Haemonetics Corp (HAE) 2007 Q3 法說會逐字稿

Good morning ladies and gentlemen. Welcome to the Haemonetics third quarter fiscal year 2007 conference call. At this time all participants have been placed on a listen-only mode, and the floor will be open for your questions following the presentation. I will now introduce Julie Fallon, Director of Investor Relations who will begin this call with opening remarks and introduce the speakers.

Good morning. Thank you for joining Haemonetics earnings call today. As the operator said, I am Julie Fallon, Director of Investor Relations. I am joined by Brad Nutter, CEO; Chris Lindop, our recently appointed CFO; Ron Ryan, our retiring CFO, Lisa Lopez, Vice President of administration, Brian Concannon, President of global markets and Dr. Mark Popovsky, Vice President and medical director. Dr. Popovsky is not presenting today, but he is available if you have questions about the recent Wall Street Journal and Dow Jones articles on the impact of new blood donor restrictions and new tests on the blood supply.

Please note that during the course of this call we may make statements that could be characterized as forward-looking. Our actual results may materially differ from the anticipated results. Additional information concerning factors that could cause actual results to differ materially is available in our press release and 10-K. And one more thing before I turn the call over to Brad, I want to draw your attention to a few items that have an impact on our year-to-date and comparative results.

As you may remember in the third quarter of last year, past fiscal '06 we received a significant arbitration award that under GAAP accounting was included in our operating results. In the current fiscal year there are four items that impact our year-to-date results. First, expenses related to stock compensation or FAS 123; second, international restructuring; third, the second quarter in process R&D charge related to our acquisition of Arryx; and fourth, a third-quarter onetime positive tax benefit. Our press release includes the reconciliation between our GAAP results and our results adjusted for these items. So when describing the business today, in order to give greater clarity to our operating results we will be speaking about adjusted results unless we specifically state otherwise. With that, let me turn the call over to Brad Nutter, Haemonetics President and CEO.

Good morning, everyone, and thank you for joining us. Before we begin today's overview let me thank Ron Ryan, our retiring CFO for nine years of outstanding service. We announced Ron's planned retirement a year ago, and he continued to serve as CFO during our search for a new CFO, putting his personal plans on hold so that we could take the time we needed. This unselfish commitment to Haemonetics is a hallmark of Ron's legacy, so Ron on behalf of me, our Board of Directors and all Haemonetics employees, thank you and good luck as you begin your retirement.

Today we will review three topics. First is an introduction to Chris Lindop, our new CFO, and Chris will review financials and operations. Second, Brian Concannon will give you an update on OrthoPAT, Japan market trends and our continuing international transformation efforts. And finally, I will close with comments on key strategic issues. So let me begin with the quarter. We've been very consistent over the last three years in achieving double-digit operating income growth on high single-digit revenue growth. And this quarter was the same.

We delivered 30% operating income growth on 7% revenue growth. I am pleased that we continue to deliver solid financial performance. We do have a challenge in Japan where we have high market share and face a changing market, and Brian will give you more detail in a moment on this market shift, as well as our mitigation plans. The growth drivers of the business remain strong with global plasma and red cells delivering approximately 20% growth over prior year. OrthoPAT delivering 40% and 5D growing more than 50%. As we leverage these trends we forecast year end double-digit growth in operating income and EPS.

Now let me introduce Chris Lindop. Chris enjoyed Haemonetics on January 1, and as many of you know, Chris was CFO at Inverness Medical, a global MidCap medical device company roughly the size of Haemonetics. During Chris' tenure at Inverness he and his financial team contributed to that company's rapid growth, much of which resulted from acquisition. Chris knows Haemonetics very well. Prior to joining Inverness he was an audit partner at E&Y with Haemonetics as a client. So I am delighted that we have added a person to our executive ranks who has industry knowledge, strong financial expertise and a track record of expanding through acquisition. I have asked Chris to briefly share with you his reasons for joining Haemonetics and then walk us through the numbers.

Thanks, Brad, and thanks to those of you who have reached out to congratulate me on this new assignment. I am looking forward to meeting our investors and analysts over the next few months. I consider myself fortunate to have joined such a great organization, although it was a tough decision to leave another great organization, let me share with you the reasons why I joined Haemonetics. This business has an exciting strategic plan backed by solid financials and a strong core business. It has a great executive team and a supportive Board of Directors and more specifically several items stood out as I considered my move.

First, this team has executed exceptionally well in its strategy to exploit its core competencies of process management, service and innovation to improve profitability. It has consistently delivered double-digit growth in operating income. This is a strategy that has created tremendous shareholder value.

Second, as Haemonetics redefines its markets, and Brad will talk more about this later, the range of potential complementary businesses expands as does the size of the market we will address. We have a very strong balance sheet and great cash flow generation ability. This will permit us to expand into new businesses and markets. I have some experience working in an acquisition rich environment, and it's very exciting for me to join Brad and the Haemonetics team to grow this business.

