Haemonetics Corp (HAE) 2007 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Haemonetics first quarter fiscal year '07 conference call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for 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?

Thank you, operator. Good morning, everyone. Today I'm joined by Ron Ryan, our CFO; Lisa Lopez, General Counsel and VP Administration; Julie Fallon, Director of Investor Relations; and Brian Concannon, President of the Patient Division. Our call today will cover 3 things. First, I'll comment on the Company's overall performance in Q1. Second, Ron Ryan will detail our quarterly financial performance. And third, I'll comment on our execution to key strategic initiatives.

Let me begin by confirming our previous pro forma guidance for the current fiscal year. Our sales growth of 10% to 14%, gross margin of approximately 52%, operating income growth of 14% to 21%, with operating margins of approximately 18%, and earnings per share in the range of $2.05 to $2.17. As we also shared previously, FY '07 results were impacted by 3 items. Stock compensation expense, FAS 123, restructuring charges, and an acquisition. A breakdown of this information is included in the press release and on our website. Ron Ryan will share more about these and their impact in that his comments. Excluding stock compensation and restructuring expenses, the 2 items affecting Q1, our pro forma results for the quarter are as follows: Sales increased 7.3%. Gross profit increased 5.3%. Gross margin was 51.9%. Operating income increased 6.1%. Operating margin was 17.7%. Earnings per share were $0.52, up 10.6%.

Now, let me put the quarter in perspective. It was a good start to the year. Ron will share more detail, but here's my overview. We're particularly pleased with our U.S. disposable revenue growth. U.S. plasma and OrthoPAT grew more than 40%. U.S. red cells grew 28%. Now remember, these 3 growth drivers are the key to FY '07, and they are off to a strong start. Our Japan business saw a $2.9 million revenue decline. This was due to a reduction in platelets and plasma collections by the Japan Red Cross. Ron will give more detail on this in a minute.

Now, regarding strategy number 1, which is leveraging the core business to improve profitability, operating income increased 6.1%, showing modest positive drop-through from gross profit growth of 5.3%. A few additional thoughts. Our confidence in our full year guidance is bolstered by our belief that sales are expected to build in the second half of the year. Now, the reasons for this are, first, just as we've seen during the last 3 years, we expect a trend of sales weighted in the second half of the year. Second, we recently added 22 sales people in the United States who will become increasingly more successful selling OrthoPAT. Third, over the last 2 quarters, we placed 1,100 additional plasma devices which will see increased sales later in the year. Fourth, red cells continue to maintain sales momentum from unit growth and product mix. Now, each of these dynamics should positively affect sales throughout the year. We shared this during the our Investor Meeting, and the first quarter came in as expected. In addition, you remember that we're launching 7 new products spanning fiscal year '06 and '07.

We also closed on the Arryx acquisition on July 18th. Arryx is a Chicago-based nanotechnology research company. As a result of this acquisition, we have another new product to market. We are anticipating $1 million in sales from the product this year. We will also pursue licensing opportunities for the Arryx holographic optical trapping technology. Now more on Arryx a little later. For these 5 reasons, we are confident in affirming our outlook for the full year. With that, let me turn the call over to Ron Ryan to review the P&L and balance sheet in some detail. Ron?

Thanks, Brad, and good morning, everyone. As Brad stated, I want to take the time to describe the quarter's successes and our full year opportunities so you can see how we plan to achieve full year guidance. Let me begin by discussing each product's disposable sales growth, as disposable sales represent nearly 90% of total revenues. Donor Division growth was driven by our plasma and red cell business. I'll talk first about plasma. Our annual plasma revenue guidance is growth of 16% to 20%. Quarterly revenue growth was 16.9%. U.S. plasma disposables grew 41% and Europe grew 14%. The U.S. plasma business drives the worldwide market. Throughout the year, we will continue to see the benefit of our new ZLB contract. In addition, industry sources estimate total U.S. plasma collection growth this year in double-digits. We can confirm that we are seeing this type of collection growth at many of our U.S. customer's sites. As we shared previously, we placed 2,900 plasma devices last year with U.S. customers and expect to place another 800 machines this year. In Q1, we placed 400 devices between the U.S. and Europe. So we placed half of the devices in our annual operating plan in just the first quarter. We expect to see the impact of all these machine installations in the second half of the year and into fiscal '08. This is why it Brad just indicated that we'll see ongoing growth in the U.S. plasma business throughout the year.

