Haemonetics Corp (HAE) 2006 Q4 法說會逐字稿

Good morning, ladies and gentlemen, welcome to the Haemonetics 4th Quarter fiscal year '06 conference call. [OPERATOR INSTRUCTIONS] Please note that during the course of this call, Haemonetics may make statements that could be characterized as forward-looking, and actual results may differ materially from those anticipated results. Additional information concerning factors that could cause actual results to differ materially is available in the company's press release and 10K. Brad Nutter, Heamonetic President and CEO will moderate this call. Mr. Nutter.

Thank you, operator. Good morning, everyone. Today I'm joined by Ron Ryan our CFO, Lisa Lopez, General Counsel and VP of Administration, and, Julie Fallon Director of our Investor Relations. Let me thank you for joining our call. We're starting a little earlier today because we're hosting an investor day which starts at 10:00 this morning. That meeting will build upon our comments from this call and give you more detail as to how we expect to grow our business in FY '07. The meeting will be web cast at Haemonetics.com., for those of you unable to join us in person.

Our call today covers three things. First, I'll comment on the company's overall performance for FY '06. Second, Ron Ryan will detail our 4th Quarter, and full fiscal year operating results. And third, I'll comment on our FY '07 guidance. Before I begin, let me qualify that Ron and I will talk about our full-year results, excluding the impact of the $30.8 million arbitration award that we received in Q3. The award represents $0.62 of incremental earnings per share and our GAAP results. As is our practice, all numbers include the impact of currency.

For the 4th Quarter, sales increased 10.4% with very strong leverage throughout the P&L. Operating income increased 52.1%. Quarterly earnings per share were $0.61 verses $0.37, a 65% increase. Now, during our Q3 call, I said we are very confident in the earnings power of this business. As such, we expected our year end operating income growth of about 20%, on sales growth of 8-10%. And that's the positive drop through you've come to expect from Haemonetics. I'm pleased to report that we met our financial targets. Full-year FY'06 sales increased 9.4%, gross profit dollars increased 11.5%, and gross margins were 52.5% verses 51.6% in FY'05. Operating income grew 21.4%, that's $12.8 million over prior year. Operating margins for the fiscal year were 17.3% verses prior year of 15.6%. Earnings per share for FY'06 were $1.90 verses FY'05 of $1.52, an increase of 25%. All in all, it was a good year for Haemonetics.

Let me put the year into context with results from prior years. As I shared three years ago as my first call, as Haemonetics, CEO, our objective is to enhance shareholder value. We plan to grow the company through consistent, sustainable, quality performance by introducing new, higher margin products to our portfolio, and spending more time on the execution of our business plan. When I think about the performance of the business, we've worked very hard to fulfill that promise. Since FY'03, gross margins have improved from 46%, to more than 52%. Operating margins have improved from 11%, to more than 17%. Operating income has increased more than 20% each year. So, for three years in a row, we have consistently executed well to our first strategy, which is leveraging our core business to improve profitability. We're very confident in our ability to sustain leverage going forward, as we implement our strategy.

Now, our second strategy is to expand the business by leveraging our core competency's. Our goal is to deliver consistent, double-digit revenue growth. Now, this would mirror our consistent, double digit, operating income growth. We plan to do this through internal R&D, marketing partnership, and acquisition. In FY'06 reported revenue grew 9.4% with virtually no help from currency. From this base, we see FY'07 as a breakout year for our Company. An important step in our business transformation, if you will. I'll come back to that theme as it relates to expanding to the business later in the call. But, before I do that, let me turn the call over to Ron Ryan. Ron?

Thanks, Brad, and good morning, everyone. As Brad said, we're particularly pleased with this year's results. 9.4% revenue growth is the highest in 10 years, operating margin of 17.3%, is also a 10-year high. Earnings per share grew more than 20% for the third consecutive year. But as important, we achieved many significant milestones, our position as well, for FY'07 and beyond. So, today I'll review revenues, while highlights some of our achievements. Then, I will cover the rest of the P&L and the balance sheet. And let me remind you, the full-year numbers I'll discuss exclude the positive impact of the arbitration award received in Q3. We've posted a reconciliation of these financial statements on our web site for your review also.

