Haemonetics Corp (HAE) 2007 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Haemonetics second quarter fiscal year '07 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 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 of Administration; Brian Concannon, President of Global Markets; and Julie Fallon, Director of Investor Relations.

Our call today will cover four areas. First, I'll comment on the Company's overall performance. Second, Ron Ryan will detail our financial performance. Third, Brian Concannon will comment on OrthoPAT, new product, and the international restructuring effort. And finally, I'll finish with comments about our expectations for the balance of the year. So let me begin with our financial results.

As we shared previously, three items impact FY '07 results. These are, number one, expenses related to stock compensation, FAS 123. Number two, restructuring, which began in Q1 of this year. And number three, the Arryx acquisition. We've included a breakdown of these charges in our press release. Excluding these items our pro forma results for the quarter versus Q2 of FY '06 are as follows. I'm particularly pleased to report double-digit disposable growth of 10.8%. You will remember that disposable sales represent almost 90% of our total revenue. However, equipment sales declined 33.5% in the quarter, or $2 million compared to a very strong quarter last year. Therefore, though disposable sales are strong, the drag on equipment sales resulted in total sales growth of 8%. It's important that equipment sales, which are opportunistic on a quarter to quarter basis, not obscure the momentum in our disposable sales growth.

Gross profit dollars increased 6.7%, and operating income increased 14.9%. That's the positive drop-through you have come to expect from your company. Earnings per share were $0.46, up 15%. Gross margins were 50.9%, versus prior year of 51.5%, and operating margin was 16.3% versus prior year of 15.3%.

As you saw in our press release, we're conforming our pro forma guidance for the fiscal year. Our guidance is sales growth of approximately 10 to 14%, operating income growth of approximately 17%, and earnings per share in the range of $2.05 to $2.17. Let me reiterate our confidence in achieving double-digit revenue growth for the year. How we get there, that is, the product line mix, that gets us to 10 to 14% revenue growth will be slightly different than we expected at the beginning of the year. So let me update you so that you can see a simple clear path to achieve our revenue target.

Our first growth driver is plasma. We're doing very well in plasma with a year-to-date performance at the high end of our guidance range. Plasma is on target to represent about $130 million in business this year. So it's almost a third of our corporation's total business. We believe plasma will perform at the top end or may even exceed our guidance range of 16 to 20% for the year. Plasma collections are increasing rapidly to achieve levels required to meet market demand.

Our second growth driver is red cells. The red cell product line should represent about $47 million in business this year. So red cells are about a third of the size of our plasma business. As we announced in Q2 we signed an agreement with the American Red Cross that strengthens our business. Despite the ARC agreement, sales are somewhat softer than we expected, but I'm not disappointed with that, and here's why. Some customers anticipate the launch of our next-generation red cell system called Symbol. They're holding off on growing red cell collections. Now, we're very glad our customers are excited about our new product, and frankly that's a nice problem to have. But for this reason we are now most comfortable with annual red cell sales coming in at the low end of our guidance range of 25 to 30%.

Our third growth driver is OrthoPAT. The OrthoPAT product line represents about $33 million in sales this year. Our original guidance range was 70 to 90% growth, and we're going to change that to 45 to 55% annual growth rate. And here's why.

We have kept most of continues on the direct basis from our previous distributor, and we have seen pricing improvement. We have a building pipeline of new accounts in the United States, but we're recognizing that our new sales reps need more time and experience. Frankly, we're guilty of setting a very bullish growth target originally, but I'm still very pleased with growing the business 45 to 55% in our first year since going direct. If we can be as successful with other new product line launches in the future, we'll be in great shape. So let me sum up our revenue growth for the first half of the year.

The growth drivers of our business, plasma, red cells, and OrthoPAT, continue to perform well. Now, assuming we perform as I've just described, these product lines represent incremental growth in a range of 41 million to $43 million in FY 07. Additionally, we expect services and software, a $30 million business, to grow about 10 to 12%. That's an additional $3 million in incremental revenue. Now, the point is this. The growth in plasma, red cells, OrthoPAT, and services gives us incremental sales revenue of about 44 to $47 million this year, or at the low end of our guidance range. This is just one scenario that gets us to our target of being a double-digit revenue growth company. So I'm very confident in our team's ability to execute.

Now let me turn to our Board of Directors. Ron Matricaria will be retiring from Haemonetics Board of Directors at the end of the calendar year. I want to personally thank Ron for his leadership, tremendous support, and significant contribution. During the last four years under his stewardship as our Chairman, a detailed strategic plan was developed and implemented. Additionally, the Board was transformed. We added five independent directors, and our governance structure and processes were strengthened. Ron Gelman, who has been a Haemonetics Board member since 2000 will assume the position of Lead Director.