A decrease in Japanese plasma collection was a drag on global plasma growth. As we have explained previously, the Japanese Red Cross, JRC, had been reducing plasma collections. However for this year, JRC set a goal for a slight growth in collection. We anticipated that the JRC phase in the increase evenly over the year. Instead, we are seeing that JRC is holding back on increasing collections until later this year. JRC is maintaining its full-year collection targets and we anticipate the collections will strengthen later in the year. We experienced quarterly fluctuations last year also, as this is not new.

Turning to blood bank disposable revenue, our guidance is annual revenues level with FY '06. In Q1, blood bank disposable revenue, which is mostly platelet collections sets, declined 4.1%. Some of you may recall that last year, a local competitor experienced quality problems in Japan. As a result, the JRC turned to Haemonetics to supply more of its platelet collection sets and our market share increased. The competitor has resolved its quality issues, and so we're seeing some rebalancing of collection allocation. It is important to note that Haemonetics market share for the quarter remained in the 70% range, which is consistent with our historical and expected market share level. Our strategy is to maintain that share.

The other factor impacting sales in the quarter was a decline in platelet collections in Japan, due to improvement in Japanese operating efficiency. We expect sales to strengthen later in the year, when we introduce an enhanced platelet collection disposable in Japan, a higher priced set that supports our customers GMP requirements. As we mentioned previously, because of our high global market share, our opportunities for platelet growth are emerging markets, as well as North America. I am pleased to report that in the quarter we signed 2 important contracts for new platelet business. In the Eastern European market, we signed a contract with the Belarus Transfusion Medicine System to be its exclusive supplier of platelet collection systems. The contract represents about $1 million in incremental revenue, including the equipment sale of 21 devices for platelet collections. Importantly, the contract shows our second year of growth in the Eastern European market.

In the North American market, we signed a long-term contract with Canadian Blood Services to be its primary provider for platelet collection systems. CBS is the largest blood collector in Canada, collecting about 26,000 units of apheresis platelets annually. CBS is now committed to using Haemonetics for about 70% of its platelet collection. This is a competitive conversion that we are pleased to be taking market share. The conversion to Haemonetics systems will begin later in the fiscal year.

The other growth driver in the Donor Division was the red cell product line. Our annual guidance is revenue growth of 25% to 30%. Red cell disposables revenue grew 25.4% in the quarter, while U.S. red cell revenue is up 28.1%. You may recall that we began transitioning the Red Cross regions to our higher priced filter disposable set last year. That conversion was complete in Q3 of last year, and now the Red Cross red cell collections done with Haemonetics sets are using this more efficient disposable. We'll continue to see the revenue growth benefit of this conversion throughout the calendar year.

Unit growth will also contribute to our red cell revenue growth for the year. Customers in the U.S. continue to experience significant blood shortages. And Haemonetics double red cell collection technology is a way to get more blood from their existing donors. Currently, just 6% of the estimated 15 million units of blood collected in the U.S. comes from Haemonetics automated systems. So there's a significant opportunity for ongoing market penetration.

Now let me turn to our Patient Division. Our annual guidance for the surgical product line, mainly Cell Saver sales, is 0 to 5% revenue growth. For the quarter, sales were level with Q1 FY '06. As expected, the Cell Saver market continues to shrink because of a shift to less invasive surgeries, and the impact of drugs eluding stents.

Moving on to the orthopedic market for the year, we expect OrthoPAT revenue growth at 70% to 90%. OrthoPAT disposable sales grew almost 30% in the quarter, driven by strong U.S. revenue growth of 41%. I'm pleased with the 41% which beat our plan, but I want to address how we plan to get to the 70% to 90% global growth for the year. First, our new sales team has only just completed its training. Second, many hospitals are still working through inventories from our former U.S. distributor. Now, we've set aggressive sales targets for the year, we recognize is back end loaded. We are confident in our growth, and let me tell you why. In Q1, our plan was to sell 9,900 units in the U.S. We exceeded our plan by selling more than 10,500 units. As the sales force matures and inventory is consumed, our target increases to 12,500 in Q2, 15,000 units in Q3, and 17,000 units in Q4. Our sales guidance is in revenue. What I've just given you is a unit growth number, but let me also remind you that the sales price of our OrthoPAT disposable sets has risen from about $150 to our prior distributor, to about $400 now. Our combined unit growth and pricing will get us to 70% to 90% annual growth.