Third, Haemonetics is introducing seven new products with more than $400 million of market potential to help drive its near and medium-term growth. It is exciting to have such a strong new product potential compared to our existing sales base.

And fourth, I believe that the new HOT or holographic optical trapping technology that we brought in the Arryx acquisition can be truly game changing for this exciting -- because we can leverage it to expand into new multibillion dollar markets. In summary, I am convinced that the long-term growth potential of this company can create significant shareholder value. Having said that, let me turn to the numbers. Our results are as follows.

Revenue was $114 million in the quarter, up 7.4% and $333 million year-to-date, up 7.5%. Gross profit was $56 million in the quarter, up 1.4% and $169 million year-to-date, up 4.4%. Gross margin was 49.7% in the quarter, down 300 basis points and 50.8% year-to-date, down 160 basis points. A word on gross margin. As we communicated at the beginning of the year gross margin was impacted by plasma sales which carries somewhat lower gross margin but attractive operating income margin. The second impact is changing market share in Japan where we have high gross margins.

Operating expenses are down 9% for the quarter and 0.6% below prior year. Last year's third quarter operating expenses were burdened with a write-off of $3.75 million of certain intangible assets, which is partially offset in our fiscal 2007 year-to-date operating expenses, by about $3 million of ERP costs. Year-to-date operating expenses are flat. So I am pleased with how well the team has demonstrated spending discipline, continuing to leverage the P&L to improve profitability. Let me give you the details.

Operating income was $19 million in the quarter, up 29.7% and $57 million year-to-date, up 16.1%. Operating margin was 17.1% in the quarter, up 290 basis points and 17% year-to-date, up 120 basis points. EPS was $0.55 for the quarter, up 34.5% and $1.52 year-to-date, up 18.8%. It is worth noting that without the impact of foreign currencies, sales increased 8.3% operating income increased 54.9% and earnings per share increased 56.5%.

Now let me give you even more color on the mix of our sales. For nearly two years sales have increased more than 20% over the prior year in the United States. This performance is in stark contrast to the period before fiscal '06 when the U.S. business was growing by low single digits. The company's restructuring of the U.S. business during the last three years is one reason for the dramatic turnaround in sales growth.

In fiscal '04 U.S. sales represented about one-third of our sales, and by the end of fiscal '08 we expect U.S. sales will represent nearly half of our sales, and we are pleased with our building sales momentum in the United States. And of course, the fact that a greater portion of our sales will be in U.S. currency mitigates some of our foreign exchange exposure.

Now let me turn our attention to the international sales mix. Year-to-date sales in Europe and Asia are growing at low to mid single digits, while Japan's sales have declined about 10%. Leveraging the skills and experience gained in the U.S. business, we are actively working on strategies to grow the European and Asian businesses faster and to stabilize the Japanese business. Brian Concannon will take us through some details on this in a moment.

Now let me discuss our sales performance both in the quarter and year-to-date by disposables productline. Focusing first on our growth businesses, for the quarter plasma disposable sales were $32 million, up 17.8% and year-to-date plasma disposable sales are $96 million, up 19.3%. This very strong growth is coming from increasing plasma collections in the United States. For the quarter red cell sales were $11 million, up 19.6%, and year-to-date red cell sales are $32 million, up 20.4%. Unit growth in the United States was a key driver of growth. And for the quarter OrthoPAT sales were $7.5 million, up 31.5%. Year-to-date OrthoPAT sales are $22 million, up 39.9% with growth driven by pricing. U.S. sales grew 53% in the quarter.

And finally, sales we designate miscellaneous and services, which includes 5D sales, were $19 million for the quarter, up 33.9% and $24 million year-to-date, up 19.4%. It is worth mentioning that the size of this business is now comparable to our OrthoPAT and red cell sales and continues to grow rapidly.

Other products sold into more mature markets, which contribute significant cash to the business include our blood bank and surgical productline. For the quarter blood bank sales were $31 million, down 7.8%. And year-to-date blood bank sales were $94 million, down 4.5% as a result of weak platelet sales in Japan. For the quarter surgical sales were $17 million, up 1,2% and year-to-date surgical sales are $49 million level with last year, as planned.

For the quarter equipment sales were $5 million, down 10.6% and year-to-date equipment sales are $15 million, down 18% or about $3.3 million. As we compare against a particularly strong year for equipment sales last year. Now moving to the balance sheet, cash flow was outstanding in the quarter delivering $16.4 million in operating cash flow which we define as free cash after working capital and capital expenditures. We had record low days sales outstanding in the quarter. We closed the quarter with $228 million in cash and $30 million in long and short term debt. And we completed the $40 million share repurchase, which we initiated in September.