Let me take a minute and talk about one market dynamic not related to revenue growth but important to our market. As you may know, two key competitors are undergoing significant changes. It's unclear at this point what this will have as an impact in FY '07 or FY '08, but frankly for all Haemonetics employees, our focus is and always has been on the customer. So for the first half of the year we're off to a good start. We're confident in our product line growth drivers and our ability to execute our operating plan just as we have executed well over the last three years. With that, let me turn the call over to Ron Ryan who will give you specifics on our performance so you can see that building momentum we have in our business. Ron.

Thanks, Brad. Good morning, everyone. Today I'll provide some quarterly highlights of product line sales as well as some additional insight into our P&L results. Let me start with a high-level review of sales. Second quarter revenues were $109 million, up 8% over last year. Year to date revenues are 219 million, up 7.6%. Here's a key point. Disposable sales were up 10.8% for the quarter. Also, our services and software line was up 12.5%. So we saw double-digit growth in disposables and services which combined represent 96% of our total business. Now let me share a bit more detail on revenue.

Our plasma business is very large and thus its growth significantly impacts our total sales performance. For this reason I'm going to spend some time talking about the plasma market. In the quarter, plasma disposable sales were $32 million, up 23.6%, and year to date plasma disposable sales are $64 million, up 20%. Plasma is performing at the high end of the guidance range. Quarterly growth was driven by U.S. plasma sales which are up 46% due to new business with DLB and several new customers as well as a general increase in U.S. plasma collection. There are two growth drivers in the U.S. plasma collection market. Number one, plasma collections are increasing to meet current demand, and number two, plasma collectors are further ramping up collection capacity to meet a rising demand for IVIG. Let me go into a bit more detail here.

The forerunner to an increase in plasma collections is device placement. We shared previously that we expect to place 800 devices this year. In Q1 we've placed 400 devices, and in Q2 we've placed another 200 devices. So half-way through the year we've achieved 75% of our annual goal. Customers are requiring more devices because they're increasing collections to meet an increased demand by fractionators. Specifically, the market demand for IVIG has grown it at an average of greater than 10% annually for six years this rate is higher than we previously believed. IV IG is intravenous immunoglobulin, a therapeutic derived from plasma which drives the rate of plasma collection in the U.S.

These developments are significant because Haemonetics has a large market share in the U.S. Since 2003 our market share has grown from roughly 40% to about 70%. As customers increase collections we will benefit. Given the strong start for the career we expect plasma revenues to come in at the high end, or exceed our 16 to 20% growth target for the year.

Now let me turn to our red cell product line. In the quarter, red cells disposable cells were $10 million, up 16.5% over previous years. U.S. sales were up 20% in the quarter. Year to date worldwide red cell disposable sales are $21 million, up 20.8%. It's worth pointing out that for six successive years we've reached our red cell growth of greater than 20%. Red cell sales now comprise about 10% of total sales, so this business now has an important impact on total sales growth. We announced earlier in the quarter that we signed a five-year agreement with the American Red Cross to support its automated red cell program.

Our next generation red cell system, symbol is uniquely designed to meet the blood collection needs of the mobile market. Symbol is now in limited market release in Europe and we have submitted our 5-10 K in U.S. We expect U.S. launch in Q4. We are seeing some customers holding back on installing new red cell machines in anticipation of the release of Symbol. And we're pleased that our product line has generated such customer excitement, but at the same time we're launching sales programs to incent customers to continue ramping automated collections prior to symbol's release.

Even so, we believe red cell growth will now be at the low end of our 25 to 30% range for the year. Our blood bank sales in the quarter were $32 million, down 1.6%, and for the year are $63 million, down 2.8%. Japan's platelet collections are a key part of our blood bank sales. As expected, we did not yet see a rebound in the market in Q2 but we continue to expect some uptick in Japan's platelet revenues in the second half of the year as we introduce a higher priced enhanced disposable. As we've shared in the past the global platelet market is flat and we don't expect growth in blood bank.

Moving to the patient division, which consists of our surgical and OrthoPAT product line, in the quarter surgical sales were $15 million, down 1.9%. Year to date sales are $32 million, down 0.6%. As expected, the Cell Saver market which represents nearly all surgical sales, continues to shrink because of a shift to less invasive surgery. We are retaining our market share. But given the maturity of Cell Saver our forecast is for a modest 0 to 5% revenue growth for the year. The impact of new product in the second half of the year is included in that growth. Brian will discuss these later.