Let me begin by discussing each product's disposable sales growth since disposable sales represent nearly 90% of total revenue. Donor division growth was driven by plasma and red cell disposable revenue. Plasma disposable revenue grew 22.3% of the quarter, and 12.2% for the year. We executed well to our plan for converting ZLB plasma centers to Haemonetics systems. All ZLB centers were converted by February, we will see the full-year impact of this contract in FY'07. We also installed almost 2900 additional machines in the U.S. market. As we predicted, the industry has worked through the glut of plaza, and plasma collections grew in the U.S. and Europe. 'With the benefits of new contracts and growth in plasma collections will contribute to ongoing sales strength in plasma sales in FY07.

Finally, we plan to place another 800 devices this fiscal year, which will positively impact FY '08 The other growth driver for the Donor Division was a red cell product line. Red cell disposable revenue grew 22% in the quarter and 31.9% for the full year. U.S. unit growth continued to be strong, up 26.4% over last year. We also made excellent progress this year in converting existing customers to our higher priced filter disposable set. These sets benefit customers by reducing blood processing costs and supporting regulatory compliance. The higher mix of filtered red cell mix will continue to drive growth in FY'07.

Finally, we are pleased that the Symbol Automated Blood Collection system was launched in Europe slightly ahead of schedule. The Symbol is our next generation system for collecting two units of red cells. It's half the size of our existing technology and the smallest most portable device now on the market. Our goal, is to use the Symbol to accelerate adoption of automated red cell technology.

Blood bank disposable sales revenue remains somewhat level with FY'05. For the quarter, revenues up 5.1%, mainly from growth in our Asian platelet market. For the year, blood bank disposables were up 1.5%. Platelet disposable sales represent more than 90% of the blood bank business. The platelet market will continue to be a slow-growth market in FY'07 as collection technologies are improving yield.

Let me turn to our patient division. As expected, the Cell Saver market continues to shrink because of a shift to less invasive surgeries and the impact to drug eluding stents Cell Saver revenues represented 75% of total patient revenues, so Cell Saver sales results really impact our total patient business. Cell Saver disposables revenue in the quarter declined 5.3% and for the year declined 1.4%. OrthoPAT Disposable sales, also reported in the patient division, grew 6.9% for the quarter and 8.5% for the year. In contrast to the Cell Saver system, the OrthoPAT system is marketed in a growing field. In fact, orthopedic surgeries are growing 7 to 9% per year. It is a large market that is virtually unpenetrated for surgical blood salvage. OrthoPat sales growth will, not only, offset decline in the Cell Saver business, but will be able to be the new growth engine for the business going forward.

For those of you new to our story, in August 2005, we decided to end our relationship with our U.S. distributor and sales direct. We said this conversion would have a significant, yet temporary drag, on sales growth, and it did. Conversion process resulted in about $5 million and lost revenue in FY'06. As we head to FY'07, we worked through the conversion process and will be capitalizing on this opportunity. Previously, our exclusive relationship only gave us access to one-third of the U.S. orthopedic market. By going direct, we can now address the entire U.S. market, a $470 million opportunity. There are two significant points here. First, with the conversion of our gross margins, increase from 50 to more than 70%, and second, as a result of the conversion, we expect U.S. OrthoPAT revenue to more than double in FY'07. Specifically, revenue should grow from $13 million, in FY '06, to between 26 million and 29 million in FY' 07.

Besides from the OrthoPAT converse, the other big story for the patient division is new product introduction. During the year, the division continued its worldwide introduction of the Cell Saver 5 plus, which contributed almost $6 million in equipment sales. The division also launched, and had sales of the SmartSuction Harmony and the CardioPAT system. The sales of the SmartSuction Harmony system were bundled with a purchase of our Cell Saver and OrthoPAT system. Customers are seeing the value proposition of a larger product offering that delivers a total blood management portfolio.