So to summarize, in the quarter we saw solid performance from our growth drivers. In fact, our established productlines, plasma, red cells, OrthoPAT and miscellaneous and services which includes 5D are growing at about 20% or greater year-to-date, and we continue to see the positive drop through in the P&L. A hallmark of this team's operating discipline. For the quarter, operating income was up 30% on 7% sales increase and EPS grew 34.5%. Now with three quarters behind us let me walk you through how we expect to finish the year as we have some updates. And let me remind you that I am talking about guidance of results that have been adjusted for the items duly listed at the beginning of this call.

First, we are updating sales guidance from growth of 10% to 14% to growth of 7% to 9%. For the year the growth from our plasma red cell, OrthoPAT and software businesses will not be enough to overcome the sales pressure we are describing on this call and in previous calls, namely the decline in Japan. We expect gross margin for the year will approximate 51%. And while strict spending discipline will mitigate about half of the gross profit impact of the change in sales guidance, we estimate operating income growth for the year will be in the low double-digits and operating margin will be approximately 18%.

Finally, we expect to finish within our previous guidance range of $2.05 to $2.17 in earnings per share. And these estimates exclude the favorable impact of another unusual item, a recently disclosed settlement agreement with Baxter. Under this agreement Baxter has paid us $6 million to end a dispute related to its obligations under our Company's pathogen and activation agreements. In addition, those agreements will be terminated. We have one litigation matter remaining between us and Baxter, namely a patent infringement suit. And with that overview I would like to turn the call over to Brian Concannon.

Thanks, Chris. Today I want to update you on three things, first, OrthoPAT; second, the Japanese market; and third, our international transformation efforts. So starting with the OrthoPAT. U.S. OrthoPAT sales grew 53% in the quarter. This is driving global productline growth. We remain focused on strategies to drive growth and improve account manager productivity. We are making good progress. Last year's market disruption from the transition to direct sales is largely behind us. You may remember that we started that transition with an objective to maintain at least 70% of the OrthoPAT disk volume. I am happy to report that at the end of Q3 we were running at a rate equivalent to 90% of the disk volume. I am pleased, but not satisfied. We are continuing to work very hard on getting our new 35 person sales force completely trained on the OrthoPAT and the rest of our new products so that we can move forward even more aggressively in fiscal year '08.

Now let me move onto the Japanese market. As Chris shared, Japan platelet sales are down. Let me describe what is going on. For three years our platelet market share has been over 70%. Clearly we have a very strong position that our Japanese team has worked hard to build. Last year one of our competitors had product quality problems and by year end our market share was 74%. This year we saw a decline in our market share due to rebalancing by the Japan Red Cross among its suppliers. This was anticipated, but we expected the rebalancing to occur over an extended period of time rather than just a few quarters. The rebalancing between platelet suppliers was accelerated by a third quarter quality issue that has now been addressed. Even so, despite our temporary quality issues we have maintained our market share at approximately 69%. The end result is that platelet sales in Japan are down more than $4 million year-to-date.

Our plasma collections are also down in Japan. We shared earlier in the year that we expected Japan to meet its full-year forecast to collect 910,000 liters of plasma. The Japan Red Cross is tracking to this target. However, it is getting more plasma units from whole blood collection than has historically been the case. The Japan Red Cross decided to change its mix. So while our Q3 Japan plasma sales are up for the quarter, they are not up as much as expected because the Japan Red Cross is shrinking the market for automated plasma collections. Our share of the plasma collection market remains at over 80%. The year-to-date impact from fewer automated plasma collections is $3 million. So Japan platelet sales are down $4 million and Japan plasma sales are down $3 million. That's $7 million of high margin business year-to-date. We know we won't be able to make this up in Q4. The market has changed rapidly. Despite the changes our Japanese team has done a great job of retaining market share, and that is our strategy; to maintain the business and market share we currently have. The shrinking market is beyond our control. We can control our marketing position, however, and in that regard we are launching a new premium platelet set in Japan. This new set provides enhanced safety features for blood collection staff. We design the set at the request of the Japan Red Cross to meet its specifications, and the set allows us to retain our competitive edge in Japan. We believe this premium price set, as well as some device enhancements will provide additional benefit in ease-of-use for our customers.

That brings me to my next point, our international transformation efforts. We noted earlier that the U.S. is consistently growing revenue at about 20%. We shared that our plan is to maintain current sales levels in Japan. So to be a higher growth company we must grow our other international markets. That is what our international transformation is all about. We have a simple plan. First, to grow in under penetrated markets and second, to strengthen our European growth. To address point one, the largest under penetrated markets are eastern Europe and Asia. To drive growth in these regions we've made two important changes. First, in Asia we've made the decision to invest in country resources for some key markets to better manage our distributors. For example, China and Korea.

Second, we hired Mark Beucler as Vice President and general manager of global distribution channel management. Mark was formerly CFO at Lifeline Systems. We are pleased that Mark has joined Haemonetics and look forward to working with him in this important assignment. Mark's objectives are threefold; first to accelerate growth in markets served by distributors; second to introduce new products to our distribution channels; and third to identify new markets for distribution relationships. So the result of point one of our international transformation plan should be that our Asian, Eastern European and other distributor markets, which today represent about $50 million in sales, begin to mirror the growth of our U.S. business.