In the quarter, OrthoPAT revenue was $7 million up 56.2% over prior year. Year to date, OrthoPAT revenue was $15 million, up 44.6%. Growth is attributable to pricing and new accounts. We believe most hospital customers have worked through inventories from our former U.S. distributor, having said that we did not achieve the very ambitious growth we had planned on at the beginning of the year. Brian will also talk more about this in a minute. Moving from disposable sales, I want to talk about equipment sales. As I said earlier, our disposable sales growth of 11% was somewhat offset by an equipment sales decline of 33%.

Now on the second quarter of last fiscal year we had particularly strong equipment sales, up 157%, stemming from the introduction of our Cell Saver 5 plus and sales of cell processing systems in the U.S. New products should contribute to equipment sales later this year. Our final business segment is services and software. Sales for the quarter were $8 million, up 12.5%, and sales for the year are $14 million, up 11.4%. We haven't given you a lot of visibility into this part of the business, so it may surprise you that this business is about the size of our OrthoPAT business. Growth here is a meaningful contributor to overall revenue growth.

Included in services is our 5D information management division. 5D has two new products, having recently launched EQ and submitted for 5-10 K approval for e-link. These software systems help customers with efficiency and compliance control over their operation. We continue to plan for sales growth and total services in the range of 10 to 12%. I will move down the P&L now. Let me remind you that I'll be discussing non-GAAP results.

Excluded from my pro forma numbers are three items. First, FAS 123R stock compensation expenses, in the quarter the impact was $2 million or $0.06 a share. Year to date the impact has been $5 million, or $0.13 per share. For the year, stock compensation expenses are expected to reduce annual GAAP earnings per share by about $0.25. The second item excluded from our numbers is a 3 to $4 million restructuring charge spread over the year to improve international efficiency and sales strength. In the quarter we spent $1.1 million negatively impacting earnings per share by $0.03. Year to date, we've spent $2.7 million negatively impacting earnings by $0.06.

The third item excluded from our numbers is an in-process R&D charge related to our acquisition of Arryx. We took a charge of $9 million in Q2 and it negatively impacted earnings per share by $0.33. We have posted a pro forma reconciliation on our website that you may find useful. Having finished with my comments on revenue I'll briefly turn to the rest of the P&L.

Again pro forma results, gross profit for the quarter was $55 million, up 6.7%, year to date gross profit is $113 million, up 6%, operating expenses were $38 million for the quarter, up 3.2%, and $35 million year to date, up 4%. For three years we have managed expenses to 50% of our incremental gross profit dollar growth. Year to date, expenses grew in line with our goal. For the full year, operating expenses will also be in line with our goal, and that's including 5 to $6 million of ERP expense. We continue to be strong in operating discipline. As a result, operating income was up 14.9% for the quarter at $18 million, and up 10.1% year to date at $37 million.

Let me review margins. Gross margin for the quarter was 50.9%, down 60 basis points, and year to date is 51.4%, down 80 basis points. The significant gross margin improvement resulting from the conversion to direct sales of the OrthoPAT as well as $1.5 million of savings from our structural cost reduction program were offset by a product mix change as our plasma sales continue very strong growth. The net effect is that gross margins will be down slightly for the year versus last year and versus our guidance. We now expect gross margin in the range of 51%. Operating margins for Q2 was 16.3%, up 100 basis points. Year to date operating margin is 17%, up 40 basis points. Our guidance for annual operating margin in the year is 18%. Earnings per share were $0.46 in Q2, up 15%, and $0.97 year to date, up 11.5%.

Let me finish my financial comments with the balance sheet. The quarter delivered $18 million of operating cash flow which we define as free cash after working capital and capital expenditures. At the beginning of the year we had 250 million in invested cash. In the quarter we spent $26 million to purchase Arryx. We also began a share repurchase program and spent $14 million to buy back 305,000 shares of our stock. We have $26 million remaining under the $40 million Board authorization. We now have $242 million in invested cash, and $35 million in long and short-term debt.

I promised to give a brief quarterly update on ERP. We completed our first important milestone, the development and design state, through the second quarter we remain on time and on budget with this project. In closing, we are transforming your business and in Q2 we made important progress towards that transformation. Overall our product line growth drivers are performing well. We remain very confident in achieving our annual guidance. Now I will turn the call over to Brian Concannon.

Thanks, Ron, and good morning, everyone. As some of you may know, I recently took on a new assignment as President of Global Markets. In addition to the patient division, the international Presidents now report to me versus Brad. I will lead our international transformation initiatives and am excited about this opportunity. Today I'm going to give you more detail on OrthoPAT sales, new products, and our international restructuring. Let me start with the OrthoPAT.

