Haemonetics Corp (HAE) 2005 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome the Haemonetics’ fourth quarter fiscal year 2005 conference call. At this time, all participants have been placed on 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 CEO, will moderate this call. Mr. Nutter, you may begin.

Thank you, Operator. Good morning. Today I’m joined by Ron Ryan, our CFO, Lisa Lopez, General Counsel and VP of Administration, and Julie Fallon, Director of Investor Relations. Our comments today will cover 4 things-- first, I’ll comment on the Company’s overall performance for FY ‘05. Second, Lisa Lopez will comment on 2 legal issues. Third, Ron Ryan will provide details of quarterly and annual operating results. And, finally, I’ll return to discuss our financial and strategic guidance for FY ’06.

Let me begin by reminding you that our annual guidance for the year just completed was revenue growth in the mid single-digits, gross margin in the high 40 percent range, operating income growth of more than 20 percent, and improved operating margin. You may remember at the end of Q3 we raised our annual earnings per share guidance to a range of $1.43 to $1.48.

For the year, revenue was $384 million, up 5.3 percent over FY ’04. Although we continue to strive to reach a higher growth profile, we are satisfied with this performance given the events we overcame. We absorbed a $17 million negative impact from the loss of the Alpha business, as well as consolidation in the plasma market, and we’re comparing to our prior fiscal year that included in an extra billing week, so 53 weeks instead of 52 weeks this year.

Gross margin for the year was 51.6 percent versus 47.6 percent in fiscal ’04. Throughout the year we’ve talked about our commitment to higher margins, and I’m pleased with the way we continue to make steady improvement here.

Operating income as a percent to net sales for the year was 15.6 percent versus 13 percent in fiscal ’04.

Earnings per share for the year finished at $1.52, up 27.7 percent over prior-year, which was $1.19 per share.

To summarize our financial performance, we demonstrated the kind of positive drop-through we know this business is capable of delivering. In a year when revenue growth was 5 percent, gross profit increased 14 percent and operating income increased 27 percent. These results were accomplished by disciplined management of product mix, pricing, structural cost reductions and expenses.

All in all, FY ’05 was a solid year. Now, before we hear from Ron on our operational performance, Lisa Lopez has some brief comments. Lisa?

Thanks, Brad, and good morning everyone. This morning I’ll comment briefly on 2 unrelated legal matters. The first involves a situation in Italy and the second is the status of our litigation with Baxter.

Now, with regard to Italy, earlier this week 2 employees of our Italian subsidiary were arrested as part of an investigation being conducted in Genoa, Italy. As best we can tell with information currently available, the investigation rather is about whether kickbacks were paid in exchange for business with government hospitals. The authorities are interested in consulting fees we paid to a particular physician who has consulted to Haemonetics for many years. This development in Genoa is an investigation of the same matter by the Italian authorities in Milan late last year.

Now, published reports in the Italian press, and frankly I’m at a disadvantage relying on these as a source of information, but they indicate that these arrests are part of a broader investigation involving a number of other companies and public officials in Italy.

Now, in any case, following the action by the Milanese authorities last year, the audit committee of our Board of Directors engaged independent outside counsel who investigated our consulting arrangements. That investigation concluded and uncovered no wrongdoing by any Haemonetics’ employee and nothing improper about the consulting fees paid to this medical consultant according to his consulting contract.

However, in response to these arrests, we will reopen the investigation by independent counsel to our Board so that he can address any new information that comes to the attention of the Company. The employees are on paid leave.

Now, though the developments are still unfolding here, and we’re told to expect the Italian legal system to operate very slowly, it’s important to keep in mind that all of our business in Italy, and this includes public tender business as well as business with private institutions, it amounted to less than $17 million this year, representing only 4.3 percent of our worldwide revenues.

Now, I also want to comment on our litigation with Baxter. This is our lawsuit against Baxter over its refusal to honor our supply contracts with Alpha after Baxter purchased Alpha’s plasma collection business almost 2 years ago. We filed for arbitration about a year ago in January. The dispute was heard by an arbitration panel for 3 full weeks this past March. We expect the panel’s decision, which will be final and binding, sometime in the first quarter, and we will issue a press release about the outcome. Now, whatever the results of the arbitration, it is not a factor in FY ’06 guidance.

Now, I know that some of you may wish to ask questions about what I’ve just covered, but please appreciate that in matters of ongoing litigation, we really are constrained from commenting beyond what I’ve just reported.

Now, I’m going to hand off to Ron Ryan, who will take you through our results on a more detailed basis.