Now to move on. Although our biggest sales drivers company wide, were plasma and red cells, I want to mention other strong contributors. Equipment sales were up 24.5% for the year with growth diversified across several geographies and product lines. Miscellaneous and service, was up 34.7% for the year, due to growth in our 5D information management business. 5D more than doubled sales as it gained a full year benefit of a military contract. In addition, to record sales growth, 5D also introduced two new products late in the fiscal year.. eQue and eLynx, are software products that support blood collectors' needs for automated donor recruitment tools and improved operating efficiency. Through these new products, 5D can be fully integrated in the blood collection operation and expanded market reach. Frankly, our ability to provide complete service to our customers through 5D technology differentiates us from competitors.

Before I turn to the P&L, I'll comment on the components of sales growth, as I do every quarter. In the quarter disposables revenue growth was 10.5%. Pricing contributed 0.9% and volume contributed 17.8%. Conversely, mix, impacted us by negative 5.8% and foreign exchange impacted us by negative 2.5%. Gross margin for the 4th Quarter was 53.1%, down 40 basis points. Gross margin for the year, was 52.5% up 90 basis points over prior year. Structural cost savings of $5 million contributed to gross margin improvements for the year. Over the last eight years, we've taken more than $36 million as structural costs out of this business. Now we look forward to the ERP initiative, which will bring us to the next level of leverage in business operation. ERP is another enabler of our ongoing strategies to increase profitability and expand the business.

Now, let's turn our attention to operating expenses. Previously, we said we expected Q4 operating expenses to be less than Q4 FY'05. And Q4 expenses did decline 8.0% verses last year. Spending was lower in the fourth quarter because we incurred the costs of several major projects earlier in the year. For the full year, operating expenses increased 7.1% and were well controlled. Increasing $10 million over prior year compared with gross profit dollar growth of $23 million. As a reminder, we committed the shareholders to limit our expense increase in FY '06 to half of gross profit dollar growth. We achieved that. So as anticipated, we got a great deal of leverage in the quarter, which contributed to achieving the year's target for operating income. Q4 operating income was $24 million, up 52.1% over Q4 FY '05, full year-operating income was $73 million up 21.4% over FY '05. Again, this represents the third consecutive year of more than 20% of operating income growth. Operating margin for Q4 was 21.6%, up 590 basis points, and for the full year was 17.3%, up 170 basis points. As I said earlier, this a record for us, but, we have higher aspirations. Earnings per share for the quarter were $0.61, up 64.9%, mainly due to sales growth and operating leverage. Earnings per share for the year were $1.90, up 25.0%.

Let me finish my comments today with a balance sheet. The year delivered $35 million in operating cash flow, which we defined as free cash after working capital and capital expenditures. We have $251 million invested in cash and $39 million of long and short-term debt. So, we finished the year with strong financial results and a strong balance sheet, but we really end the year with a lot more than that. The goals we achieved in FY '06 position us for greater growth in FY '07 and beyond. For example, we end the year successfully bringing a major product line sales in-house. We also the end the year as the exclusive supplier to one of the world's largest plasma collector. The sales from the OrthoPAT and Plasma lines will significantly add to our FY '07 sales success. Beyond existing products, we end the year having launched four new products and positioned three additional systems for launch in FY '07. These new products give us a solid platform for sales growth in the future. With that, let me turn the call back to Brad.

Thanks, Ron. FY '06 was indeed a good year. Now I'll walk you through the highlights of our FY '07 guidance. And you'll see, it too, will be a good year, and I'll provide additional comments. Please note that our growth targets for the coming year does include the negative impact of currency. The guidance does not include the impact of stock compensation expense, which we estimate at approximately $0.25 cents per share, or the impact of of a restructuring charge of 3 to 4 million pre-tax or $0.07 to $0.09 per share for business transformation initive. Additionally, comparisons to FY '06 exclude the arbitration award. To assist you in understanding our projections, our web site includes scenarios for the high and low ranges of our FY '07 guidance and P&L.

So, our pro forma guidance for FY '07 is as follows. Revenue growth of 10 to 14%. Gross margin in the 52% range. Operating income growth of 18 to 25%, operating margins will improved to approximately 19%, earnings per share in the $2.15 to $2.25. Finally, we anticipate operating cash flow will be $35 to $40 million in FT '07. Operating cash flow includes, higher capital expenditures in our recent run rate, and reflects the investment in ERP. Ron will talk more about this at the investor meeting later this morning.