When we went to direct sales late last year we set a goal to retain 70% of the customer base. We did better than that, achieving 90% customer retention. So when we set our sales goals for this year we set even higher expectations, and we're falling a little short of those expectations. In fact, we're about 1300 units short of our plan year to date. So while on the one hand, 45% revenue growth on a $22 million product line is excellent, on the other hand we were expecting more. I believe the reason for this is our new U.S. sales force. I'll get back to this point in a minute. We are now reducing our annual OrthoPAT revenue guidance to a range of 45 to 55%, but frankly this is still significant growth.

Let me share some additional details on OrthoPAT sales. At our current run rate in the U.S., with no incremental unit sales, we would finish the year at about 46% worldwide revenue growth coming from price improvement. Let me say that again. We can get to the low end of the guidance range that I just discussed without unit growth. But I'm very confident that we will have unit growth. Last quarter we signed ten new U.S. contracts. We have nine active evaluations underway. We have 113 targeted accounts. If we keep adding new accounts in Q3 and Q4 then we can get to the incremental units required for us to achieve the high end of our new annual guidance. Let me be clear. We have seen continued enthusiasm for this product. This is evidenced by our results. Specifically, once we get a surgeon to evaluate we have an 80% close rate for contracts. So I'm confident we'll see continuing unit growth in the second half of the year.

The OrthoPAT is an exciting opportunity for us, addressing a 625 million virtually unpenetrated market that's growing about 10% each year. The second quarter marked the one-year anniversary of our decision to go direct with sales of the OrthoPAT in the U.S. We have made good progress in our transition and we'll continue to set high expectations for ourselves. Another opportunity for growth comes from new product launches. We have four new surgical products in various stages of market launch. The CardioPAT system, the SmartSuction Harmony system, the filter bag, and the SmartSuction Solo system. I'll briefly talk about two of these today.

First, the CardioPAT. The CardioPAT system has a nice customer pipeline with about 40 accounts either trialing or scheduled to trial the device. These accounts represent about 25,000 cardiovascular surgeries annually. We're delighted with the initial input. In fact, I just received some exciting news on the CardioPAT system. With October results in I can report that we sold more cardiopat disposables in the month of October than we sold in total since the beginning of the year. I hope this validates our confidence in the strength of the CardioPAT for the second half of the year.

The SmartSuction Solo system is our newest product and the product that will expand our market reach beyond blood salvage into blood management. The system addresses a $230 million market. Customer acceptance trials are underway in Europe and initial feedback is positive. We announced regulatory clearance of the SmartSuction Solo system in the U.S. in September. Moving on to our international restructuring efforts, I have been in my new position for about 90 days now, and I have assessed each of our international markets. Our restructuring efforts are well underway. We have closed some offices, reorganized the services function, and invested in new management talent. We also plan to centralize warehousing where appropriate. Our restructuring efforts will cost us 3 to $4 million this year. As a result, we'll save $2 million. We'll then save 3 to $4 million annualized in FY '08 and beyond. We're pleased with our results so far. These efforts enable to us get closer to the customer and improve operating efficiency just as we've done in the U.S. over the past three years.

So let me summarize. We've had some challenges with getting our U.S. sales reps up to speed more quickly. However, we're happy with our projections for OrthoPAT. 45 to 55% growth over prior year would be a great accomplishment in our first year of going direct. Our new products are gaining momentum and being positioned to contribute to FY '08 growth. And our international restructuring efforts are on track to deliver strength in international operations. With that, let me turn the call back to Brad.

Thanks, Brian. We started this call by affirming our annual guidance. We are building sales momentum in our business. Q1 disposable growth was 8% and Q2 disposable growth was 11%. That momentum will continue in the second half of the year for these reasons. First, we expect continuing growth in plasma, as collections growth to meet demand of IVIG. Additionally, new collection centers continue to come on line. The 600 new machine placements in the U.S. market is truly exciting. Additionally, new patient sales teams will penetrate our new target accounts for OrthoPAT in the second half of the year. Additionally, OrthoPAT will be comparing against a weak second half last year, when we were converting from our distributor. We'll also see increased disposable sales from our surgical products in the second half of the year. And finally, we expect equipment sales in the second half will strengthen as we benefit from the introduction of the new patient division product and the new red cell product line.

So while the mix of product line growth will differ from what we have planned, we have a clear path to achieving double-digit revenue growth. Plasma, our biggest business, will probably be at the high end or exceed our original targets. Red cells, a $47 million business, will likely be at the lower end of our guidance range, and OrthoPAT, a $33 million business, will be at about 45 to 55% for the year.