Thanks, Lisa, and good morning. I’m pleased to report on another year of solid performance against our goals. Today I’ll briefly review some fourth quarter highlights and then focus my remaining time on year-end results.

In the quarter we remained focused on operating leverage. Revenues grew 2.3 percent, but as Brad noted, the fourth quarter of fiscal ’04 included an extra billing week, so we’re up against tough comparisons this year. In fact, if we exclude the 14th sales week, the negative impact of the plasma business and the positive impact of currency, then organic revenue for the quarter grew 9 percent. So I believe it was a solid quarter.

Gross margin for the quarter was the highest gross margin we’ve achieved in 8 years at 53.5 percent versus 49.8 percent in Q4 of fiscal ’04. As we previously communicated in Q3, projected expenses were high in Q4 as we prepared to convert ZLB plasma centers to Haemonetics’ devices. We also ramped up marketing expenses for launches of new products in FY ’06. Actual fourth quarter expenses were $38 million, up 13.3 percent over Q4 of FY ’04. Operating margin was 15.7 percent for the quarter, leveled with FY ’04. Earnings per share were $0.37, level with last year. So for the quarter, revenues grew 2.3 percent while gross profit grew 9.7 percent and operating income grew 2.1 percent.

Now, let me move on to review our full-year results. I’ll cover a few areas of the P&L where I’d like to add some detail. For the year, disposables revenue was $343 million, up 5.3 percent over fiscal ’04. Disposables revenue was negatively impacted $17 million, as noted by Brad, because of plasma industry consolidation, but this was offset with currency gains and double-digit growth across other product lines. I’ll detail product line growth in a few minutes.

Gross margin for the year was 51.6 percent, 400 basis points over FY ’04. Gross margin for the year is a real success story. Our CORE program continues to reduce our manufacturing time. At the beginning of the year, we thought we could achieve annual savings of $5 million. In fact, we were able to still pull $5.2 million in costs out of the business. We’ve also improved pricing, which contributed $1 million dollars to gross profit, and we’re making good progress on improving our product mix.

Operating expenses were $138 million for the year, up 9.3 percent from FY ’04. Our commitment to shareholders is to limit growth and expenses to one-half the growth and gross profits. That’s how we know we’ll continue to improve operating margins. We succeeded. Gross profit dollar growth was a little over $24 million and total expense was a little under $12 million, so expenses increased at less than half of gross profit dollar growth.

Our tax rate for the year was 33.8 percent, down from 36 percent in FY ’04. We continue to execute well on opportunistic tax strategies to bring our tax rate down. This year’s tax rate benefited from a combination of additional export tax benefits, higher tax exempt interest income, and an adjustment of reserves.

We maintained a strong balance sheet, producing $56 million of operating cash flow, which we define as pre-cash after working capital and capital expenditures. We’re managing capital expenditures below depreciation expense. Beyond operating cash flow, we generated $29 million from stock option exercises for the year. We now have $186 million of invested cash and $46 million of short- and long-term debt.

Consistent with our communications over the past year, our numbers are as reported. Foreign exchange had a positive benefit on the P&L for the year. If you want to review our results with and without the impact of foreign exchange, you’ll find a detailed P&L break out and operating cash flow metric on our website.

I want to drill down a little deeper into revenue by product line for disposable sales, since disposables continue to be the best indicator of our business strength. First, I’ll review our Donor product family, which consists of the plasma, blood bank, and red cell product lines. I’ll include miscellaneous and services in this section.

In the plasma business, we planned for revenues to decline 7 to 9 percent, as we knew going into the year that revenues would be impacted by 2 significant factors-- 1) the loss of a large customer, Alpha, that had been acquired by a competitor, and 2) the continuing reduction in plasma collections worldwide to compensate for excessive inventory. In fact, the reduction in plasma collections had a greater impact on our business than we predicted, with significant declines in Asia, which resulted in our performing below our expectations. For the year, plasma revenue was $97 million, down 15 percent or $17 million from FY ’04. Fortunately, we were able to offset this loss.

Now, let me turn to the blood bank business, which includes platelets, cell processing, and intravenous solutions. At the beginning of the year, we expected to grow blood bank disposable sales 11 to 13 percent. Actual FY ’05 disposables revenue was $130 million, up 16.2 percent or $18 million over FY ’04. So this $18 million growth in blood bank offset the $17 million decline in plasma. We’re extremely pleased that in a mature market, growing only single digits, we were able to grow blood bank revenue well beyond market growth for 2 consecutive years.