Now let me add some additional color. As I said earlier, over the last three years, we've been working hard to position your company to be a double-digit growth company. Now that is, growth exceeding 10% on both revenues and operating income. We've done a good job growing operating income more than 20% annually, we've come just close on double digital revenue growth, we've fallen just short. From FY '04 to FY '06, we successfully repositioned the business. FY '07 will be the year we transform the business to a double-digit growth company on the top line. Our management team has worked diligently to transform operation, and put in place strong structure required to deliver higher top line growth. We have transformed sales channels to deliver greater profitability, we are transforming markets with a new rich product line that will drive future growth. We believe FY '07 will be our breakout year. Both divisions will contribute to revenue.

The key drivers in FY'07 are plasma, red cell, and OrthoPAT. So, let me touch on each one of these. First plasma. Plasma sales are expected to grow by 18 to 21 million. As we predicted, the plasma collections grew among many of our customers in the United States and Europe. Our recent data indicate that there are about 10 million plasma collections in the U.S. annually. That research also indicates there are about 12 million collections per year are needed to meet the demand for plasma drive pharmaceuticals. So over the next 2 to 3 years, the industry is expected to return to a growth mode, which align collections with demand. Our large market share in all geographies, positions us well to capitalize on market growth. Additionally, in FY '07, we'll see the full-year impact of the conversion of ZLB to hemonetics equipment.

Now, let's turn to red cells. Red cell disposable revenues are expected to grow between $9 and 11 million over prior year. An increase in unit sales and the ongoing conversion to filter sets in the United States, will drive sales growth in FY '07. Finally, OrthoPAT. OrthoPAT sales are expected to grow $14 to 19 million over the prior year, driven by the conversion in the United States to our direct sales model. Heading into FY '07, we have already secured contracts 90% of our unit volume run rate. Specifically, our run rate had been about 50,000 OrthoPAT disposables through our distributor. Today, with these contracts, we have now secured about 45,000 [discs] on a direct basis.

So in FY '07, we'll grow the business further in both, existing and new accounts, plus benefit from the direct sale price. Now recall that I just said red cells and combined will be growth vehicles. They will grow approximately $27 million over prior year in FY '07. Several years ago we created the market for these products, and in FY '07, about 60% of our incremental growth will come from just these two product portfolios. This product line is diverse. Marketing success and focussed implementation is a key to our future success. We have shared in the past that FY '06 was a learning year on how to launch new products, and I'm very confident we've learned how to do that very well. Now we'll take these earnings and apply them to ramp up sales of new products even faster than we did with red cells and OrthoPAT. In FY '06 last year, we worked hard to position plasma, red cells, and OrthoPAT, as the growth drivers for this year, FY '07. FY '08 growth drivers will come from new products launched this year. Now, to assist you in understand the product specific revenue guidance, we have posted some revenue models on our web site. We hope this helps you out.

Now let me turn to gross margins. We expect them to be in the 52% range level with FY '06. Now, the reason for this is a product mix shift as our plasma business ramps up. Plasma disposable margins are attractive, but still slightly below our corporate gross margin. We're going to see our margin on OrthoPAT, as Ron talked about, in the United States, go from 50% to more than 70%. But the increase in OrthoPAT margin, will only partially offset the large volume increase in plasma.