Let me remind you this is the first year of what we call transformation. That is, positioning your company as a company with sustained double-digit growth on both revenue and operating income. Haemonetics has not grown revenue double digit in more than ten years. We hope that trend is over. We are well positioned this year to start a new trend, one of building revenue momentum for this fiscal year and beyond. That, combined with our proven track record of improving profitability, will allow us to achieve our goal of continuous shareholder value. With that operator, I'll turn the call over for questions.

Thank you. [OPERATOR INSTRUCTIONS] Your first question is from David Zimbalist of Natexis.

Hi. Thank you very much. I'm wondering, if you look at the plasma business, which is clearly having a strong performance, last quarter there was a relative hiccup in Japan in terms of sales patterns. Can you talk a little bit about the pacing of Japanese sales at this point and your outlook for the second half? And then related topic also, if you remove the impact of your ZLB contract, what's the pace of growth in the rest of the plasma business?

David, be happy to answer your question this is Brad. Plasma is truly growing very, very well for us. As Ron reported, sales are up 23% over prior year in this quarter. So we feel very good about that. We also feel particularly good about the 600 new machines well ahead of schedule that were placed in the U.S. markets. As it relates to Japan, we've indicated that we expect the JRC will see a building momentum for them to hit their growth target in the second half of the year. They have a very consistent pattern of hitting growth targets each year within plus or minus 1 or 2%. So we see the 910,000 liters that they're projecting will be a second half build. We also see that this marketplace in Japan is continuing to grow and strengthen, and I'll ask Brian Concannon to talk a little bit about the collection targets with the JRC. Brian.

Yes, David, we expect overall our business in Japan will be within $1 million of where we finished last year. So that means we'll see these collections rebound on a comparison standpoint this year versus last year. The JRC, as Brad had indicated, has been very consistent with respect to their performance for targets, so we'll see a very positive comparison in the back half of collections versus last year for this year.

Okay. But if you look at this quarter versus the prior quarter, not last year, but last quarter, has Japan started to accelerate, or is it all still a second half issue?

David, it's a second-half issue.

Thank you. Your next question is from Rebecca Kujawa of Stanford.

Good morning and happy Halloween.

Thank you, Rebecca.

I wanted to go and drill down a little bit on the patient division. I understand, and I appreciate all of the color commentary that you gave to us, but I wanted to understand a little bit better on the surgical side first, I understand there's a $2 million sequential decline, and I understand the Cell Saver is kind of a status quo type business, but that's still a surprising sequential decline. Is there a particular contract or a group of physicians that are no longer using it that had been using it? Is there any more detail you can give us?

Rebecca, this is Brian. The primary amount of that decline is the equipment we launched last year, our Cell Saver 5 plus. We saw the demand for that build as we announced that we would be launching it, so it's a year-over-year comparison.

But I'm actually thinking about the sequential number. So last quarter in -- so June of '06 you had 17.1 million, and then this quarter 15.1 million. Is there anything sequentially that changed?

No, what we're seeing there is more seasonality than anything else.

Okay. And then on OrthoPAT it seemed like a similar -- I wanted to talk about the sequential difference. You went from 7.2 million to 7.1 million. I understand the sales force needing some additional time to train. Did you lose momentum with some of the accounts that you had? Is there anything -- I mean, I know it's a very small number, but can you talk about why there wasn't even a modest increase sequentially?

If you look at our OrthoPAT business over the course of the last three years you will typically see in the second quarter of our fiscal year, which is the summer months, and when elective surgeries are typically impacted, we have seen about an 18% decline year-over-year. So we're very pleased with that performance. In effect, we actually saw growth from a comparison standpoint.

Thank you. Your next question is from John Putnam of Dawson James.

Good morning.

Good morning, John.

Two questions. I wondered if you could comment on the gross margin. You said that it was down because of mix, which is understandable, but is there anything else going on in terms of pricing of any major lines that would have caused gross margin to have been down?

John, in terms of gross margin, we have expected our margin to be slightly down. Ron indicated in his comments that we expect for the full year to be at 51%. That's because of the tremendous influx of volume that we're seeing in the plasma set. As you know, those sets have a lower sale price than we see in the rest of our business. So there's nothing other than that affecting our business. We had a good quarter in terms of structural cost reduction. We have had a good quarter in terms of seeing a red cell margins increase slightly. So overall it's the impact of plasma.