Several factors contributed to our success this year-- currency, a shift to higher-priced platelet collection sets in Japan, an increase in revenue from I.V. solutions, unit volume increases in Asia, and market penetration in emerging markets.

Turning to the red cell business, we planned for annual revenue to increase 35 to 40 percent. Actual FY ’05 red cells were $29 million, up 28.5 percent. These results were affected by lower than planned disposable unit growth in both the U.S. and Europe.

However, we do have several success stories. Our priorities for the year were to grow collections at existing accounts versus going after new accounts and to convert existing customers to our higher-priced filtered sets. Let me go into a bit more detail here.

Across the U.S., about 5 percent of all red cells are now collected using Haemonetics’ technology. That’s up from 4 percent at the end of FY ’04. The American Red Cross was a big contributor to this growth. Some of you may remember that in FY ’04 it was a year for adding new Red Cross regions as accounts. At the end of that year, more than half of the Red Cross regions were Haemonetics’ customers. In FY ’05, usage at these regions really exploded, going 214 percent over FY ’04. More than 150,000 units of red cells collected by the American Red Cross in FY ’05 were collected using Haemonetics’ technology. This is great progress but also an indication of how much opportunity exists for future growth.

I mentioned that our second strategy to grow our red cell business was to convert customers to our filtered disposables set. We were also successful here. At the end of FY ’04, 30 percent of double red cell collections in the U.S. were filtered. By the end of FY ’05, we had moved the needle to 43 percent of total collections.

Moving on to the miscellaneous and service line, FY ’05 revenue was $20 million, down 8.3 percent. Revenue for our Fifth Dimension subsidiary, or 5D, was reported on this line. 5D sells primarily to plasma customers, so its sales experienced pressure from the plasma industry consolidation. However, in the second half of the year, 5D saw revenue gains from new contracts for its blood bank management software.

Specifically, we recently announced that 5D was awarded a contract with the U.S. Department of Defense to provide technical support for the Defense Blood Standards System. The Defense Blood Standards System manages the acquisition, inventory, and distribution of blood products as well as transfusion services for the medical systems of the U.S. military.

Under the terms of the contract, I can’t disclose the dollar value of the deal. I can state that the value of the contract is a significant win for 5D. The contract provides for a recurring revenue stream. More importantly, while 5D has been extremely successful in penetrating the market in the plasma industry, the contract with the Department of Defense represents 5D’s entrance into the blood bank market, confirming that 5D’s software systems can gain acceptance in the important blood bank market. We anticipate that 5D’s revenue will grow more than 30 percent in FY ’06.

Now, let me review revenues from our Patient product family, which includes the Cell Saver and OrthoPAT brand. Cell Saver disposables revenue for the year was $67 million, up 4.7 percent over FY ’04. OrthoPAT disposables revenue for the year was $20 million, up 51.4 percent over prior-year.

For the year, we planned for Patient product family disposables revenue growth of 11 to 13 percent, and we specifically looked at the OrthoPAT system sales to contribute to most of that growth. So we came in on plan with total revenue for the patient products up 12.7 percent. OrthoPAT revenues benefited from disposables unit growth and price improvement in Europe and the U.S.

Also, Zimmer, our U.S. partner, placed more than 500 new machines during the fiscal year. Revenues benefited from the rental fees on these machines, but more importantly, this level of device placement positions us well for future growth. We continue to think of OrthoPAT as a relatively new product, but it is having a more and more meaningful impact on the business.

I’ll close by saying that we’re pleased that we grew double-digits in the blood bank, red cell, and patient product lines and that this growth was able to offset the $17 million hole in plasma revenues. We continue to increase operational effectiveness, and operating income grew more than 25 percent on single-digit revenue growth. In fact, this is the second consecutive year in which we’ve delivered financial results that demonstrate strong leverage of the P&L.

Now, back to Brad, who will talk about next year.

Thanks, Ron. As you know, we’ve been operating with 2 strategies. The first strategy is to leverage our core business for improved profitability. As our results indicate, we’ve executed well to this strategy. The second strategy is to expand our business for future growth, leveraging our core competencies to reach a higher growth profile.

We’ve made important progress this year in positioning the Company to target higher growth markets through a variety of ways. These include internal R&D, marketing partnerships, and acquisitions of new products, as well as investments in early stage research.