So now, let's turn to operating expenses. Many of you have asked if operating expense leverage is sustainable. Well the answer is, absolutely yes. We often speak with shareholders about our five year strategic plan. A leaner more focussed organization is key to delivering our strategic plan objective. Now recall in FY '04, as part of that plan, we restructured our U.S. operation. That reorganization was the structural platform for significant growth in the United States. In fact, 80% of our total incremental sales in FY '06 came from the U.S. Well, now it's time for the next logical step in our plan to optimize our organizational structure. We'll implement phase two by transforming our international business, streamlining our operations abroad. Implementation will be phased throughout the year. We will expect to take a $3 to $4 million charge, some of which will be taken in the first quarter, and the balance is expected to be taken later in the year. The total charger for the one-time cost is to optimize our cost structure and is being excluded from our FY '07 pro forma guidance. This international business transformation, plus ongoing structural cost initiatives, such as our core program, will free up approximately $8 million annualized, to re-deploy for future growth. One objective of the transformation, and that is sustaining leverage operating expenses with a leaner international cost structure well into the future. But the most important message here is this, the business transformation allows us to more nimbly introduce new products and penetrate new global markets. In other words, the transformation positions us for stronger international growth in the future just as we reorganize the U.S. operations and have seen stronger growth in the United States as a result.

Now, let's move down the P&L and look at our guidance and what we expect in our operating income. We expect operating income growth of 18 to 25%. This will be the fourth consecutive year of operating income growth in the 20% range. And the kind of positive drop through you've come to expect from Haemonetics. The operating margins will be approximately 19%, up from the 17.3%, of FY '06. So that's a little bit of how we're going to execute on our first strategy to improve profitability. Our second strategy is to expand the business by leveraging our core competencies. As I said earlier, in FY '07 we expect most of our revenue growth will come from the three existing products. But a key story for our future is the four products we introduced in FY '06 and the three more we'll introduce in FY '07. We'll feature these new products at the investor meeting later this morning.

Folks, our new product pipeline is diverse. Coming to us in, both internal R&D, acquisition, and positively impacts both divisions. Our new suction devices, the Smart Suction family products, will be the first products in the patient division to expand our marketing reach. In fact, this is the first step in transforming Haemonetics from a surgical blood salvage company, into a total blood management company. Two software products lay the foundation for the Donor Division's goal to help customers manage the total blood supply chain from the donor all the way to the patient. We have a very exciting future ahead of us. Most importantly, the market potential of the new products that we're introducing is greater than our total FY '06 sales. That's a great opportunity for your corporation.

So let me summarize. Three years ago, we were committed to enhancing shareholder value. And we've done just that. But you should know, that our management team believes it's only a start. We have much, much higher expectations. FY '07's guidance is a reflection of the discipline and the maturity of your management team. The team has been disciplined into executing in two strategies. The first allows us to reposition the business, and now the same operating discipline will allow us to transform the business. Let me personally thank our shareholders for all of your support of our efforts. To our employees, who set out every day to service our customers, thank you for your focus, discipline, dedicated hard work. I'm proud of this company, and of our performance. FY '07 will be a great year. Strategically, positioning Haemonetics to be a double-digit growth company, which creates shareholder value well into the future. With that, let me turn the call over to the operator. Operator?

Thank you. The floor is now open for questions.

[OPERATOR INSTRUCTIONS] Your first question is coming from David Zimbalist, of Natexis.

Thank you very much. Ron, I'm wondering if you could make some comments about your expected impact of foreign exchange over the course of 2007, given the way you set up for your hedging strategy.

Yes, David. We do expect some foreign exchange negativity next year, we're scoping that the a the earnings level to maybe negative $0.14 to $0.16 per share. As you know, we use foreign contracts to lock in on currencies. And we disclosed in our filings the -- an index that we hope is useful to investors to explain the movement in currencies. Next year we're facing some head winds on a top line basis, we might be looking at negative 1 to 2% impact.

This is Brad, it's important to remember the guidance we just shared with of that 10 to 14%, includes that negative headwind of foreign exchange. So we're really pleased that the business is positioned well to grow into FY '07.

Okay great. And my follow up is the ERP product that you're putting into place.

Yes.

Can you talk a little bit about where the cost of that are going to be-show up in the P&L. Is it mostly planning this year? Therefore, more expenses in fiscal 2008? Or is it part of the restructuring? Just some clarity on that.

Yes, I'll give you a little preview of some remarks I'll make later at the investor meeting. But basically, the cost of the project will be about 50/50 between operating expense and capital expenditures over a three year period. Anticipating in FY '07, the upcoming year, $5 to $6 million of operating expense, which is included in our approximately 20% earnings growth model.