Now to move on, although our biggest sales drivers Company-wide were plasma, red cells and OrthoPAT, I want to mention another strong contributor. Software sales from our 5D Information Management business, reported on the miscellaneous and service line, were up 64.7% or $1.2 million for the quarter, as a result of ongoing work with the military. 5D also made new product gains, releasing its newest software products, eQue and eLynx, in the European market in April. Additionally, eQue is now being marketed in the U.S. As we move down the P&L, let me remind you, i will be discussing non-GAAP results. Excluded from these pro forma numbers are 2 items. First, FAS 123R stock compensation expenses are expected to reduce our annual GAAP earnings per share by about $0.25. In the quarter, the impact was $3 million or $0.07 per share.

Second, as we shared previously, we anticipate a 3 to $4 million restructuring charge spread over the year, to improve the efficiency and sales strength throughout the Company's international operating structure. The transformation will free up about 3 to 4 million annualized to sustain our operating leverage and to redeploy for future growth. In the quarter, we spent $1.6 million of this total, negatively impacting earnings per share by about $0.04. We're making good progress. The Q1 unusual items are reconciled in our earnings release.

With respect to our Q1 results, we normally don't go to this level of detail, but I want to give you visibility into our Q1 performance, and how this quarter affects our full year. We finished at 96% of our sales plan, 99% of our gross profit plan, 97% of our operating expense plan, and 103% of our operating income plan. That speaks to 2 things. 1, our ability to plan and execute. And 2, our flexibility to aggressively adjust and manage our business to improve our bottom line. Given Q1 performance, plus the expected step up in revenue in the second half of the year, we remain confident in our annual guidance.

Now turning to pro forma Q1 results, gross margin for the quarter was 51.9%, down 90 basis points, due primarily to a product mix change, as our plasma sales grew significantly in the quarter. As we shared during our investor meeting, over the past 8 years, we saved $35 million through our structural cost reduction program. This year we have committed to cost reductions of $8 million. As well as -- well above our historic commitment of $3 million to $5 million. These savings will partially offset the margin pressure we would see from the mix shift due to grow growing plasma sales and increases in raw material costs. The net effect of all of this is that we will maintain gross margin levels in FY '06. Operating expenses increased 4.9% over prior year. The majority of the incremental expenses were increased SG&A expenses as we added to Patient Division sales force. As Brad reminded you, over the last 3 years we've managed expenses to 50% of our incremental gross profit dollar growth. Expenses grew approximately 60% of incremental gross profit dollar growth. This is actually below our plan in Q1.

For the year, we have planned expenses so that our operating income growth model includes $5 million to $6 million of ERP expense. For the full year, operating expenses will be in the range of 50% of gross profit dollar growth. When this team -- 1 thing this team is particularly good at is operating discipline. As I just said, while our Q1 expenses were higher than our annual target, they were lower than planned. As a result of our continued spending discipline, we achieved some P&L leverage from the gross profit dollar line to operating income. Operating income was $20 million, up 6.1%, or $1.1 million. Now, over the past 3 years we've seen quarterly fluctuations in operating income growth, ranging from 2 to 139%. The fact is we have consistently grown operating income for the last 3 years in the range of 20%. Operating margins for Q1 were 17.7%, down 20 basis points, and consistent with our annual guidance. Earnings per share for the quarter were $0.52, up 10.6%.

Earlier, Brad affirmed our previously announced pro forma guidance for the year. Let me go into more detail on our pro forma earnings per share guidance. As we noted previously, our earnings per share guidance is before the $0.25 per share impact from FAS 123, and the $0.07 to $0.09 from restructuring charges. Also we closed Arryx on July 18th. When we announced the Arryx acquisition, we referred to an expected R&D charge, which we now have an estimate for. In Q2 we will take a 1-time charge, primarily in the -- an in-process R&D charge of up to $16 million or $0.56 per share. So again, our annual pro forma earnings per share will be in the range of $2.05 to $2.17. With FAS 123, restructuring charge, and now the total impact of the Arryx acquisition, our annual GAAP earnings per share will be in the range of $1.15 to $1.29.

