Haemonetics Corp (HAE) 2008 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to Haemonetics second quarter fiscal year '08 conference call. At this time, all participants have been placed on a listen-only mode and floor will be open for your questions following the presentation.

Let me introduce Julie Fallon, director of investor relations, for Haemonetics.

Good morning and thank you for joining Haemonetics earnings call today. As operator said, I'm Julie Fallon, director of investor relations, I'm joined by Brad Nutter, CEO, Chris Lindop, CFO, and Lisa Lopez, Vice President of corporate affairs. Please note that during the course of this call, we may make statements that could be characterized at forward looking. Our actual results may different materially 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. Today Brad Nutter will provide an overview of our progress towards our vision, Chris Lindop will review the second operating performance, as well as some long-term business trends. But before I turn the call over to Brad, I want to review a few items that affect our comparative results for the quarter.

You may remember that in the first half of fiscal '07, there were two items that impacted our results. These were the restructuring of our international businesses, and the in-process R&D charge related to our acquisition of Arryx. Combined, these two impacted operating expenses by $11.7 million in fiscal '07. For comparison purposes we've excluded these costs from our fiscal '07 adjusted results. Now, moving to fiscal '08, we also had restructuring costs. So in the first half of fiscal '08, our adjusted results exclude $2.8 million in pretax costs associated with the ongoing restructuring of our international businesses. As is our normal practice, our press release and website included a compete P&L, balance sheet, and sales by product line, for both the quarter and year to date. Our press release also includes a reconciliation between our GAAP results and our results adjusted for the items that I just mentioned. So again, when describing the business today, in order to give greater clarity to our operating results, we will be speaking about adjusted financial results.

With that, let me turn the call over to Brad Nutter, Haemonetics President and CEO.

Thanks, Julie. Good morning, everyone, and thank you for joining our call today. As you know, we have one vision for your company and that is to be the global leader in blood management solutions for our customers. In the quarter we made great strides towards achieving this vision. Now, some of you may have thought of Haemonetics as a medical device company in a mature, small niche market, with low growth potential, dependent on a limited number of growth drivers. Well, clearly, that is not Haemonetics today. The financial results we're about to share with you are an output from a very, very different company. Today, we are the global leader in a $2 billion blood management solutions market. We have an expanding and diverse product portfolio, and we are providing increased value to our customers. Because we're providing increased value to our customers, we continue to take market share, while commanding price premiums. In the last few years, we have successfully rebuilt the company. Today, Haemonetics is a different company, executing well on our new vision. We are now in a phase of expansion, and as such, we continue to expect double-digit growth in revenues and operating income, creating a new level of shareholder value.

Now let me give an update on our progress during the second quarter. As we have shared, to create and sustain shareholder value, we have two strategies. Our first strategy is to leverage our business to improve profitability, and our second strategy is to expand our business by leveraging our three core competencies. Today, I'm going to focus on expanding the business, and here are the highlights. A diverse product portfolio drove your company to almost 12% revenue growth. This is the second consecutive quarter of double-digit sales growth. Now to put that in perspective, you have to go all the way back to before 2001 to see sequential double-digit revenue growth. Our product line growth drivers continue to do very well. I'm also pleased to announce that our geographic growth was significantly over our internal plan. In the quarter, for example, Asia, a $32 million business in FY '07 grew nearly 28%, and Europe, a $135 million business grew 11%. There was even a slight negative impact from currency on these reported revenues. So, our efforts to reorganize these businesses are really paying off.

Our base business is exceeding our expectations, and we expect this to continue to through FY '08 and now through FY '09. In Q1 we signed a multi-year agreement for our platelet and plasma systems with Hema AG in Europe. In Q2 we announced the addition of a multi-year expanded relationship with Octapharma Europe for plasma systems. Because of these two contracts and strong market growth, we expect much stronger plasma device placement, which is now trending towards 2,300 placements for the year. Once they're fully installed and operating, 2,300 machines represent an incremental $30 million in revenue. Now, Chris will give you the details on our new product launches, but I just want to make a point that we have a robust product pipeline today, as we launched seven new products with market potential exceeding $400 million. This is an exciting opportunity, but it's worth emphasizing that almost all the growth reported in Q2 was independent of these new product launches. Just as planned, new product will have a minor impact on our overall revenue growth this year. These sales will build late this year and into FY '09.