This is Lisa, David, none of that is in any kind of a charge. It's all in.

Thank you, your next question is coming from Steve Hammill of Piper Jaffray.

Thanks. In terms of the growth guidance that you've given for fiscal year '07, you've said, Brad, that you're going to do 18 to 25% --

18-25% growth in operating income, that's correct, Steve.

About 13 to 18% growth is making its way down to the bottom line, and I was wondering if you could talk about that, and in particular, you've got share count going up fairly significantly. At what point does it make sense for shareholders in your opinion, Brad, to start to buy back some stock or at least enough stock so that you don't get that negative impact from your share count rising?

Yeah, it's a great question, Steve, thanks. We have brought to our board in the past and will continue to bring to the board going forward, the concept of buying back stock as of just recently, we have not yet determined to do that. However, with the wonderful cash position that we have today, we have exciting opportunities to expand our business going forward with the use of that cash as we look at new markets. And we'll be talking about that in the investor conference in about an hour. So we've kept our [power dry], as you know, in terms of the utilization of cash to look at expanding into new markets or to expand into new markets by acquiring new core competencies. So, we'll talk about that as a use for cash going forward, but we continue to review with our board on a routine basis. If the purchase of Haemonetics stock is the appropriate thing to do, and when the appropriate time to do that would be.

There's a lot of appetite, frankly, Steve, conceptionally for repurchasing enough stock to off set the dilution of those kinds of share counts, increases.

Thank you, your next question is coming from John Putnam of Standford Group Company.

That you think, I wondered if you might comment on OrthoPAT a little bit more specifically, with respect to market penetration and I know it's low. And I wonder how quickly you can really penetrate that market, Brad.

yeah, sure, John. As you all know, we've really been very pleased with our performance of the Brian Concannon and patient division team and securing the large number of contracts as we decided to go direct on OrthoPAT. I would remind you that there were just over 200 accounts where we in fact, had OrthoPAT penetrated through our U.S. distributor over the last five years, and we've secured the better part of that business. When you think about the fact that there are 4500 hospitals in the United States, and many of them do OrthoPAT--or orthopedic procedures, this is really an under -- very underpenetrated market. What Brian Concannon will share in our investor conference later today, is just how substantial we believe this market is. Ron indicated he thought the market potential was somewhere in dollars of about 470 million. And so you can see that we have a long way to go to penetrate that market. Now, part of our strategy, as we went direct, was to affect a couple of things. Number one, for two years we did not see our U.S. distributor meeting their growth requirement. Number two, we saw a margin opportunity enhancement with our margins going from 50% to 70% going direct. And third, we thought we could utilize this internal additional margin to fund a sales force. And what Brian Concannon will share later today, is the fact that we have made investments in our sales force so that we can penetrate, not only existing accounts, where Zimmer or Stryker docs aren't using the technology, but also get beyond those 200 accounts that are only using the technology in the United States. So clearly that $470 million market is very, very attractive to us, we have more than 30 sales reps positioned to do that in the United States, and those 30 same sales reps, are also being trained, on frankly, all of the new products that we're launching that Brian will talk about in the patient division. So we feel really good about that decision, we feel really good about the implementation in FY '06, but, to be honest, your question is right on the money. We feel more excited about the growth prospects for this business going forward. And as Ron indicated, we expect to see our growth over prior year be between 70 and 90% on OrthoPAT as we go into FY '07.

Thanks, Brad. One follow up question.

Sure.

Can you give us an update on cardioPAT?