Both of these strategies will continue to be key drivers for the business in FY ’06. Our focus on 2 strategies is reflected in our FY ’06 guidance. We expect revenue growth of 11 to 13 percent and a slight improvement in gross margin. Operating expenses for the year will increase no more than half the rate of incremental gross profit dollar growth. This way we can achieve operating income growth of about 20 percent, which is for the third consecutive year, and operating margins above 16 percent. Finally, we expect earnings per share for FY ’06 will be in the range of $1.73 to $1.83. So we’ll continue to leverage our P&L to improve profitability.

Now, let me break down some of our guidance for you further. First, what’s most exciting about our guidance is that for the first time in more than 10 years we’re going to be able to see double-digit sales growth. As Ron alluded to earlier, if you back out plasma revenues and currency in fiscal ’05, we’re already growing at double-digits. So we have a high level of confidence that we can achieve our revenue targets.

Let’s review further. Let me start with the Donor Division. We’re now poised to benefit from the rebound in the plasma industry. We expect plasma disposables revenue to grow 7 to 9 percent. Now, after several years of dealing with negative market forces, the immediate future looks bright. We will still feel some adverse market pressures from continuing consolidations in the European and Asian markets, but we’re implementing a long-term supply contract with ZLB Plasma Services that will add $8 to $10 million in incremental revenue this year. Note these sales will be weighted towards the last quarter of the year because we need to complete the swap out of equipment and training for 54 plasma centers.

Now, let me share with you why we’re so excited about the ZLB business. We recently completed Phase I of the conversion process. To give you an idea of the magnitude of this effort, in Phase I it included the placement of more than 700 PCS2 units at 22 ZLB centers in 22 different cities across the United States. We trained more than 200 ZLB employees, and we did this over the course of 3 weekends.

In January ’06, we’ll execute Phase II of the process. Specifically, we’ll ship about 1,300 more machines to ZLB to convert its 32 remaining plasma collection centers to Haemonetics’ technology. This is the biggest single new piece of business in the history of your Company. As expected, ZLB start-up expenses will continue to be high through the fiscal year, but we have been and will remain on budget. This transition has gone very, very smoothly. We’ll update you on Phase II of the conversion progress during our third quarter call. Now, this contract represents more than 15 percent of the Company’s incremental sales growth for FY ’06. This is a significant win for the Company.

Now, moving to the rest of the Donor product family, after 2 years of outstanding growth, specifically double-digits, we expect our blood bank disposable sales to stabilize with single-digit growth. However, red cell disposable growth is expected to be in the 30 to 40 percent range.

Now, let me turn to our Patient Division. Disposables revenue is expected to grow in the 10 to 15 percent range. This growth will be fueled by continuing OrthoPAT disposables revenue growth of 35 to 45 percent, and by some contributions from 2 new products, the cardioPAT and the SmartSuction systems. Our goal is to introduce these systems to the full market later in the year. Now, assuming we meet our targets, we expect new products to contribute 20 to 30 percent of the overall growth of the Patient Division’s disposable revenues and allow us to reach the high end of the Patient Division’s guidance.

In addition to detailing our revenue expectations, I want to spend a few minutes on gross margin and expenses for the year. We have made great headway at improving gross margin over the past 2 years. While currency has certainly helped us, it’s important to note that we have made significant changes in how we run the business. These changes have helped us achieve a 500-basis point improvement in gross margin since FY ’03. We will not relent in our commitment to improve gross margin every year. We will set realistic expectations for incremental improvement and execute, execute, execute.

For FY ’06, you can count on us to continue to capture incremental price increases, we can continue to pull costs out of the business, we can continue to rationalize our product line, and we can continue to identify accretive marketing partnerships. However, we’re also introducing 4 new products with a combined market potential of more than $600 million. Now, the nature of new product introductions is that early on we won’t be operating or manufacturing at optimal efficiency, so these new products will counter some of the margin improvements we make. In essence, gross margin will improve but not as dramatically as you’ve seen over the past 2 years. We’ll improve gross margin slightly this coming year.

Now, with regard to expenses, in the last 2 fiscal years we generally planned for and executed the spending levels that were higher in the second half of the year. In FY ’06, this trend will reverse with heavier spending in the first half of the year. The reason for this is that spending for the year will support several projects.

These include-- 1) about $2 million will be spent on the conversion of ZLB centers to Haemonetics’ devices. We need to complete the conversion by early in the fourth quarter to insure that we realize our planned revenue contribution at the end of the fiscal year. Second, about $1 million dollars will be spent to support new product introductions, including cardioPAT, Bloodstream, Scansystems, and Crit-Scan, again, to insure that these products are contributing to revenue growth later in the year. Third, about $5 million will be spent on R&D projects. We must invest in our future product pipeline and we will. And, finally, about $2 million will be spent to cover public company and compliance initiatives.