This is Ron. I would just add that we had 1.5 million of structural cost deduction which continues. We've had nine years of structural costs. We've taken $36 million out of the P&L over that time. Also in the quarter, we did have a little foreign exchange head wind on the margins, although our primary overarching reason is the change in product mix. I guess just looking at margin, what pleased me in the quarter was again our spending discipline. We were able to grow our operating expense in dollars about 46% of the growth and gross profit. That reflects some restraint in operating expense, particularly SG&A. I noted that for the year, SG&A is up 4%. I think I might have misstated the amount. We've spent $75 million, but it's 4%. That includes the impact of ERP so far and also the expansion of our U.S. patient sales force. So we're very pleased at the discipline in the business and managing our margins.

As, Ron, you conclude those comments, I would say I'm also pleased that we see our operating income increasing over -- from 16.3% from prior year, 15.3%, because of that strong discipline. So we're pleased with that. And I think it's reflective of the kind of discipline and the positive drop-through that our investors have come to expect from Haemonetics.

Brad, follow-up question. I wondered if you might comment on your continued enthusiasm for service and software. What kind of gives you the belief that that will continue to be strong?

As you know, John, we're in the beginning stages of launching two new product lines. One is EQ, and the other is e-link. When you really take a step back and look at our plasma business, we have been very successful getting this ELB contract and other contracts because we have used information technology to help run the back-half office for the plasma collectors. So EQ and e-link are very similar system, and we really see this as step one in providing the same kind of value-added service to blood banks that we're provided in the plasma arena. So we're very excited about those product lines and we think that will continue to be a growth driver for us. It's amazing that miscellaneous and services in the software business is now a business the same size or just about the same size as OrthoPAT. So that's growing at 10 to 12%, so it's another great growth driver for us, and we would expect that to continue in the future.

Incidentally, we have just returned from the American Association of Blood Banks meeting a week ago, and there was quite a buzz about these kinds of products being extended into the blood bank operations arena.

Thank you. Your next question is from James Sidoti of Sidoti & Company.

Good morning. Can you hear me?

Yes, Jim. Good morning.

First question is with regards to symbol. You said you expect to launch that in the fourth quarter. Are there any regulatory approvals that are pending for that launch, or?

Jim, we're just pending 5-10 K approval which was submitted.

And you expect to get that I would assume sometime in this quarter and then do the launch in the fourth quarter?

We would hope. That would be our game plan.

Okay. And then second question is related to the -- I guess the competitive situation with Baxter and Gambro. Can you -- do you know of any significant contracts that are up for renewal over the next six months where you will be competing with those two?

No, I don't.

Thank you.

Thank you.

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

Hi. Thank you. I have actually two questions. First, your foreign exchange reconciliations are not on the website yet. Could you give us the gross margin, operating margin and EPS had -- at constant currency, and then the second question is, can you talk about the contribution of Arryx in the quarter, both sales and also where you're at in rejiggering that product and rolling out R&D projects on top of that technology?

David, this is Brad. Let me comment on Arryx first, then Ron can respond regarding FX. We had in the quarter our first sale of BioRyx 200 The sale price of that was approximately $350,000. We have been very comfortable with our first introduction of that new technology into the marketplace. We have modest growth expectations, although we expect to continue to perform well with the BioRyx 200 as we place that into university settings or into labs. So that's from a product standpoint.

The real focus of the team this quarter has been when you consider that we have owned this business now for about 100 days, is making sure that we're developing the right kind of strategic plan for this business. As a matter of fact, we have shared some of that strategic plan with our Board, and really feel very comfortable that we're building out that business from a strategic standpoint and from a management standpoint to really get the right people in and trying to identify the research steps that we want to take over the next couple of years. So I am comfortable that we have made good progress. I continue to commute to Chicago every other week to stay on top of that, and I think we're doing pretty well. Ron, comment on FX?

Yes. As I indicated earlier, FX in the quarter did have a little bit of a head wind effect on gross margins. When we do post the pro forma reconciliation to foreign exchange it will show that our sales were relatively unaffected by currency. At 8%, our gross profit actually improved more in constant currency at 8.5% operating income was up 22%. So very good drop-through -- effect of currency.

To that point, as we indicated at the beginning of the year we'll see Q3 and Q4 more of an impact, or head wind, if you will, in terms of FX. That's why we're particularly bullish and feel good about the quarter when you consider the impact of currency on the business.

Thank you. [OPERATOR INSTRUCTIONS] Your next question is from Rebecca Kujawa of Stanford.

Hi. Thanks for taking the follow-up. On the equipment revenues, the 4.4 million in the quarter, is there a certain amount? I understand you're saying that some of it is opportunistic, but is there a certain amount that you would expect as kind of an ongoing rate of equipment revenues? Because I haven't seen anything as low as 4.4 going back like about eight quarters, ten quarters.