Brian Concannon is going to be upset when I start stealing all of his thunder for the investor presentation. So let me hold off on some of that. Because I think you guys will be please to hear, and I'd like Brian to explain it, but we're right on time in our launch. As you know, we pulled that product line back. We went to the FDA in terms of making sure it was absolutely the perfect product to launch. We've gone through limited market release, and we're feeling really good about the cardioPAT launch. Brian will talk about the market opportunity and its size, it's scoped at 100 to 120 million in size. And, so this, again, is a product line that has, virtually no competition, because the device moves with the patient outside of the surgical setting into a post operative setting. So, we are really excited about the growth. And our limited market release has indicated the product line has, we think, substantial legs for growth in FY '07, but even well beyond that into FY '08. I would mention that our growth vehicles for FY '07 clearly are, OrthoPAT, red cells, and plasma. We have a wonderful position to be able to hit double digit growth with those three product lines that really make sure FY '07 is a great growth vehicle. FY '08 is a story about launching these products well in FY '07, and then seeing substantial growth in FY '08 from those products. So, we bought ourselves time from all of the hard work we did in FY '06 to really penetrate red cells, OrthoPAT, and the plasma market. So hopefully that gives you a little more color, and we'll give you you a lot more specifics about this during the investor meeting.

Thank you, your next question is coming from David Schneider, of Hoover Investments

Yes, in your press release, you mentioned that your cash flow growth was going to exceed your earnings per share growth, which I view, as a positive thing, because cash generation really shows a very high quality of earnings. But, can you discuss why that's going to happen? Maybe go through the cash flow stuff?

Yes, just let me recap our cash flow and FY '06, which really matched our expectation. As we indicated we had $34 million of operating cash flow and that incorporated capital expenditures that has exceeded our depreciation by about $9 million. Historically, our CapEx and our depreciation have matched up closely this year as we recapitalized for growth in the plasma business, we had somewhat higher capital expenditures. The team has done a great job in managing Accounts Receivable, we held our DSO pretty much at last year's level, which is a record. We ended the year with six turns in our disposable finished goods. And that's up favorably from 4.9 turns last year. And since disposable finish goods represents the majority of our inventories, we're very pleased with that. We place a lot of value on cash flow generation, and so certainly going into next year, FY '07, we're targeting $35 to $40 million notwithstanding, again, somewhat higher capital expenditures supporting the business and supporting ERP. We continue to work hard on asset management and so we expect in FY '07 our DSO will be a top target for the team, and our operating flow will continue to maintain our inventory turn at the current level.

And how do you calculate cash flow as expressed in your earnings release? Different people have different formulas?

Yeah, we use--our operating cash flow is pretty straight forward. Net income, plus depreciation, plus or minus changes in working capital, minus capital expenditures, and other parts of our business, such as the sale of capital equipment that generates cash.

At a very high level, I just want to add that, we placed almost 3,000 machines last year, equipment placements, and they generate a tremendous amount of cash flow going forward in disposable units. That really is the so-called fly wheel of this business.

And Lisa's referring to the 3,000 placements of plasma machines in FY '06. And that was on a base of, about 3,000. So we had 100% increase in the number of machines placed for the commercial plasma business in the United States.

Thank you. [OPERATOR INSTRUCTIONS] Your next question is coming from Steve Hamill, of Piper Jaffray.

I was wondering if you could talk a little bit more about your guidance for the new products, Brad, you've only got $5 million of new product revenue built into your guidance with, essentially at least four new products coming out last year and, as you said, another three this year. Given all of your bullishness about, you know, these new opportunities, are you just trying to strike a consecutive pose on the new products?

It's a great question, Steve. I think that the new products are clearly a growth driver of our business in the future. When you think about the market opportunity of those seven new products being greater than the total sales volume of the company today, the question becomes how quickly can we penetrate those markets because clearly that's plenty to make sure we can be a double digit growth company on the top line, well into the future. That's why we're so bullish. As it relates to introducing the new products, I would remind everybody that in our patient division in the United States, we have virtually a brand new sales force, to a large extent, as we added a number of people to support OrthoPAT. So, there's a little time to get comfortable within your territory, there's a little time being comfortable of being trained and developed and so forth. So, we're in a wonderful position that we don't have to have all new product sales hitting FY '07 to make our numbers. Because in FY '06, we worked so hard to position OrthoPAT, position red cells to grow and position plasma. So, there's really up side for us in new products in FY '07 and that will be a great story if we do it right in FY '07 and launch well for a tremendous start in FY'08. So, that's really the story.

And if I may, why was your guidance for equipment flat for 2007? I would assume that Cell Saver 5 plus, as well as, the SmartSuction Harmony are going to flow through that line?