So after two consecutive quarters of double-digit revenue growth, and more importantly understanding what is driving this growth, which is our base business, we are increasing our annual revenue guidance from 7% to 9%, which we targeted earlier this year to 10% to 12%. That is, we expect to be a double-digit growth Company on revenues, operating income, and EPS this year. This increased revenue guidance is independent of the definitive agreement regarding Haemoscope, which we announced on Tuesday. The acquisition is strategic and non-dilutive, and when we close that deal, its revenues will have a modest positive impact this year. Therefore, we are raising guidance based on the confidence we have in the fundamentals of our base business,

Now I'ill talk more about the acquisition later in the call, but before I do that, Chris Lindop will review our outstanding performance in the quarter, by key product line and geography. Chris?

Thanks, Brad. As Brad just indicated, we are raising our revenue guidance from 7% to 9% to 10% to 12% for the year. Rather than just review the numbers, I'll give you the reasons why we are so confident in a double-digit revenue growth profile, not just for fiscal '08, but beyond. The investment thesis in this business is simple. We have a diverse product portfolio with multiple ways to win in a $2 billion market. The competitive landscape is changing in our favor, and we see little risk in our ability to profitably grow and expand. Our cash flow is strong, and our mature management team continues to execute our strategies very well. Today, we have so many ways to win. Let me explain why we're so confident in the revenue momentum of our business.

First, I'll comment on what is driving our plasma disposables business. This is our largest business with expected annual revenues of more than $140 million. In the quarter, plasma disposables revenues grew 17.2% over prior year, and year to date, global plasma revenues are up 15.1%. This compares favorably to our annual guidance of 10% to 13%. But most importantly, in our largest plasma market, the U.S., plasma revenues grew 26% in the quarter. So the question is, what is driving the consistent rapid growth in the plasma market? Well, several things. First, if you follow the plasma market, companies such as ZLB, Talecris, Baxter, Ultrapharma and others are all indicating they expect double-digit revenue growth because the market for plasma-derived biopharmaceuticals is growing substantially and the growing patient demand for IVIG alone is significant.

As Brad indicated, we have added two significant contracts this year, with Octapharma and Hema AG. These new contracts are in addition to the expanding contracts with Talecris and ZLB from previous years. Keep in mind that these contracts also call for annual price increases, which will improve our profitability over time. The underlying plasma market growth, coupled with the long-term contracts, gives us great confidence in planning for double-digit revenue growth for this, our largest business, through fiscal '11. On top of that, we are investing more than $10 million in plant expansion to support current contractual obligations to plasma customers. We would not be making these investments were it not for our strong confidence in the health of this market. More over, much of the plant expansion involves automation which will reduce our costs significantly when this plant comes on line in fiscal '10.

The second reason for our confidence in sustained Company-wide double-digit revenue growth is our global market. As Brad said, because of the reorganization efforts taken over the last 12 months in Asia and Europe, we are now seeing growth in these geographies even sooner than we;d expected. During the second quarter, Europe grew almost 11% over prior year and Asia grew almost 30% over prior year. To put this in perspective, this represents more than a third of the revenues of our corporation. Clearly, the reorganizations led by Brian Concannon are paying big dividends. Outside the U.S., the blood bank market is a growth driver. Most of that business is made up of platelet sales. Disposables have analyzed sales in the range of $130 million, and in the quarter, this business grew 7.8% over prior year and 6.6% year to date. Some of you have asked about the recent changes affecting our two largest competitors. Based on the growth in our block bank sales, we appear to be taking share in platelets outside the U.S. It's too early to tell, but this may be an emerging trend.

Now, let me shift to discuss our software, red cell and OrthoPAT businesses, which have one thing in common; we are creating these markets. Approaching $40 million in annual revenues, our software and services business is larger than our OrthoPAT business and almost as big as our red cell business. In the quarter, software and service revenues grew by 11.9%, and on a year-to-date basis, revenue is up 31.9% over prior year. More over, we've just signed several expansions on software agreements, which insure sustained growth well into fiscal '09. Remember, we have a vision to be the global leader in blood management solutions for our customers. Haemonetics software solutions business is critical to this vision, expanding disposable sales with market expansion. Software differentiates us from our competitors and will be a key growth driver in the future. This growing $40 million business is a big factor in our confidence in becoming a double-digit growth company.