Let me finish my financial comments today with the balance sheet. The quarter delivered $5.9 million in operating cash flow, which we define as free cash after working capital and capital expenditures. We have $260 million in invested cash and $35 million in long and short-term debt. I promised at our investor roundtable to give a brief quarterly update on ERP. So let me share a few comments. We completed our vendor and contract negotiation, and have chosen Oracle software as our partner for application, implementation services, and end user training. Our project team completed its initial training, and is now working on the development and design phase of the project. Through the first quarter, we are on time and on budget with this project.

In closing, we're transforming your business, and Q1 was a good start in our transformation process. We remain confident in achieving our annual guidance, and as such, we have allocated 50% of our financial measurement for bonuses to achieving our sales growth. Now I will turn the call back over to Brad.

Thanks, Ron. Ron talked a lot about our progress in implementing our first strategy, to leverage the core business. Our second strategy is to expand our business, and we're making good progress transforming your Company from a strategic perspective. So here's a quick update. Let's start with Arryx. All employees are now Haemonetics employees. I've personally visited with the team twice in Chicago during the last month, and everyone is very enthusiastic about joining Haemonetics. With regard to Arryx technology, you may recall we previously announced that we have optically trapped red cells, white cells, and platelets. We decided to acquire the company after they had proven that they could optically trap bacteria. Today, I'm very pleased to report another exciting development. Our teammates at Arryx have optically trapped viruses. Specifically, the HIV virus. This is a significant milestone, and again proves that the technology is robust. When you consider the ability to optically trap and separate both bacteria and viruses, it's no big leap to see the potential this technology has for Haemonetics. With the Arryx acquisition, we also added a new product to our portfolio, the BioRyx 200. Our newly developed marketing plan, calls for us to sell more than than $1 million worth of this product by year end. Another growth opportunity would be to license this robust technology to others. Let me close my comments on Arryx by saying this was a strategic acquisition which we're very excited about. It has multiple applications. It's a game changing technology. And we believe it can become a contributor to sustain shareholder value.

Now, let me comment on a few of our new products. The products that we're launching are expected to -- $2 million to $5 million in incremental revenue later in the year. Our recently expanded U.S. Patient division sales team is making good progress getting up to speed on all of our product offerings. The territory managers are now trained on the CardioPAT and Smart Suction Harmony. A highlight is CardioPAT. 80 machines have either been sold or are being demo'd. In the quarter, we also received 510K clearance for the filter bag, designed for use with our surgical system. The filter bag is now in customer acceptance trials.

Finally, Smart Suction Solo. This is a sister product to the Smart Suction Harmony. It's just entering customer acceptance trials in Europe. Ongoing sales of these new products are affirming our sales strategy. The customers see the total value proposition of Haemonetics. We are transforming Haemonetics to be the market's only total blood management company, versus a niche blood salvage player.

Now moving on to the Donor Division, our second generation red cell collection system, Cymbal, continues to be well received in customer acceptance trials. We have placed 15 machines, and are just finishing trials in 4 countries. Our goal for the Cymbal is to accelerate penetration of the red cell collection market in Europe. In April we announced the European launch of eQue and eLynx. Now I am pleased to announce the 510K clearance of eQue for sale in the United States. This software system will be sold through our existing Donor Division sales force, with support from 5D. And we have already had our first sale of the system.

Let me close with some final, but additional perspectives. And I will target my comments to our shareholders and our employees. Let me start with our shareholders. I am reminded that 3 years ago this month, we embarked on a repositioning of your Company. We took a restructuring charge for our U.S. operations. And that was the beginning point of our efforts to reposition the Company. We are pleased with our overall results, and many of you have commented on the fine job our team has done in executing to our mission. That is, our mission to create and sustain shareholder value. Additionally, we have 2 strategies which keep us focused on that overriding mission. These strategies are leveraging the core business, and expanding the business. In the 3 years of our repositioning of your Company, the management team has learned a great deal. We made consistent progress, each year gaining momentum, and significantly improving shareholder value.