Moving to point two of our international transformation plan, our European business. While we do have strong market share in Europe, there is room for greater market penetration. We are transforming our European operational structure similar to our U.S. restructuring three years ago. The new structure will allow us to better serve our customers and proactively attack changing market dynamics. So the result of point two of our plan should be that our direct European sales, which today represents approximately $110 million, begins to grow at high single digit through market share gain and new product introductions.

We've had success turning around our U.S. business, and I believe that the lessons learned there will position us well in Europe and Asia in the future. I have now been in this international assignment for six months. We have new leadership teams in place in each market, and they understand what steps must be taken to transform the business to better meet customer expectations. They are committed to the process and have made good progress. I look forward to telling you more about our transformation of these markets in the coming quarters. Now let me turn the call back over to Brad.

Thanks, Brian. Q3 was a solid quarter. We leveraged the P&L significantly, and we saw a good positive drop through. Our product growth drivers were up 20% plus in revenues. Revenue was up 7%, operating income up 30% and EPS was up 34%.

Now I want to focus my comments today on strategic issues, but before I do that let me spend a minute on the contract we announced this morning which we expect will deliver more than $120 million in plasma, in 5D software revenues over a five-year period. We have signed a long-term agreement with Talecris Plasma Resources to supply its centers with plasma collection systems. Talecris recently purchased 58 plasma collection centers from International BioResources or IBR. IBR was a Haemonetics customer, and so of course we are very pleased to retain this business. But we are also very excited about the growth outlook for Talecris. Of the 58 centers purchased, just 33 are presently operating. So Talecris expects to open the remaining 25 centers, new centers over the next year to drive collection growth. As part of the contract Talecris also signed on with our 5D software division to automate their plasma collection centers. So there is a significant new business outlook for this customer which will contribute to ongoing growth in both plasma and 5D software product lines.

Now I would like to close with some thoughts on our future. Our vision is to be the global leader in blood management solutions for our customers. Now one way we can do this is through a strategy that we call arm to arm which will begin to implement in FY '08. Arm to arm is a concept of improving the blood supply chain beginning at the patient who receives the transfusion all the way back to the blood donor. With our product portfolio and information technology platforms Haemonetics is uniquely qualified to add value to our hospital customers who are looking for ways to better manage and optimize their blood supply chain. There is a compelling business case for improved blood management; a stronger blood supply chain can deliver better patient care while reducing costs. Simultaneously through our arm to our strategies we will move beyond blood collection systems, to help blood banks with regulatory compliance, attracting donors and improving their operating expense efficiencies. Now one part of achieving this vision is to expand into a new adjacent market that are part of the blood supply chain. And I'm excited for Chris to join us and drive more aggressive business development. In that regard we announced the acquisition of IDM Medical Software, a company whose information technology for blood banks will be an important element in our arm to arm strategy.

IDM is a leader in the market for information technology serving blood bank, and as you know 5D is a leader in the market for information technology serving the plasma industry. IDM's products coupled with our own eQue and eLynx products from 5D will go a long way in providing solutions to blood bank's need for information to better manage their blood supply chains. Let me congratulate and welcome [Tim Colburn] and the entire team at IDM who are listening to this call from Chicago. Welcome to Haemonetics. You'll make a great contribution to our growth in the future. Now do not be surprised to see us do other small bolt-on acquisitions or partnerships similar to this in the future. Importantly, every new product offering will help us realize our vision to be the global leader in blood management solutions.

Now a brief update on Arryx. We continue to make good progress with our research efforts. We recently filed six new patents that make this technology applicable in adjacent multibillion dollar markets. We remain very excited about this opportunity and plan to give you a comprehensive update on Arryx at our May investor conference.

In closing, Q3 was a solid quarter. Now we have some challenges in Japan, but as all of you know we have faced challenges before. This reminds me of FY '04 and '05 when we saw a competitor by our largest plasma customer and then close down the plasma collection centers. That action had a significant short-term impact on our sales. Despite that in less than 24 months we focused our energies and grew our U.S. plasma business. Now Brian and our international teams have plans in place to change our growth profiles in Europe and Asia, while growth expectations in Japan from an already strong market position remain modest. The growth in earnings potential of Haemonetics business is healthier today than it was a year ago, and this is why we are so confident in our ability to achieve another year of solid growth in FY '07 and beyond while continuing to invest in our future. We remain committed to continuing to drive shareholder value creation with your investment in your company. With that, I will now turn the call over to questions and the operator. Operator.

(OPERATOR INSTRUCTIONS) David Zimbalist, Natexis.

Thank you very much. I'm wondering if you could give us a couple of adjusted numbers on your businesses, in particular the plasma business and the OrthoPAT businesses, if you exclude from the plasma business the specific step-up in the ZLB contract and on OrthoPAT the conversion from wholesale to retail. Then I have a follow-up.