Now, let me talk about our $45 million red cell business. For the quarter, our red cell business was up 7.7% over prior year, and year to date the red cell business is up 11.5%. Now this is a combination of equipment and disposable sales. Equipment sales increased over prior year, driven by sales of the newest generation Cymbal product, as well as continuing sales of the legacy MCS+ product. Our Q2 red cell disposable sales increased 4.5% over prior year, which is up somewhat from our Q1 reported growth in red cell disposables. As expected, we saw demand for our double red cell technology recover later in the quarter and see this continuing throughout the year. Based on sales of Cymbal and MCS+ we're confident that 10% growth for the year continues to be realistic.

Now, let me turn to OrthoPAT. This is a $35 million business. OrthoPAT disposable sales for the quarter grew 10.8%, and year to date have grown 9.5%. As you may know, the orthopedic surgical market is growing at about 8% per year, and our challenge is to continue to build this market so that in the future, the OrthoPAT device becomes the standard of care. We're pleased with the growth rate for the quarter. In Q2 we're also -- we also placed 54 devices in the field. Our blood management value proposition is gaining traction in the world of orthopedic surgery.

I'll close my product line sales review with a comment on equipment sales. In the quarter, equipment sales grew 55.1%, and year to date equipment sales have grown 37.8%. Strong equipment sales are being driven by two things: Plasma equipment sales in Europe and Asia to meet demand in the growing plasma collection market, and new product equipment sales, particularly sales of Cymbal. As Brad commented in his opening remarks, today we are a very different Company operating in an expanded $2 billion market. As you can see from our comments, given the diverse product portfolio we enjoy today, our success is no longer dependent on hitting a growth target for red cells or OrthoPAT. Our 12% total revenue growth over prior year comes from strengths from multiple product lines. Our base business product line additions and now diverse geographic growth will sustain double-digit revenue growth into the future.

Now let me give you the specifics on new product placements. Let's start with Cymbal. In Q1 we've placed 24 units, and in Q2 we placed 15 units. Our overall plan is to place 80, so we're right on track for the year. Regarding HARMONY suction products, we placed 67 units year to date, and we placed 43 CardioPAT units year to date. So the bottom line with the new product placement is that we're off to a reasonable start. In Q1 sales of new product were $1.2 million, and in Q2, $600,000. With all of these products we're building new markets, so our product growth expectations are conservative. The new product placements will be a building momentum story in FY '08 and '09 and '10, as well. Our original plans were for $6 million to $8 million in new product sales in fiscal '08, and at this time we still believe we'll come in at the low end of that range. An incremental $6 million in new product sales this year will be a great base to build on in fiscal '09 for sustained revenue growth.

Let me put our new product growth into perspective. Of the Q2 $120 million or 12% growth in reported revenue, only a small part of it came from new product sales. The obvious conclusion is our base business is performing very well and is very strong. We have the luxury of building our new product markets appropriately. The key point is, the combination of our strong base business growth plus the pending acquisition that Brad will speak about plus new product growth should deliver continued double-digit growth into FY '09. At no time in our Company's history has our product pipeline been so robust, nor expecta -- excuse me -- nor our execution on this now diverse product portfolio been so successful.

Now, lets me switch to the rest of the income statement, starting with gross profit. While Q2 gross profit grew by 8 .6% year over year, gross margin declined about 1.5 percentage points to 49.4% from the prior year. The reason for the lower margin is plasma growth of 17% over prior year. That's a $140 million business, so it drives a mix shift in margins. We see this reversing in the second half of the year, driven in part by currency, and increased plant utilization. For the second half of the year, gross margin should be about 100 basis points higher than in the first half. In fiscal '09 and beyond, margin improvement is expected to continue, as plasma pricing improves under existing contracts. And we experience continued growth in higher margin products like platelets, red cells, OrthoPAT new products, and software, impacting margin mix positively.