Now let me turn to the future. At our May Investor Meeting, we talked about transforming the business to a higher growth profile. We are still focused on creating long-term shareholder value, and utilizing our successful strategies. Today, we shared with you more visibility in how we run the business, and to some extent, provided you with some opportunities that the Arryx acquisition will offer. As you look at the quarter, you will see our gross and operating margins are right on target. Our international restructuring is going very well. We have made good progress regarding ERP, and our new product launches. We remain quite comfortable with our outlook for the balance of the year. We're absolutely delighted with the progress with Arryx. Optically trapping viruses, specifically HIV, is clearly a major milestone. Arryx technology is a strategic opportunity for the Company.

Now let me address some of my remaining remarks to Haemonetics employees. Thank you for a good first quarter, guys. We're at 96% of our sales plan, 99%t of our gross profit plan. Expenses are well controlled at 97% of plan, and therefore we overachieved and we're 103% of our operating income plan. Good start. To Steve Swenson and the plasma team, nice job with your 17% increase over prior year. Also, to all of you on the Donor team under Pete Allen's leadership, you should be pleased with your 25% increase in red sales. Nice job. Brian Concannon and the Patient Division, you should be very pleased with the quarter. We added many new salespeople. To those of you who are new, we have high expectations of growth. We expect our worldwide OrthoPAT business to grow 70% to 90%. And I'm very pleased with our 41% increase in the U.S. Focus on your weekly and monthly plans. We expect our plan will build over the year, as Ron indicated, and therefore with this start, we have confidence in your ability to achieve your target, and therefore, make our target for the full fiscal year. Nice job. Keep it up.

To our team in Japan, we recognize the quarterly fluctuations which we've historically seen regarding the plasma market in Japan. The JRC rarely misses its targets, and is expecting to grow this year. Therefore, I am comfortable with some seasonality or variance in Q1 performance. Regarding the platelet product line, you should feel good that over the last 2 years, as Baxter and Terumo either exited the marketplace, or had product quality problems, you grew our market share from 70% to approximately 74%. You were opportunistic, which was greatly appreciate. For the JRC to rebalance platelets to our traditional 70% market share comes as no surprise. To our teams in Europe and Japan, thanks for your start on restructuring these key initiatives. These are an important part of our business transformation process.

To our operations team, under the leadership of Bob Ebbeling, you're off to a tremendous start. We plan to take $8 million of structural costs out of our cost base this year. And this will have a significant positive impact on our P&L. Congratulations on a great start. Finally, to our R&D and marketing teams, good job on your initial start to launch key new products, which will have an impact in FY '08 and beyond.

So I want to thank all of you for your efforts, but let me remind you of 1 last thing. We talk about leadership here at Haemonetics all the time. Some of our competitors are facing significant challenges. If we continue to focus on our customers, and show the leadership they expect from us, then we'll transform Haemonetics into a Company with a new growth profile. Keep focused on your customers, and execute on your monthly plans, and this will be an outstanding year. Thanks. Thanks for a good Q1. With that, operator, we will turn the call over to questions.

[OPERATOR INSTRUCTIONS] David Zimbalist, Natexis.

Can you guys talk a little about OrthoPAT inventories at the customers, and what you're seeing there, given the volumes that you're selling. Because they were before you dropped -- or before they lost rights to distribute, combined with the sales that you're making now? re you seeing the underlying market grow? Do you expect -- how do you expect them to burn off those off those inventories?

Sure, David. Let me turn that over to Brian Concannon. Brian?

David, we are seeing that there are still some customers that Zimmer loaded up with inventories prior to them exiting the market for the OrthoPAT. But to put that in perspective, our growth for the quarter Q1 FY '07 over Q4 FY '06, was in excess of 33%. So we're seeing that inventories -- those inventories wane off pretty rapidly, and our impact starts to take -- take its effect.

Any sense about the underlying market?

