report that they won't donate because they feel that the hematocrit test and the finger stick is uncomfortable. For these reasons, our customers see the Crib Scan as a donor recruitment tool.

Bacterial detection is another important market for Haemonetics. This represents a $20 million market in Europe and our agreement with Hemo Systems is an exciting opportunity for both companies. Bacterial detection is measuring the level of bacteria in platelets prior to transfusion to the patients. Maintaining low levels of bacteria is important because bacteria and transfusion can cause adverse reactions in patients. Recently, the national blood agency in France decided to implement bacterial detection in 2005, joining a small group of early adopters consisting of the Netherlands and Belgium. Several other countries, including Germany, Austria and the UK, are considering the benefits of bacterial detection. If some countries or blood collection agencies move to bacterial detection, we could capitalize on this market trend. Our initial plans indicate that we may be able to achieve approximately $2 million in sales from this opportunity in FY '06.

The Crib Scan and Hemo Systems' marketing partnerships provide our customers with innovative technologies and provide key suppliers with a strong marketing channel in Haemonetics. The net effect is to build our product portfolio and increase service to our customers. We would expect approximately $5 million in FY '06 from these two new marketing partnerships.

So let me summarize. We have two strategies -- one, leverage the core business, and two, expand the business through internal R&D, acquisition, and marketing partnerships.

So what's new and different at Haemonetics? Our goal to expand the business will begin to have an impact in FY '06 as we launch five new products, one from internal R&D, the CardioPAT; two from acquisitions, the blood stream products Brian spoke about and two from marketing partnerships, Crib Scan and bacterial detection systems. These products have a combined market potential of more than $600 million. Now we have a product pipeline which positions us for expanded growth. That's what's exciting, that's what's new, and that's what's different at Haemonetics. As promised, we will continue to execute on strategies that create shareholder value. Strong disciplined offering operating leverage on our P&L will continue and five new products position us for growth in the future. Let me thank our Haemonetics employees for a strong Q3, and operator, we can now open up the lines for questions.

(OPERATOR INSTRUCTIONS) Steve Hamill, Piper Jaffray.

Congratulations on your quarter. First, can you talk a little bit about the plasma business? This was a quarter where it certainly started to move in the right direction and I was very interested in Ron's comments about only 6 to 9 months away from seeing inventory levels back to a normalized position. Is it reasonable to expect then, that as we look three and four quarters down the road, we should be starting to think about this business growing in the low-single digits?

I think low-single digits is right on the money. We have seen the plasma market turnaround faster in the United States than other parts of the world. As you may know in Japan and China, that has been slow to recover, there's still more inventory there. So we're beginning to see the fastest adopters to consolidation in the industry in the United States. Europe is lagging a little bit behind the United States, but overall, that 2 percent growth of the plasma market is about what we would expect on going forward.

As my follow-up, can you talk a little bit about gross margin and the impact of mix with regard to equipment, because equipment was pretty strong this quarter, we hadn't been expecting that, and I'm wondering -- is that the drag on gross margin or not?

Equipment sales are typically at lower margins than our disposables. We had a reasonably good quarter in equipment. Generally, our equipment rises and falls based upon opportunistic sales activities, so we don't see that any -- that this represents any (indiscernible) change from past trends.

David Zimbalist, Natexis Bleichroeder.

Thanks, nice quarter. Can you talk a little bit about your red blood cell business -- to what extent you're seeing unit growth start to slow to still great rates? And a little bit perhaps about penetration rates in the U.S.? And second, if you could talk about what you're looking at outside the U.S., especially as you now have the new Symbol instrument available over there.

First, the United States. On the red cell business, we've been pleased with our new relationship or new agreement with the American Red Cross. We've worked hard with those regions that aren't using the technology to evaluate it and use it. We've also been very pleased with the leadership looking at this technology as a way to improve the supply of red cells. So we expect our continued growth rate throughout the remainder of this year. We haven't developed our plans for a rate growth rate for next year, but I would expect it would be very similar to what we're seeing on an annualized basis this year. In terms of Europe, that was an area where we had not done a particularly good job for a variety of reasons on red cell growth and we're particularly pleased to see that marketplace developing a little bit. So I hope that kind of gives you some answers on America and Europe.

Can you comment a little more in the U.S.? You've given statistics in the past about how UBS (ph) is doing in terms of the number of red cells or percentage of their collections. Are you seeing anything at the American Red Cross that you can parallel that? You've talk about some of the raw numbers (technical difficulty) etc., but anything in terms of the target penetration rates or where we're at, just sort of overall in the U.S.?

The American Red Cross is using our technology in over half of its regions throughout the United States. When it began, the program -- it targeted a 5 percent penetration within the first year of launch. Frankly in some of the regions that have launched most recently, it has significantly accelerated beyond that target. And so, although we see penetration rates frankly all over the map, we have some of the American Red Cross region that are sort of high double-digit numbers. And in the UBS region, we have penetration rates significantly higher than that. So we're continuing to see both unit and penetration growth in the United States. I do want to clarify -- you asked a question about the experience at Symbol. Symbol is not launched in Europe.