I hope this gives you a sense of how we’re investing in the future of Haemonetics. Remember, FY ’06 expenses will grow at less than 50 percent of incremental gross profit dollar growth despite the investments in FY ’06. As noted earlier, we expect earnings per share to be in the range of $1.73 to $1.83.

As many of you know, more than 60 percent of our sales come from international operations and we’re affected by currency fluctuations. We have benefited significantly from the weakening dollar over the past couple of years. In FY ’06, our currency tailwind will temper somewhat. Constant currency revenue growth will be in double-digits. Now, let me repeat that. Our organic growth will be in double-digits. About [12 percent] of our earnings per share improvement will come from foreign exchange.

Now, that covers our guidance for FY ’06 and gives you some points to measure our FY ’06 success versus our strategy to increase profitability, again, leveraging 11 to 13 percent revenue growth, to slightly improving margins, and a 20 percent operating income growth.

Now, we’ll spend a few minutes on our second strategy, which is expanding our business through marketing partnerships, acquisitions, and internal R&D. We’ve made some good improvements in all 3 areas. During the last 12 months, we’ve positioned ourselves with a growing product pipeline to expand the business. In fact, about 15 percent of our FY ’06 incremental growth will be from new product introductions, including cardioPAT and SmartSuction systems for the Patient Division, and Crit-Scan and Scansystem for the Donor business. We reviewed these products on our last conference call, so let me just restate that for the first time in recent history we’re launching 4 new products in 1 year, giving us a stronger new pipeline. With the successful launch of these products in FY ’06, FY ’07 should continue our new organic growth rate of low double-digit revenue growth.

Now, I’ll review a longer-term opportunity that is potentially a very exciting growth vehicle for us in the future. I’m referring to our research with Arryx. You may remember that we have an equity position in Arryx, which uses laser nanotechnology to separate fluids and particles at the cellular level. Arryx has already shown that its technology can separate platelets from blood. Our current research with Arryx is dedicated to proving that the technology can process higher volumes of blood at very rapid speeds and we’re making good progress. While still very much in early stage research, we’re very excited by the potential of this technology given Haemonetics’ access to new markets or new therapeutic classes with exciting growth potential, and I’ll update you on our next earnings call.

I just want to close with a few comments. On our website we have posted our guidance as well as 2 P&L scenarios that reflect our FY ’06 guidance. Also, on May 16th we’ll be hosting an investor roundtable in Boston to highlight our FY ’06 plans. Now, you can find more information about that meeting on the Calendar section of our website, and we hope to see all of you there.

Number 2, let me thank all of our shareholders. You know, 2 years ago we set in motion plans to create shareholder value and we’ve made good progress. Thanks for your interest and, more importantly, your support. We still have a lot to accomplish, but I’m very confident that our future is very bright.

And, finally, let me conclude by thanking all Haemonetics’ employees for their outstanding efforts. For 2 years we have performed to our guidance, overcoming the challenges of restructuring in FY ’04 and the plasma market challenges in fiscal year ’05. We have met our commitments, and we intend to meet our commitments again in FY ’06. We have and will continue to perform well operationally. We’re now beginning to position Haemonetics to be a solid growth company. Our strategic plan is complete and exciting.

Now with that, Operator, I’ll turn it over for questions.

Thank you. The floor is now open for questions. [OPERATOR INSTRUCTIONS]. Our first question is coming from Steve Hamill of Piper Jaffrey. Please pose your question.

Good morning. I was wondering if you could talk a little bit more about the red cell business. It obviously didn’t grow as fast as you had hoped in ’05 despite all the benefit at the Red Cross. I’m curious, do you feel like you--? Well, obviously, you seem to feel like you can turn it around given the guidance you just gave. What gives you that confidence?

We are confident, Steve, that our growth target for next year will be very solid based on the fact that we’re making very good progress with the American Red Cross. Remember, this year was a year once we signed that new agreement in Q2 to get things set up and really start rolling forward. We’ve seen tremendous support from the American Red Cross. I think our relationship is stronger now than it has been in many, many years. And so, we just feel as we looked at our planning models that that growth rate that I identified in the call is really 30 to 40 percent right on target.

Okay, and I guess just to push on that a little bit more, it seems like the last couple quarters, at least according to your 10-Q, more of the growth in this product line had been coming from the mix shift to the higher, to the leukoreduced disposable set, and at some point here it would seem like you’re going to start to catch up with that uptake. So, again, just to push you a little harder, you really feel like it’s a continued upgrade cycle that’s going to drive that 30 to 40 percent or is it more likely to be volume related?