Our equipment revenue is generally opportunistic. There's some marketplaces in which the general standard of practice is to sell equipment, international markets particularly. This was a somewhat low quarter, but there are other quarters that you saw last year where we grew over 150%.

Yes. Absolutely.

It's important to remember, Rebecca, Ron talked about placing 200 additional PCS 2 machines for the plasma market. Those are placements, not sales, in our plasma model. So you won't see sales of those units even though we've placed over 600 of the 800 units in the first half of the year.

Looking past, I know you've given guidance for the equipment revenues for the rest of -- the rest of fiscal year '07. Would you expect a steady run rate into fiscal year '08? Is it likely to increase or decrease? Is there any early directional guidance that you'd give to us for '08?

It would be awfully hard to do that, Rebecca, at this time. As we get closer to the end of the year we'll be able to have more visibility. As we launch and have launched the CardioPAT, as we have launched Symbol, excuse me, will launch Symbol, launched Harmony, we'll have a better view as we go through the next two quarters to really see what FY '08 will look like.

Fair enough. Thanks so much.

You bet.

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

Hi. Thanks. One last question. Assuming you guys get all your clearances for E-link and EQ and are actually able to make -- sign contracts this year for those products, is there a pretty straightforward operating margin model as blood banks sign up to put these in place, or is there a start-up cost and installation effort that has lower margins and then only follows through with a per unit or trailing higher margin recurring revenue?

Yes, number one, EQ is already approved and is just now being launched. E-link is what we're waiting for, David, so that's point number one. Point number two, our model cost for us -- calls for us to charge on a per-click basis versus a software installation charge. So we really think that's going to provide us a tremendous opportunity for our revenue stream going forward. So we feel very good about that model. So you won't see a big uptick by selling a lot of placements in terms of IT costs going forward. And really in terms of a cost of implementing that in terms of SG&A line, we don't see a big impact on that this year.

It will be a very steady operating margin model going forward.

Thank you.

You bet.

Thank you. [OPERATOR INSTRUCTIONS] Your next question is from Anthony Cavalli of Viscogliosi.

Hi. Would you talk about the OrthoPAT and what you're hearing about Zimmer doing in the market and the success you've had in going beyond Zimmer in orthopedics? Thank you.

Anthony this is Brian. The only thing I can tell you about what we've heard with Zimmer is what they've said on their calls and what they said at the time that we took the product as a direct product from Haemonetics, and that they anticipated to have a product in the market within six months. We have not heard much more than that at this point. They do have a nonwashed product that is out there, and they continue to try to position that product against us. But this is, I think, the great thing about this device is that when you consider that we started out with 13 sales representatives and expanded to 35 territories now, the real strength of our ability to maintain 90% of the existing business was based on the quality of the device. This is a very good device that brings very strong clinical and economic value, in the orthopedic environment. So we continue to remain very bullish in that respect and continue to see good acceptance of that device.

To be clear here, we see no evidence of any competitive device which is washed cell salvage as a peri-operative device here.

Your next question is from [Matthew Bueton] of Sapphire Capital.

I joined the call late so I may have missed the discussion on the operating margin guidance of 18%. I know you had reduced slightly your gross margin. How are you going to maintain that 18%? Maybe if you could just walk me through your ability to keep -- to preserve that in light of maintaining sort of the revenue range and dropping gross margin a bit?

Yes, the one controllable on that P&L is operating expense, and so as I mentioned earlier, we're managing our operating expenses to grow less than half of the growth of gross profit dollars, and we're pretty confident that we can achieve the level of investment that we need this year in our major project and still bring in our operating expense in a way that would deliver that operating margin goal.

That's consistent, as Ron indicates, over the last three years we've had operating expenses grow at a range of 50% of incremental gross profit dollar growth, and so as we are through the first six months of this year and as we have over the last three years, that's a very consistent ability to do that.

Okay. One other question. Stock buybacks. Maybe can you update us on where you are in the program and what your thoughts are now?

Yes, in the quarter we purchased $14 million of our stock, over 300,000 shares. The Board has authorized 40 million. So we have a certain amount left to go on that.

Thank you. [OPERATOR INSTRUCTIONS] Your next question is from Bruce Jacobs of Westfield Capital.

Hi, guys. Just two quick questions. On Japan, I thought I had heard you say in the past that you expected they would get back to their total for the year, and I'm just wondering if you still expect that to happen in terms of what you originally anticipated they would do.