(OPERATOR INSTRUCTIONS) Jim Sidoti, Sidoti & Co.

Quick question on the guidance for the fourth quarter. If you look at what you did in the first three quarters, you're talking about doing 34, 35 cents next quarter, which will be the only quarter this year where your UBS would be down from a year ago. Is that mostly due to the increase in operating expenses to support the new product launches, or is there something else there?

No, it's primarily, Jim, this is a business that has not launched enough new products. And this quarter as we indicated that the end of Q2, we're going to start doing that. We feel we're in a position now to position us for growth in FY '06. So expect in Q4, we will see a continuation of that effort.

And then can you just give us an update on how the negotiations with Baxter are regarding Alpha, and on tax rate for the next quarter?

On the Alpha situation, and you may remember that we filed for arbitration about a year ago in January. That arbitration is coming due for hearing in March before a panel of three arbitrators. And so that will, we expect, finally resolve this claim, which we brought because we believe that Baxter, when it purchased all of the Alpha centers and failed to honor the commitments and the supply agreements, constitute a breach of contract and other claims. We continue to believe in the strength of those claims. But we will have to wait and see the outcome of the arbitration panel.

As far as the tax rate, our underlying tax rate of the business has been about 36 percent, and I meant from quarter to quarter such as this quarter. We had some onetime adjustments that flow to the P&L. Looking at Q4, we have no known adjustments that we would be making to that underlying rate.

Steve Hamill, Piper Jaffray.

I'm curious as to how you think strategically about two of your key growth drivers -- OrthoPAT and then the Red Cell business. OrthoPAT at this point looks like it may be on track to surpass the Red Cell business soon. I'm curious as to how much of a surprise that is to you and how you expect to take advantage of that in the future, or is this is a shortcoming in the Red Cell business?

Steve, let me ask Brian Concannon to talk specifically about OrthoPAT. He and his team globally have done a great job with that product.

The OrthoPAT continues to grow in a very strong way. I think there's a number of factors for that. One of them is the new agreement that we signed with Zimmer going back to last year, and I think that has positioned both organizations for a continued strong partnership and continued strong growth in the U.S. market. Additionally in the European market, we repositioned the device in that market from a strategic standpoint, and we are -- to put that in perspective, we positioned it not too dissimilar to the way that we've strategically positioned the device in the U.S. and we've seen similar results grow out of that repositioning with that team doing a tremendous job. So we expect that to continue.

Let me comment on the Red Cell question that you asked. We don't see a shortcoming in our Red Cell growth plans whatsoever. On the contrary, we began the year with a plan to focus on growing the penetration in our current Red Cell customer accounts because we're really committed to going from a -- sort of a niche application by customers to incorporating the technology so that it becomes mainstream in the operation. And we really felt that focusing our current customer base on growing their donor base and the commitment to the technology was the way to do that, as well as converting customers from a non-filtered collection protocol to a filtered, which of course increases our own profitability. We've seen those numbers increase this year from a 30 percent penetration on the filtered technology to a 40 percent this year. And so that continues to go in the right direction.

If I could just follow up on that, Brian. In terms of how you -- can you explain more about what you mean by repositioning OrthoPAT in Europe? And at this point, are you still thinking about bringing on the distribution partner there the way you have Zimmer here in the U.S., or do you not feel that's necessary?

We're always reevaluating the best way that we bring our products to market. Right now, we don't believe in the European market, but that's necessary. But in terms of the positioning of the OrthoPAT in Europe, what we look at is in the European market if you recall from some of the presentations that we've given the investor community, our market within Europe had a very strong focus on orthopedics and our Cell Saver brand focused primarily on that. The repositioning really speaks to the perioperative value of the OrthoPAT device; in other words, its use both interoperatively and postoperatively and the salvaging of blood postoperatively and economic values that that brings to our patients in that market. And that's been the repositioning strategy that we've employed there.

David Zimbalist, Natexis Bleichroeder.

One quick follow up to a prior question. Symbol, you expect to launch that in Europe this year or not?

In FY '06, yes, David.

Next year.

Next year. And when does the Japanese move to filtration anniversary?

Probably the second quarter of FY '06. That's about right. I'm not exactly sure of the exact time, David. I'd have to get back to you in terms of date as to when that will happen, but I believe Ron's exactly right.

(OPERATOR INSTRUCTIONS). There are no more questions. Here is Mr. Nutter with closing comments.

Thank you, operator. We're really pleased that we've been able to focus our energies on a product pipeline that gives us the combined market potential of more than $600 million as we enter FY '06. That's exciting and that's new and that's different in Haemonetics. And with that, I would lie to thank all of our employees for a strong Q3 and we look forward to reporting our Q4 numbers with you in early May. Thank you very much.