David, in terms of plasma we have anniversaried the ZLB business. I don't have that number available. I will turn to Ron, do you have that? I don't believe we have that. We will have to dig that out and get it back to you so I can't answer that question specifically now. In terms of OrthoPAT I am real pleased with the 53% growth over prior year in the quarter that we saw in the United States. That is a tremendous effort; we are seeing traction in the United States. Brian, I would ask you to add any additional feedback for David on OrthoPAT.

In terms of maybe more the apples-to-apples comparison which I think is what you're trying to get at David, is that in the U.S. we are now at a run rate maintaining about 90% of that disk volume as we transition the business a little over a year ago. So apples-to-apples that is where we stand. The majority of that or the entirety of that growth in the U.S. is a price growth.

And then the second question is you guys have talked about in the past trying to work towards becoming a double-digit topline growth company. This year was -- you were going into it with a lot of opportunity on that front. Some changes have obviously scaled that back. Is there a change in your outlook for that or in the way you are approaching it? It sounds like you are expecting to do a lot of little acquisitions, IDM adds a percentage point to the topline. Is there anything else? Is that something we should expect to be part and parcel how we model out the business in terms of incremental sales?

Let me first take your first part of the question in terms of double-digit growth rate. As you guys know, we really did a great job of repositioning the business over the past three years, and this is the first year of a three-year business transformation where we expect to see double-digit growth as we exit this business transformation timeframe. So we are working very hard to get there and we're very, very confident as we looked at the beginning of the year in doing that. So the question becomes what is different? And frankly, it is Japan. The sales miss in Japan is because, as Brian indicated in the call, we have a number of factors in both plasma and platelets where we see the market changing. And one thing we know is controlling a market, if you will in terms of the Japanese or ministry of health is probably something we or any of our competitors can't do. So if you were to back that out we are really looking at a sales growth over prior year on a year-to-date basis that is 9.7% -- very, very close to that double-digit target that we are looking at. And because of the high profitability of that business our operating income if you back that sales less than prior year out, because of Japan, our operating income growth would be north of 20%. So generally all parts of our business are operating very, very efficiently and effectively. What we didn't see was the blind side that Brian talked about in terms of the changing markets in Japan.

The second part in terms of IDM, one comment, this is a tremendous company. They are the leaders in blood management solutions for blood banks and in labs. I want to stress that this is a $100 million market, and we spent $9 million to get into this market. It is reminiscent of where we spent less than $5 million to get into the suction market, and that market with Solo, HARMONY and Filter Bag is more than $370 million market. So we are excited about the addition of that company. Additionally, that acquisition is nondilutive this year. So we feel very, very good about this tremendous opportunity. It is a great team of 60 plus people in Chicago and this will be a great add as we build up this arm to arm strategy.

David Lewis, Morgan Stanley.

I want to focus on two issues. One is Japan. The second is the plasma business broadly, and then I will jump back in the queue. If Brad or Brian, I just want to kind of clarify your comments around Japan to make sure I am clear. There are two issues obviously platelets and plasma. You talk about a changing dynamic in Japan. Are you referring more to plasma specifically than platelets, or is there something else going on as the JRC rebalances the distributing of product that was more severe than you would have expected just based off the competitive changes of 12 to 18 months ago?

There are both issues in play in Japan. Number one, in terms of the plasma market we continue to have 80% market share, but they are deriving more plasma from whole blood collections than we anticipated to reach their goal. We saw that trend just develop rapidly and has developed relatively rapidly late Q2 into Q3. In terms of platelets you may remember that as Baxter exited the marketplace a number of years ago and then Terumo had product quality issues our market share went from its traditional 70% up to, as Brian indicated, more 74%. And so we anticipated that to go back to about 70%, and it actually rebalanced -- the JRC has rebalanced that to about 69%. So that is the other dynamic that we see in platelets. Brian, any additional color?

The only additional color I would add there is that we anticipated that we would see that rebalancing. The quality issues that have now been addressed for us probably accelerated that a little bit. The Japanese market is a market that focuses on very, very high quality. We are proud of our position there. We are proud of what our team there continues to do, and we believe that we are positioned to continue to move forward in maintaining that market share and maintaining our current sales in the future.

I think that is an important point to stress for everybody on the phone. If we go back over four years, we've maintained about 70% of the platelet market share and 80% of the plasma market share. I have identified this as one of the more stable markets where we have high, high penetration and have felt very good about it. We have seen that $7 million hole a very high margin which was a little bit of a surprise to us, no question, from prior year. And you take that out of the equation and we are firing on all cylinders other than that.

So it is safe to assume that the platelet visibility has been improving here last two quarters and seems to have pruned your level where visibility is returning; however the plasma issue obviously remains somewhat invisible?

That's correct.