Yeah, remember as Lisa talked about we had tremendous increase more than 25% increase in equipment this year, Steve, which is a pretty high number for us. So when you do comparisons to FY '06, on that kind of growth for FY'06 into FY '07, that's a big number to run after. So, that's why it looks flat.

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

Good morning.

Good morning.

I had phone issues, I missed part of the call. I had two questions. One the restructuring charges internationally, should -- is it safe to assume, it's the same type of activities that you did here in the U.S.?

That's right, Jim. What we're really attempting to do is less about what we save in this, but we're really repositioning the business so we can better serve the customer. I'll give you an example. In some marketplaces, In some broad geographies, we have seven or eight distribution centers that we use to service the customer. In the United States, we have one. Now think of the amount of inventory we utilize and spread throughout seven or eight distribution centers to service the customer. Our earnings, when we reorganize the United States, is to have less distribution centers where we have more inventory, to better service the customer, but less expense to the company. That would be an example, operationally, of how we can give better service to the customer by looking at our operating structure. We really expect this restructuring will position us to be able to more nimbly, quickly, introduce products in FY '07 and FY'08 throughout other marketplaces other than the United States.

All right. And then just one follow-up. With the earnings scenarios you have on the web site. The difference between the two scenarios, the share count was significantly different from one to the other. Is that because if you hit the higher numbers, the options get awarded, or what was that for?

Yeah, Jim, the share count can vary for a variety of reasons, including the compensation that management is awarded, so, we put a little range in there just to show that there could be some variability there. But, what's really driving our expectations next year is getting into double digit revenue growth, improving our operating margin up into the 19% range, which we're very pleased to target that, and to sustain that leverage to the bottom line for the fourth consecutive year.

Thank you, your next question is a follow-up from David.

Hi, thanks. I'm wondering if you could talk about what types of commodity costs are assumed in your scenarios for 2007. And if you are assuming that commodity costs are going to continue to rise or if they're basically holding at current levels?

David, this is Brad, when you look at the cost of a barrel of oil, you'll see in Bob Ebbeling's presentation, later this morning, that is increased steadily over the last three years. And through our core program, which we're very proud of, and very pleased with Bob Ebbeling's leadership, our VP of operations, he has mitigated those costs per year, each year for the last three years. So when we look at that core program, and Ron referenced leveraging the P&L strategy number one, we've taken over $36 million out of cost, over the last number of years here, that Bob and his team have done a groat job with that. So, we mitigated the cost of oil increases in FY '06, we expect to be able to do that again in FY '07.

Okay. And this quarter, SG&A when you take out the effects of currency, was actually down year-over- year. And, can you talk a little bit about where you're at on the hiring front in terms of your target, your original target of sales reps for the [auto cell] business and to the extent that you're actually continuing to spend more in that area, what were the primary contributors to the year-over-year absolute decline in SG&A?

David, the primary contributors were that as we mentioned in our prepared remarks. Some of the new product costs are behind us. Certainly the preparation of plasma collection devices for the ZLB and other areas of growth, that was behind us. And so basically, our SG&A is a percent of sales receded somewhat as we now prepare for a new plan and new ways to deploy our P&L investments.

In terms of sales force, David, Brian Concannon in the patient division,have got almost a full compliment to date of the hiring for their U.S. sales force. There are still a few territories left to be filled, but they're pretty close to completing that. As a matter of fact, next week they'll be having their national sales meeting, as will as the Donor Division to really kick off our FY '07. We're almost complete with the hiring in terms of salespeople for the United States to support OrthoPAT and the other new products we're launching in the patient division.

Thank you. There are no more questions, here is Mr. Nutter with closing comments.

Thank you very much, operator. FY '06 was a good year. We're really excited about FY '07, we believe it will also be a great year. We have worked hard to strategically position and transform Haemonetics to be a double-digit growth company. We believe this will secure the fact that we will meet our mission of creating shareholder value, not only in FY '07, but well into the future. We're looking forward to being able to share more specifics with you at our investor meeting which will start at 10:00 this morning. We look forward to sharing this information with you. Have a good day, thank you very much, bye.