Bruce, this is Brad. Yes, we expect that. We expect our sales this year will be within $1 million of what our sales were last year. That's the building momentum that we see in the back half of the year. And again, that's particularly going to be the case our plasma marketplace.

And the other question on the top line guidance for the year, you've kept the 10 to 14% range. Is there a scenario you envision where the higher end of that range is achievable? I'm just wondering why in light of the first half you didn't point people towards the lower end or perhaps you are pointing people towards the lower end.

We see the lower end as being a number -- or a range that we're comfortable with. We're particularly pleased that plasma growth is growing more than 20%, that red cells will be about 25%, that OrthoPAT will be in the 45 to 55%, and, of course, service, the 10 to 12%. So we're very comfortable with those. We may be being a little bit conservative here. On the other hand, we don't want to speculate on some of the back-half opportunities that we see. In the back half of the year we've always seen sales ramp up a little bit. Our mix is that generally speaking 47, 48% of our business is pretty strong in the front half of the year, and 52, 53% in the back half. So we're working on a number of opportunities in the back half of the year, but frankly we just don't want to speculate on them at this time.

Last question on the OrthoPAT, and I'm sorry if I missed this earlier, but if you've retained a high number of accounts, what exactly are we -- are you missing on? Is it the utilization within those accounts? Do they still have competing products there that they're using part of the time? I'm just trying to understand, if you kind of break it up, where you -- where are you missing your plan on OrthoPAT?

This is Brian. We're really missing with our U.S. sales force in terms of the ramp-up, if you call that a miss. We -- we've brought on a significant expansion of that group, and as we train them in that total value proposition of our product line, which the OrthoPAT is at the center of, we're recognizing that that ramp up is a little bit longer than we had anticipated. So getting the value from that sales force as rapidly as we had anticipated is not materializing. But we do believe we'll see that -- the strength of that group continue to grow in the back half of the year and the results reflect that.

Brian, I would also say that I think we set out a very, very aggressive growth target at the first part of the year to say to grow 70 to 90% was frankly very aggressive. I'm delighted with our growth of 45 to 50% when we now have taken this product line direct. And when you look at it another way, when you sit back and say, well, the difference between 70 and 90%, or 45 and 55% what does it really mean, well, the offset of our tremendously strong business in plasma is over $130 million, growing at the top end, or potentially exceeding our range, can offset what we're seeing with a lower possible range on OrthoPAT. So we feel pretty good about that.

Thank you. Your next question is from Rebecca Kujawa of Stanford.

Thanks. Actually my major question was asked and answered, but if I could ask one detail question, research and development expense in the quarter, do you expect a similar level going forward? I knew you'd expect it to the change a little bit with the addition of Arryx, but is this about what to expect?

Yes. Our R&D fluctuates somewhat because we target not a specific point of sales or specific dollar amount but rather we invest behind specific programs that we prioritize, and so right now we're comfortable with the level of R&D, and what's coming out clearly of the pipeline that we'll be introducing to the market.

Remember, Rebecca that we've spent the last three years repositioning the business. We had no product pipeline three years ago. We really focused our energies on killing some projects and coming out with products that we thought were our best bet to really get us to that double-digit growth rate that we're striving towards that we hit in terms of disposable sales in Q2 of this year. So we feel as if our new products that we're launching, those seven new products, are really well invested from an R&D standpoint, in that they represent over $400 million in new market potential, and now we need to really ramp those up as we execute with the new sales force that Brian is training here in the United States and throughout the rest of the world so that we can consistently get to that double-digit growth on top line with that new product launch and do a real good job with that. I think the team has done to date through the first half of the year a very good job of launching on time and on budget with those new product launches.

Thanks very much.

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

Thank you, operator. What's interesting as we look at first half of the year is one word, and that is consistency. For the fourth year in a row we're looking at operating income growth that's approaching or exceeding 20%. For the fourth year in a row we're seeing operating margin improving. For the fourth year in a row we see strong cash management with more than $242 million in cash and in the first half of the year we spent $42 million, so we really feel that our strong cash position with the share repurchase and the Arryx acquisition continues to go forward. And for the fourth year in a row we see consistent operating discipline. The positive drop-through even with a FX head wind in the second half of the year continues to be the hallmark of how we run this company.

What's new, and there's only one thing that is new, is that all the growth drivers of plasma, red cells, OrthoPAT and services will allow us to have, for the first time in ten years double-digit revenue growth, and we're very, very pleased with that. When you really look at our business today that's the only thing that is new. Everything else has been very, very consistent. So with that we're pleased with our progress of transforming your company. We're making great progress, and we look forward to speaking with you at Q3. Thanks so much.