Great. And then moving onto the broader plasma business here specifically very dramatic growth by the market, remains relatively tight. If you look at your more absolute growth here it has been flat over the last three quarters, so at some point we would like to see sequential growth coming into the plasma market. And I am wondering with the Talecris -- given Talecris has a whole variety of business dynamics changing within the organization, of that $120 million, how much is incremental business based on your prior relationship with IBR and maybe talk about your opportunities within the broader Talecris as it relates to maybe accelerating the plasma business on a sequential basis going forward.

As you picked up, we did have the business with IBR but this new relationship with Talecris represents about 50% more revenue opportunity than the business that we already had with IBR. So we are really proud to be working with one of the global leaders in plasma. As you know, they are involved in not only collection, but fractionation and so there is a whole slew of business opportunities represented by this new relationship.

Okay.

The 5D opportunity is very exciting for us to continue to work with them and implement our 5D system throughout Talecris. So I think there is multiple ways for us to grow that business, David, one would be of course the disposable plasma collection [sense] and this five-year agreement really solidifies our position broadly in the U.S. marketplace. And so we are expecting great things as we roll into next year. And I would also mention that as some of these agreements come into more maturity there is price increase opportunities as those agreements mature over time, as well. So that is another opportunity. And finally, it is a 5D opportunity to expand particularly with Talecris.

Thank you, Brad. That's really helpful. Have you been given any specific timeline in terms of when Talecris will be bringing up those additional facilities?

We know that it is a 12 month period is their goal. And I think they will be good for that. But we don't know much more than that. We will be working with them with greater detail as we begin to implement this brand-new agreement.

I will jump back in the queue. Thank you very much.

John Putnam, Dawson James.

Brad, just to go back to Japan or more time, I was just wondering is there an economic reason that Japan is moving to harvest plasma from whole blood or I guess, what is their motivation is what I'm trying to get at?

Let me answer that question. The collection of whole blood by the Japanese Red Cross is for the purpose of collecting red cells. Relatively recently the Japan Red Cross decided to increase the volume of whole blood that can be collected from a donor. And as part of that whole blood collection plasma is collected as a byproduct. And so as the whole blood collection collected more whole blood and red cells, there was more volume of plasma that was collected as a byproduct and consequently fewer plasma collections through automation were necessary.

Okay, thanks. And I guess a follow-up question. Can you give us an update on the suction products, how they are doing?

We continue to launch the suction products, the HARMONY, which is the product which by its name matches with our existing Cell Saver product is going well. We are seeing about a 50% closure rate on the trials that we have out there today. Again it is a transition part of our U.S. sales force getting this team up to speed and really trained on how to sell this product. We are out now with the customer acceptance trials on the Solo product which is the stand-alone product, and those trials have been going very, very well. We've received very good feedback from our customers.

It is important to note that we expect somewhere around $2 million of incremental sales on new product this year. That was about what we were looking at the beginning of the year. So we feel like we are making very good progress. We are particularly excited about the awaiting the 510-K approval for the simple red cell productline. But we are still waiting for that to happen and have not received that yet. We expect that to happen in Q4.

Thanks a lot.

James Sidoti, Sidoti & Co.

A question on the OrthoPAT. Brian, can you tell us how many units you place in the quarter?

Just under 11,000.

Not disposables, but how many new systems?

New accounts -- I can, but it will take me just a minute to get to that.

It would be great if that was a disposable number --

11,000 new customers, that would be great. I would be happy with that number, as well.

We had for the quarter, Jim, we signed seven new agreements. We have 18 new evaluations underway.

And can you make a comment on there is a new test out for TRALI and should the Red Cross start to require this test and start to screen some of the donors, what do you think the impact would be on your business?

Let me introduce to all of you Dr. Mark Popovsky who, as you know, is our medical director. And Mark, you've got a lot of experience from your years at the Red Cross before joining us five years ago here at Haemonetics. You can share with everyone what will happen with TRALI and Chagas, if you will.

Sure. So first let me start with Chagas. That is the new test that was approved in December by the Food and Drug Administration. Chagas is a parasitic infection that can be fatal. It is transmitted by blood in about 20% of all cases, and in fact was approved and will be implemented in the coming months by blood centers. That will clearly -- that will test every unit of blood that is collected by the blood collector, and that will probably add $5 to $7 per test for the testing cost for every collection.

The second point is transfusion related acute lung injury. TRALI is a form of respiratory distress that is now the number one cause of death from transfusion in the United States, and in fact in the developed countries of the world. And the way that the disease is caused in many cases is related to antibodies in blood that come from -- that are formed in female donors. And it is that process that will now be unfolded over the coming months due to recommendations by the American Association of Blood Banks where blood centers will begin to test female donors and all [white] female donors for antibodies. And these antibodies, as I said, cause TRALI. It is assumed that about 10 to 20% of platelet phoresis donors who have these antibodies will have to be replaced. That is the opportunity then for automation and for Haemonetics because it will lead to the need for replacement of platelet donors and that in turn will create an opportunity for those platforms that are mobile. Because blood centers will have to replace those donors, go out, find them and in many cases probably be going out to mobile drives and that favors our technology.