In terms of the growth of 8% to 10%, we're seeing that that market continues to grow 8% to 10%. Our opportunities in our existing accounts, our penetration there is about 25%. And we are having some pretty significant impact. We signed 30 -- we signed 35 new contracts in the quarter of existing accounts, and 10 new accounts for the quarter. So we continue to see significant impact in our ability to affect that market.

Okay, and a follow-up question. I missed your comments about CardioPAT. But could you talk a little bit about plans for rolling it out. And in particular, as you hire these new salespeople, where they start their focus, and when they start to add things like CardioPAT?

David, this is Brad. We had CardioPAT sales or demo's in 80 accounts, and Brian, you can give a little bit more clarity for the quarter.

We're seeing the CardioPAT opportunities ramp up. Our target focus there is any type of surgery where we see a high risk of an allogeneic transfusion. We're seeing that we're experiencing a very high closure rate where we trial the product. About 60% to 80% of our trials are closing at this point. So as we ramp up those trials, we continue to be bullish about our estimates on the CardioPAT.

You know, one of the things, Brian, you might talk about is how comfortable we have been with -- as our sales reps are getting trained in introducing the new products, the total value proposition, and how we're approaching our customer very differently than we were over the last couple of years, which is a key strategy for us.

Sure. As little as a year ago -- and you think about it, it's less than a year ago we began the transition with the OrthoPAT from Zimmer. And the CardioPAT wasn't launched at that point. So a year ago, we had a sales force in the United States of about 13 people selling the Cell Saver 5 plus. Today we have 35 territories in the United States, and expand beyond the world. They're selling a total auto-transfusion value proposition, both interoperatively and postoperatively, with the perioperative products of CardioPAT and OrthoPAT, and our Cell Saver 5 Plus. So just a much, much broader value proposition. Add into that now our launch with the Smart Suction Harmony, and later this year, with the Solo. Our customers are recognizing we're more than just a cardiovascular auto-transfusion company. We are their total blood management partner.

And that's why, folks, we see our plan back end loaded in the back part of the year, as we see these new territories and new sales reps getting up to speed, we expect that we'll see building momentum throughout the year. So our plan does not straight line in Q1, but builds over a period of time as our folks get more comfortable with their customers, and get better position to sell that total value proposition that Brian aptly described

Rebecca Kujawa, Stanford Financial Group.

I had a question about SG&A. So it increased about 3 million sequentially, which incidentally is slightly more that I was expecting, but I don't know that that's terribly relevant. I was wondering if you could talk a little bit about what was included that $3 million? Just additional overhead costs? Or is that a couple more sales people? Can you give me a little bit of color commentary there, as well as where you expect it to grow directionally for the rest of year?

Sure. Ron, how about if give Rebecca an update?

Rebecca, I think you actually touched on key points of the change. Number 1, certainly, as we ramp up our selling effort behind OrthoPAT, this had an impact in the quarter, that's the primary driver. In addition, we have just the added compensation costs due to merit increases that have impacted SG&A comparisons.

Will we see that much of an increase in the next couple of quarters? Or was the biggest increase, sequentially, most likely in Q1 for this [inaudible] type issue?

Well our SG&A increases will fluctuate, but we did indicate that our discipline is to grow our total operating expense dollars no more than 50% -- our OpEx dollars, no more than 50% of our gross profit dollars, and that's our expectation for the year. We did have some spending for the ERP project, as well. Our annual expense for ERP is $5 million to $6 million, and we probably spent a fifth of that or less in the quarter.

I would just add, Rebecca, one of the things that the team has done very well over the last 3 years, is really be focused on operating income growth, and positive drop-through from sales to gross profit to operating income. And we have annual plans as we go forward. So on a quarterly basis, we've seen fluctuation over the last couple of years, and we plan for some of that. So this quarter was exactly where we expected. As we indicated, we are 97% of our expense plan, a little under what we expected for the quarter, so you'll see some fluctuations on that. But Ron is right. Our expectation is to have expenses finish at approximately 50% of incremental gross profit dollars for the year.

Okay. And then the restructuring effect, just quickly. The restructuring seems to be maybe headed towards the higher end of $3 million to $4 million. Is that an accurate interpretation? Or was this just a little bit more in Q1 that you expect in the next couple of quarters?