Let me give you a little bit more color, Steve. We had significant historic unit growth in the second largest blood collector in the United States, which was our number 1 customer, and they are now for a system, probably about 20 percent of their entire system uses our technology. In some parts of the system it’s significantly higher than that, and they are the system that this year focused on getting virtually all of their collections to the higher priced filtered disposable set.

In the American Red Cross, where we really focused on unit growth this year, and that unit growth continues to grow in momentum, they’re not using any of the filtered sets yet. So we do have lots of confidence that there is plenty of room to grow both units and, at some point in the future, the filtered set with other customers.

And I’d just add additional color. I believe we have growth opportunities in Europe as well, and we have not been particularly successful in the past 12 months penetrating Europe and Ulrich Eckert and his team believe that we can in fact grow in Europe as well. So that would be another growth [factor force] on red cells.

They’re just beginning to report experiencing the kind of shortages that we’ve seen in this country in the last 5 years.

Thank you. Our next question comes from James Sidoti with Sidoti & Company.

Good morning. I wouldn’t characterize 28 percent growth as a total disaster.

Well, we’re pleased that this past year was 28 and last year was 22 in operating income, so we feel pretty good about the last 2 years, Jim.

The question I had was on stock option expensing. I know in fiscal ’06 it won’t be a factor with the recent change in the rule, but in ’07 it will. Can you give us some preliminary guidance where you think that will run you?

Jim, this is Ron. We haven’t done our models totally for FY ’07, but as we’ve disclosed in our filings, the stock option expenses have been running in the $0.20 per share range and based on our current subject.

Using buy shields?

Yes.

And you would continue to use buy shields in fiscal ’07?

Well, we have some options there that we’re evaluating.

But you think $0.20 is probably a worst case then?

That’s been our run rate.

Right. Okay, thank you.

Our next question is coming from David Zimbalist of Natexis. Please pose your question.

Hi. Good morning. The first question is if you could explain a little bit more about the layering in of the ZLB contract to that you’ve completed Phase I, but from your comments it seems like Phase II doesn’t actually go into effect until the fourth quarter. So if you could explain a little bit about sort of the pacing of that agreement.

Yes. I’d be happy to. You’re right on the money. The first part of the implementation, Phase I, happened actually in our Q4, and so that’s why we saw a lot of increase in expenses without an offset increase in revenue in Q4. The reason for the January timeframe is their existing contract with their other provider is in fact being phased out in December. So we are implementing in January, so that’s why the timeframe of that, and that will be the remainder of the collection centers will get 1,300 PCS2 machines placed at that time. So that’s the reason behind it. So we’ll see a quarter of incremental sales based on that kind of timeframe for those new machines.

Does that mean that you actually have 22 of the centers active today?

Correct.

But the other roughly 60 percent of the centers don’t become active until the fourth quarter?

That’s correct.

Okay, and of the 22 centers, those are incremental to the European centers that you had already, correct?

That’s correct.

Okay, and then the second question--

And, again, it’s about $8 to $10 million of incremental revenue for us this year is what we’re expecting out of total ZLB for the completed year.

Okay, and then into fiscal ’07 it would be a full-- a full contract?

That’s exactly right.

To give you some perspective as to what that means in the United States, it represents about 65 percent market share with the other provider. If we exclude from that calculation the centers that are owned and operated by the other provider, we will end up with about 85 percent market share of the U.S. plasma business.

Once we’ve implemented full.

Right. Okay. The second question is the equipment number was pretty strong this quarter. Could you give us a little bit of some color on that and to what extent your equipment business is sustainable?

As you know, David, the equipment business has its increases and decreases on a quarterly basis. We were pleased to have solid equipment in several geographies. Our equipment for the year was also up, and that’s primarily due to growth in the U.S.

Okay, but anything in the quarter that was significant? I know a few quarters ago you had through a one-time purchase from the American Red Cross to forward a sort of pay-up for equipment they were already using. Anything in this quarter for filling out any customers? Did any of the ZLB equipment get recorded?

No.

No, and there’s nothing particular that amounts to the significance of the American Red Cross, as we mentioned earlier in the year.

But, David, it is a very good point. When we compare Q1 of FY ’06 against Q1 of FY ’05, we’ll remember that we had a very large equipment order at the beginning of this past fiscal year that we’ll be running against comparisons to. So it’s a very good point that we’ll be looking towards that and we’ll report as such at the end of this quarter.