That is a key point I think, Mark, the mobility of our technology could really solve a lot of the problems related to this going forward.

And I just want to close the loop on the issue of the increased cost of a new test. As the cost of collecting red cells and delivering them to hospitals continues to increase it makes even more compelling and cost-effective converting from whole blood collection to an automated red cell collection that delivers two units of red cells from one donor.

So do you think you could see these changes in calendar 2007?

I think we will. We will see the beginning -- absolutely in calendar 2007, absolutely. We will see the blood centers begin to implement both the Chagas test and TRALI policies that are designed to make the blood supply safer.

I believe the blood banks have a two-year timeframe to implement these changes. But they already have plans in place. Some are already beginning to effect them now.

Thank you.

David Zimbalist, Natexis.

I appreciate the comment you made earlier on the new products. Could you talk a little bit about Arryx contribution to the quarter? And my follow-up is I am trying to understand strategically how you are balancing your tension in the patient business. You've got OrthoPAT, which is slowly starting to build some new products, new accounts. And then you've also got a flurry of new products between the HARMONY, the SmartSuction, CardioPAT all rolling out at the same time. And can you talk a little bit about how you are prioritizing your sales force attention, sales force training there? And if the opportunities really are that promising what it would take for you to increase your investment in spending in that category?

Brian, how about if you take new products and I will come back on Arryx?

Thanks, David. The real opportunity here is with our total value proposition. If you think about just in the U.S. a year ago we had a 13 person sales organization that had one product, the Cell Saver 5+. Today when you think about our vision of blood management solutions we have a selling organization that can go into an institution, a 35 person strong sales organization that has six products, three cell salvage products, the Cell Saver 5+, the OrthoPAT focused on perioperative orthopedic surgeries and the CardioPAT focused on perioperative cardiovascular surgery, as well as our three new suction products. And so what you're looking at is a total value proposition as we work with our customers to help them understand ways in which they can improve blood management within their institution. So that is our focus. It is a training issue. It is a time onerous issue. It is an experience issue, but we believe that our sales force is coming up to speed rapidly with this and believe we will see that continue to move the needle in fiscal year '08.

In terms of Arryx, we are very pleased with the six new patents. Lisa, you might comment briefly on the fact that we've done a good job of looking at our IP overall.

We recognize that what we bought with Arryx is intellectual property and intellectual horse power. And so we are going to remain focused, not only in the last quarter, but in the quarters to come in leveraging this gold into as Brad mentioned, some multibillion dollar markets beyond the market that we play in today.

I don't want to get ahead of ourselves on Arryx here, but in the May investor conference we are going to spend a lot of time on that technology. Its market applications, the size of the markets and how we will be utilizing this platform to really grow the business going forward. So beyond giving information on that, we are not prepared at this time but in our May conference we will focus a lot of energy on that.

I was actually looking for the sales that they contributed this quarter. And last top question is can you talk a little bit about your progress at the American Red Cross given your exploratory contract with them last quarter?

Yes, the impact this quarter in sales of BioRyx 200 was minimal. There was no impact on sales this quarter. In terms of the Red Cross we continue to make outstanding progress. Pete Allen and the donor division team have done a great job of sitting down and mapping out how we can continue to work with the Red Cross. Our focus, remember that ARC agreement that is new has market opportunity of over $100 million. It was signed very, very late in Q2. And so we are just getting the stages set for how we will implement that. Again, the most important thing is that is primarily red cells are being sold today with the ARC. So that should indicate our continued growth in development with the red cell productline will be healthy over the next five years. And also as Mark indicated, there will be reasons for looking at mobile platelets as an opportunity. And we have the ability with that agreement to go forward. So we feel very good about just signing that very late in Q2 last -- this past Q2 -- that it will be a real growth opportunity going forward over the next five years.

I think it is also worth mentioning that IDM, the company that we just acquired, has strong relationships with the American Red Cross, and we look forward to using those relationships in that business, as well, to continue to work together with the American Red Cross to help it manage its blood supply chain.

One last comment, just to add on to Lisa's comments. When you think about the American Red Cross plus the CBS agreement, Canadian Blood Services agreement that we signed late last year, plus the new Talecris agreement that we just identified as $120 million agreement, there is more than $200 million of sales opportunities over the next five years on red cells, platelets and plasma. So we feel really good this was one heck of a quarter in terms of getting this business positioned to transform itself to that double-digit growth company that we are aspiring to. We feel very good about that.

David Lewis, Morgan Stanley.

Just two quick follow-ups here. Mark just one question for you and it sounds a little strange but given what the JRC has recently done in terms of increasing volume per donation I figured I would ask it. If we have a whole series of women that are now ineligible for donating plasma but they actually are still eligible for fractionating plasma could this TRALI issue actually result in a plasma oversupply in the U.S. market?