It was definitely front-end loaded with Q1. As we continue to look at our plans and time some of these things, whether they be closing down of warehouses or other things, we're going to have to give you updates each quarter. But this was a little bit more heavily loaded to the front -- to the first quarter than we're planning for other quarters.

Thanks.

Steve Hamill, Piper Jaffray.

I was wondering if you could first talk a little bit more about the platelet situation in Japan, and the decline in the blood bank business. I guess I'm not real clear on just what you're referring to, in terms of the share shifting. My recollection was that the JRC had made some changes several quarters ago, and not clear if this is something newer that you have sees happen there?

Steve, this is Brad. Let me give you a rundown of the $2.9 million of sales negative to prior year in the quarter. It was broken out, about two-thirds of that was in the plasma market, and about one-third of that was in platelets. So part of the -- let me answer it more broadly, and take plasma first. The the plasma market, they actually expect that the JRC, to go from 900,000 liters collected annually, to about 915,000 liters collected annually. So they're going to see some timing issues, and in Q1 they slowed down the collections of platelets -- excuse me, plasma. And they expect to increase and get hit their 915,000 liters, which means our plan will ramp up over the year, and will make that up later in the year.

In terms of platelets, there are a couple of things going on there. Number 1, you will remember about 2 years ago, Baxter exited the marketplace. And they had about 15% market share. Much of that market share came to us. Some of it came to Terumo, and a small, little part went to Gambro. You might remember just a year ago that in fact, Terumo had a product recall. And so the Japanese Red Cross shifted some of the market share that had been Baxter's that went to Terumo, over to us. The net effect of that is, over the last 2 year period, our market share went from about 70% up to about 74%. And we were opportunistic and very pleased to support the JRC in their issue regarding a product quality recall and another supplier exiting the market. So this quarter, they rebalanced that as the Terumo came back on line with their product. So we have 70% market share, about where we were 2 years ago, and that rebalancing was expected when Terumo back into the market. The impact of that for this quarter, was about $1 million.

Okay. So if I look at blood bank then in terms of it being down year-over-year, is it safe to say that that won't be the case in subsequent quarters? Because obviously your guidance was not for a down year there.

Yes, our guidance was 0 to 5%. I think we have opportunities in the platelet market that will, yes, improve throughout the year. Ron talk about Canadian Blood Service. That's an opportunity. There may be others in the marketplace. So we would expect as we finish the year, that that 0 to 5% guidance is good guidance at this point.

Okay. And you're comfortable that there is no additional share adjustments coming in Japan?

Yes, at this point, we're pretty comfortable. We think it was a one-off quarter.

Okay. And then in terms of the Smart Suction Harmony, I didn't catch much commentary there. And I was curious what kind of feedback you're getting on the launch there for that product at this point.

Sure, Brian, how about giving Steve an update on that product line?

Hey, Steve. We've had really good acceptance for this product since we've launched it. Between the U.S. and Europe, we've actually sold 13 units, a little bit ahead of the schedule that we expected to be at this point in time. In addition to that, we have to 25 trials currently pending. We're seeing a very, very strong closure rate in these trials. So we're feeling very good about the launch thus far, and the acceptance of this product with our customers.

Okay. And are they primarily customers who already on an OrthoPAT, and want to put this -- piggyback this on the pole with it then?

its exclusively those types of customers. That's our target audience at this point.

Okay. And then in terms of the OrthoPAT, I'm curious what kind of responses you've gotten so far as you have gone to existing customers, and tried to touch the other surgeons in a facility that aren't currently using OrthoPAT today, because Zimmer didn't call on them?

That is our strategy, as you know. It is our focus to expand within our existing accounts. We're getting a very good reception from these surgeons. It's an education process. Many of them were not aware that this was a Haemonetics device. So we've certainly educated them on that. But in these accounts, the closure process is much less than in a new account, because you already have a contract in place. You already have training that has been conducted in the [inaudible] and on the floors. You already have an acceptance level within the hospitals. The have peers they can go to to talk to about the device. So it's proven to be the right strategy for us. We're seeing it have an impact.

James Sidoti, Sidoti & Co.

On Japan, is there anything else besides the lower collections in Japan that came in under your expectations of the quarter?

No.