Okay, thank you very much.

Our next question is coming from [Benjie Wood]. Please pose your question.

Yes. Thank you. I’d like to say good morning and thank you guys for taking my call.

Thank you.

Question 1 is can you guys explain how your special accounts audit committee has determined there is no fault by your employees when 2 or your key employees are in jail? And I understand previous similar situations have resulted in house arrests.

I don’t know of any similar situation. I mean I don’t know what you’re referring to by the similar situations, but I can tell you that there was an outside counsel and it was his investigation and he reported to our Board of Directors findings based on all of the information and all of the documents and all of the interviews his conclusions. So I think as soon as or if any new information comes to light, well, that will be investigated. I can’t begin to speculate on the outcome of any other litigation.

Sure. The second question is I know the Italian papers are indicting briberies by your employees that claims based on taped conversation between a doctor and one of your employees. I understand it only represents a small percentage of your sales, however, is it true that heavy costs may be levied against the Company if accusations are proved true?

And the second question is what kind of legal exposure as far as fines and fees do you guys perceive in this issue?

I have no information about the likelihood or magnitude of fines or fees, but I can assure you that our evaluation right now about the materiality of this is that it’s immaterial to our net income.

Okay.

Thank you and our next question is coming from [John Harlow] of [Barrow, Hanley]. Please pose your question.

Good morning, Brad.

Hi, [John]. How are you?

Fine. Just a couple of numbers questions-- OrthoPAT sales and Cell Saver in the quarter in depreciation and amortization?

Yes. That’s Sarbanes-Oxley, hold on a quick second.

Good morning, [John]. This is Ron.

Hey, Ron.

For the second-- for the fourth quarter, OrthoPAT was $5 million, up 21 percent, and our Cell Saver revenue was about $17 million, up about 2 percent. Of course, our fourth quarter comparisons on all of our products are impacted by the 53rd week last year.

I understand.

And your second part of that question was depreciation, is that right, [John]?

Yes, Sir.

Yes, just we were actually very pleased about our cash flow for the quarter and depreciation was certainly a factor.

[You can] replace it by what you’ve done for the year.

Yes, there you go.

So just in the quarter, our depreciation and amortization was about $8 million, which was approximately comparable to capital investments. For the full year, however, as we mentioned earlier, our depreciation and amortization exceeded our CapEx by about $5 million, and so deprecation has been a help to our cash flow, which we felt was pretty successful in the year.

On red cells, what is the international sales side of the total?

It is very, very small, [John]. It’s less than $1 million. So it’s a real opportunity.

Wow. Okay. Thank you so much.

We have a follow-up question coming from Steve Hamill of Piper Jaffrey. Please pose your question.

Yes. I was wondering if you could talk a little bit about blood bank and, particularly, the situation in Japan at this point. What’s your confidence level that you can hold on to the share that you picked up during 2005?

You want to repeat that question again, Steve?

Yes. I was asking about the platelet business and whether or not you felt-- what you confidence level was in your ability to hold on to the market share in Japan that you picked up in 2005 and, in particular, what impact do you see Gambro having right now?

It’s a good question. I think as Baxter basically entered the market, there were 3 people that picked up the platelet market share. We picked it up, Gambro picked it up, and Terumo picked it up. Based on the information we have today, we still have and continue to have more than 70 percent market share in Japan. Gambro has somewhere in the 5 or 6 percent range and Terumo has been gaining rapidly. I think when I sit back and I look at that marketplace, Steve, I believe that our market share is there. We’ll be stable.

I think the big player long-term in that market for us as a competitor will be Terumo. I do not believe it will be Gambro. I believe Gambro has a tremendous device. I think they have done well in that marketplace, but 5 percent compared to 70 percent, that’s a big way to go.

And I also believe that Terumo, being a Japanese company that has tons of resources right there in their home market, will be ultimately the long-term big competition for us. But I don’t expect us to lose our market share this year. We’ve done well in gaining the Baxter market share, in gaining that in this past year, and I think it will stabilize going forward.

So I guess just to nitpick on that a little bit--

Yes?

You said 70 percent or greater than 70 percent. My impression was that given the share that you had picked up from Baxter, you were north of 75 percent share. So are you just kind of giving us some round numbers here or have you given some of that back?

In Q1 and Q2, our market share did go up to more than 75 percent. In Q3 it moved back down a little bit, and the big winner in Q4 was Terumo. So we finished the year at about 70/71 percent market share, and the big winner in the last half of the year, picking up the Baxter business, was Terumo not Gambro. That’s the intelligence that we have at this point.