I don't think so. I think that what we will see is that blood centers will begin to reposition how they collect blood and target both blood groups and gender to particular technologies. So for male -- first I want to make clear as some accounts have been confused that female donors are still very much desired as much as male donors, but the plasma will not be used for fresh frozen plasma. Their plasma will be directed into fractionated plasma. So we will see simply a rebalancing but I don't think we'll actually see a net change in the supply.

And of course the whole concept of targeting donors and collecting a particular component from a designated donor given their own physiological makeup plays especially well to automation. Almost like just in time manufacturing where we treat a donor as the source of the blood component, allowing a blood center to use automation to target particular donors for red cells, plasma or platelets is precisely what we enable our customers to do best.

But even if, I mean obviously historically blood centers have proven to be somewhat demographically challenged. Obviously your technology has helped them but even in this interim period Mark it sounds like you are still not concerned that there would be an oversupply.

I am not, no.

Okay, perfect. And then just one quick question here on guidance. Given the global comments here as it relates to the Japanese business and its effect on margins, and obviously the expanded sales force as Brian has talked about with OrthoPAT, just looking at the guidance and sort of the lowered revenue guidance and maintaining that 18% operating margin, while the numbers are a little small, I just wonder if you can provide a little color on how that is necessarily possible.

As we look forward into the fourth quarter, we have as I mentioned, a strict spending discipline in the quarter combined with the anticipated topline growth and the margins that we expect to achieve. When we pencil it out it certainly looks like 18% operating margin. And we anticipate as we move forward the shift in sales, the areas of our business where the sales growth is coming from that we will see some margin expansion going into next year.

It is also important, Chris, to point out that last year we had a very, very strong fourth quarter where we saw a 52% increase in operating income of Q4 last year versus Q4 the previous year. And so we are up against some pretty significant comps if you will, quarter to quarter this year versus last year. But we feel this will be a very strong year. I really sit back and I say to myself after four years, what are some of the things that are really driving the value of this business? And I think back to a time when we lost that business when a competitor bought our biggest plasma customer and we had a $16 million hole in FY '05 -- that was a grim period of time to make up $16 million in sales before we saw one sale incremental this year. On a constant currency basis our sales are up 8% over prior year, and that still with the challenge in Japan. But this team has done a great job of operating discipline, meeting those challenges and going forward. And I am particularly proud of the fact that in the last 100 days, get that ARC and CBS agreements worth $100 million signed, the new Talecris deal signed for $120 million. We just added IDM which would give us $6 million of incremental sales last year. Boy I think we are executing very, very well in terms of how we are trying to create a transformational company over the three-year period here.

Great. Thank you very much, Brad.

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

Thank you very much, operator. There is one thing that is true about this quarter, it is consistency. On a 7% growth in revenues we saw 30% growth in operating income. The issues in Japan are issues that we can deal with and we are dealing with. So I feel that marketplace has been over four years and will continue to be a stable marketplace for us albeit not a growth market. What I am particularly pleased with is the way that in the last 100 days beyond just the numbers we are truly repositioning and now transforming your company. And when I talk about transforming I am talking about it in four ways.

Number one, in terms of sales the ARC, CBS and Talecris deals are very important for the future growth opportunity of the topline, and I am very pleased and want to congratulate our teams for doing a great job there. The second thing that I am comfortable with is that from an operating discipline standpoint or from a business process standpoint, we are doing a great job investing in our business in ERP, investing in our business with new patents with Arryx and making sure that we offset those short-term challenges in Japan. And I am proud of the work the team has done repositioning Japan and now Brian has talked about repositioning Europe and Asia and his team are doing a great job in that.

The other thing that I am particularly pleased with are things that -- if you will a little bit softer but nevertheless identify the commitment to drive shareholder value and shareholder return. And that is the $6 million award we got with Baxter, the second time we have seen that in two years. We are protecting your franchise and fighting for every penny and additionally to that, we saw a $3.6 million benefit from tax. So as Ron Ryan and the tax team, as he leaves today, his last day, he has done a tremendous job consistently trying to watch every aspect of our cash flow and our earnings potential. But most importantly what I am excited about is the fact that IDM is really going to allow us to reposition and transform this company into a company where we can control the blood supply chain from the patient's arm back to the donor's arm using information technology. This IDM acquisition is nondilutive. It gets as into a $100 million market with a $9 million investment. We are very, very excited about that platform when we top it with our 5D business. That should be a forerunner to the fact is Chris has joined us and has a tremendous track record and background, of looking at new markets and being acquisitive and we have the cash to do it. We think we are in the beginning stages after nine quarters of a three-year process to transform this company, we think this quarter is an outstanding quarter in terms of our repositioning efforts and our transformation efforts.

So with that, thanks so much, and we will look forward to talking with you at our year-end. Take care. Bye.