I mean, we did comment on a little bit in the script, and that is the greater efficiency by the Japanese Red Cross, where they're actually able to lower their discard rate of platelets by becoming a little bit more efficient. So that's just sort of a dynamic that's going on there.

But that's no different than we would see in any other marketplace, and that's why our platelet expectations for blood bank is slow growth, Jim. So that's not unusual.

So outside of Japan, there were no other surprises in the quarter on the sales?

That's correct. As a matter of fact, if you take that almost $3 million in Japan, much of which is timing, and add it into the quarter, we would have a quarterly growth of about 10% over prior year.

All right. And then my second question is, listening to Baxter's call last week, the end market for plasma definitely seems to be rebounding now. Do you see any opportunity over the next year to raise prices due to the increased demand?

Let me comment on the marketplace. Our customers, Jim, are going like crazy. This market is rebounding faster than they or we expected. I was real pleased with our 17% growth in Q1 in plasma this year on a global basis. That was a tremendous effort by Steve Swenson and the team. And we feel really good about that. So as you look at IVIG, the biggest driver, and if you look at what's happening with our customers, whether it be ZLB or others, or what's happening for Baxter, much of their growth at Baxter is being driven by IVIG. A tremendous amount of their growth. So ultimately, that indicates to us that this plasma market is robust and going to continue to be very robust over the next couple of years. It terms of answering your question on price increases, all of our existing agreements, which we have renegotiated over the last 2 years, all have pricing increases built into them. So that's just part of the normal course of business. And as those contracts come up on an annual basis, there will be price increases there as per the terms of those contracts.

But we're likely to see the kind of healthy market implications play out in numbers of collection.

And in other markets as well.

David Zimbalist, Natexis.

First, can you talk a little bit about plasma outside the U.S.? Give us some measure of what performance was there? If the U.S. was up 41% and Europe was up in the high teens, it seems like there must have been a fairly sharp downturn elsewhere.

David, this is Brad. There was that $2 million that I referenced in answering a previous question in Japan. So that had an impact on the quarter. But you remember, the Japanese Red Cross had a glut of plasma. Yet this year they are expecting their growth in liters to go from 900,000 liters up to 915,000 liters. So they're beginning to address and see some positive growth there. But in any other market places, there is no impact.

And could you give us a sense as to how that $2 million decline year-over-year in Japan compares to what you were seeing in previous quarters in Japan?

Last year we saw the JRC come out of the blocks very quickly to their growth target of 900,000 units. So in Q1 and Q2 of last year, we saw a tremendous ramp up, and then we saw them go down very quickly, to get to that $900,000 targeted number. So they have peaks and valleys in their quarters, just like every good business has in their quarters, and they plan accordingly from there. So last year we saw strong growth in Q1 and 2, and then they backed off in Q3 and 4. This year, they're off to a slower start by design than we had originally put in our plan, yet were seeing that they're going to continue to ramp up as we understand from them, in the back half of the year.

But as we said, David, the world plasma market is really driven by the U.S. plasma market. And so when there are market changes, and in this case very positive ones, we've seen that kind of momentum, it's not surprising that we would see the U.S. plasma market lead the rest of the world.

Thank you. There are no more questions. Here is Mr. Nutter with closing remarks.

Thank you, operator. We're making great progress expanding our business in existing markets. Remember, our market potential in existing markets exceeds $1.5 billion. And our new products have an incremental $500 million market potential, and they are on their way to becoming a meaningful contributor in FY '08. Let me close by also sharing my continued optimism for our business strategies and ability to execute to deliver on our annual commitments. For 3 years we have managed this business to our first strategy, which is improving profitability. This year, we have 3 existing products driving revenue growth of 10% to 14%. We will leverage this growth through ongoing operating discipline, for positive drop-through of 14% to 21% on operating income growth.

We're now very well positioned with our second strategy, expanding the business with new products. Our new product pipeline is richer than any time in the last 10 years. So to Haemonetics employees, thanks for a good start for the year. We remain committed to transforming Haemonetics into the great Company we all know it will be. We'll look forward to updating you on our Q2 conference call. With that, thank you very much.

Thank you. This does conclude today's Haemonetics conference call. You may now disconnect.