And so at this point you’re comfortable that they’ve taken as much as they’re going to take? You’re sustainable here at this level?

I believe so.

Okay.

I might remind you that in our blood bank segment for the last 2 years we have shown double-digit growth, so we’ve been able to be opportunistic in a variety of markets to continue to grow that blood bank business and, as you know, the majority of that blood bank business is in fact platelet business, where we’ve seen good growth in Japan. We’ve seen good growth in Asia. We’ve seen very good growth throughout Europe.

Thank you. [OPERATOR INSTRUCTIONS]. There is a follow-up question coming from David Zimbalist of Natexis. Please pose your question.

Hi, thanks. Could you talk a little bit about your assumption for the $0.12 in foreign exchange contribution for fiscal ’06 in 2 ways. First, if you could talk a little bit about the rates you’re assuming to get there and then, second, can you talk a little bit about what the implications would be for fiscal ’07 if rates stay exactly where they are today, does that mean that that $0.12 goes away and that your earnings base for fiscal ’06 becomes effectively $0.12 lower?

Yes, David. Thanks so much. I misspoke when I said 12 percent. It’s actually $0.12 of our earnings per share improvement will be from foreign exchange, not 12 percent. It’s actually more like 10 percent. So I misspoke. It was $0.12 of that EPS number will be foreign exchange for FY ’06.

And, David, just to pick up on that, the foreign exchange-- just a couple of points-- 1) we have a pretty good comparison on our website that looks at foreign exchange comparisons in the last year and it shows how foreign exchange behaves, particularly where we’re incurring about 60 percent of our revenues in euro and yen. Specifically, the foreign exchange rate that we locked in through our monthly hedging are about 5 percent higher than the rates that we locked in that impacted FY ’05, and the rates we lock in are always shown in our filings.

We’re generally confident in our foreign exchange impact estimates at the beginning of the year. Because we do hedge using forward contracts, our anticipated foreign sales proceeds that are anticipated a year from now. But we’ve generally been in the ballpark when we estimate our foreign exchange. It’s difficult to-- I think you were referring also to FY ’07. It’s difficult for us to comment on FY ’07 at this time because we haven’t completed our model.

But just structurally, if rates stay exactly the same, so you’re hedging at the same rates for FY ’07 and the currency doesn’t change, do you end up sort of not seeing the benefit of that $0.12 and so it effectively goes to zero or is that $0.12 a rate that holds?

If the question is the FY ’07, the foreign exchange model is complicated and we haven’t completed it for ’07 yet.

Okay. All right.

Our final question is coming from Steve Hamill of Piper Jaffrey. Please pose your question.

Hi. This is a little tough. I just wanted to ask a little bit more of, Ron, in terms of that delta between CapEx and depreciation and amortization. Can you give us a bit of a sense as to the reasons why you’ve been able to under spend your depreciation and amortization and the sustainability of that?

Yes. Primarily, it’s because we’ve been very effective in getting more productivity out of the Company-owned equipment that we place at customer sites. Generally, the model of placing customer equipment in the U.S. and generally in Europe is for Haemonetics to own that equipment to capitalize and then depreciate it. And as our team and the sales organization are able to work with our customers getting more productivity out of the equipment, we’re able to get more mileage out of a given amount of equipment, and also during those periods, equipment that has been depreciating basically becomes fully depreciated.

As far as the sustainability, of that relationship between depreciation and capital expenditures, we see that continuing until such time as we start replacing some of our current technology with new technology and then the clock will begin to tick anew with depreciation and we’ll have some additional capital investments there.

Before we close, I just want to make one final comment on red cells, just to make sure that the record is clear. We don’t usually break out red cells according to U.S. and international. Clearly, most of our business in the United States, but the international piece is a little less, about $7 million.

Thank you. There are no further questions at this time. Here is Mr. Nutter with closing remarks.

Thank you, Operator. FY ’06 is a turning point for Haemonetics. We have and will continue to perform well, leveraging our core business to improve profitability. But what’s most exciting is that we’re now beginning to position Haemonetics to be a very solid growth company, with the kind of revenue growth that we’d be proud of. We are very confident that in our ability to successfully implement our strategy to expand our business and grow in the future. And with that, we’ll thank you for you questions and comments and we’ll look forward to discussing our performance at the end of Q1. Thanks so much.

Thank you. This does conclude today’s teleconference. Please disconnect your lines at this time and have a wonderful day.