Turning to operating expenses, as you know this year we guided to operating expense growth at 65% of growth in gross profit as we reinvest in the business to drive revenue strength. Through the first six months of the year, our ratio of expense increase to incremental gross profit dollar growth is 84%. We sat at our investor round table and have reported consistently over the last few years that our sales mix is weighted more heavily in the back half of the year. For the last four years we have averaged about 48.5% of our sales in the first half and about 51.5% of our sales in the second half. We continue to expect this pattern in fiscal '08. Historically, our operating expenses have tended to be straight line, so having sales weighted to the second half of the year puts pressure on our expense management metrics in the early quarters of the year. And this year, ERP expense will be lower in the second half of the year than in the first. So we expect expenses in the second half of the year will decline modestly.

We remain confident in the original expectations of holding spending increases at or below 65% of gross profit growth for the year in total. And for the year we are spending I have $7 million in ERP, which is included in our expense base. The growth in the ERP implementation expense in the second quarter was roughly $1.4 million, and the reported results are bearing the impact of that comparison as our spending ramps. We expect ERP spending to conclude by the ends of fiscal '09. In addition, in the quarter we had continued investment in Arryx R&D to drive a prototype device for the diagnostics market. One final comment on the P&L. We've been facing currency challenges. You may know that our policy is to hedge anticipated gross profit out 12 months on a rolling monthly basis, and as a result, we've had negative currency comparisons for the last year and a half. But begin in Q3 we expect currency favorability for the next 12 months. All of this bodes well for the future.

Now let me move to the balance sheet. In Q2 we generated $7 million in cash flow from operations, and invested $15 million in capital expenditures. We completed the $75 million stock buy back for this fiscal year, and remember, we had a $40 million stock buy back last year, so this is the second buy back we've had in the last 12 months. After the Haemoscope acquisition, we'll still have more than $110 million in cash to use for future acquisitions or share repurchase. So before I turn the call over to Brad, let me reiterate the trends which make me very confidence about the increased revenue guidance of 10% to 12% growth for the year, and in our ability to sustain growth in the range in FY '09. First, our diverse product line has never been stronger and can sustain the double-digit growth profile that we've seen in the first two quarters. Secondly, the Haemoscope acquisition is a strategic fit which will compliment our blood management solutions value proposition. Thirdly , our geographic restructuring is producing good revenue growth in those markets. And lastly, our new products continue to have great growth potential. So we are confident with our revenue growth, and as a result, believe that EPS will be at the high end of our previous guidance range; specifically EPS should be in the range of $2.07, to $2.12 for the year.

Now, let me turn the call back to Brad.

Thanks, Chris. You may remember that during the last four years, our compounded annual growth rate for revenues was 7.5%. What Chris just reviewed indicates to us that FY '08 will provide double-digit growth on the top line, but more importantly, most of that growth on a year-to-date business -- year-to-date basis is coming from our base business. The growth rate of our base business is clearly exceeding our expectations. We now believe double-digit revenue growth for FY '08 and FY '09 is sustainable.

Now, our second strategy is to expand our business. Let me talk more about the definitive agreement with Haemoscope. This is a very strategic acquisition that contributes for our total vision of blood management. Specifically, the Haemoscope system is a diagnostic device and consumable, which helps hospitals determine the severity of and propensity for bleeding during surgery. Now, why is this important? Well, today, hospitals receive standing orders for blood without a solid understanding of their demand for blood. It's an unsophisticated supply chain, so with the Haemoscope technology a hospital can determine a patient's likelihood or severity of bleeding and then it can determine their demand for blood. By knowing demand for blood, a hospital can identify and implement strategies to reduce blood clots. The Haemoscope device has FDA approval and has been in the marketplace successfully for seven years. It's a proven technology backed by scores of scientific papers and reporting hard data. As a matter of fact, Haemoscope states that by using this device, hospitals can reduce their need for blood products on average by more than 20% by determining a patient's blood loss characteristic. So you can see why we're very excited, as this acquisition fits perfectly into our franchise and with our new vision.

Now, let me give you a financial reason why you should be excited about this acquisition if you're a shareholder. First, it's a $16 million business growing at more than 15% over prior year. Second, it's accretive on both gross profit and operating margin lines of our existing base business. And finally, it's nondilutive in FY '08 and accretive in FY '09. Now we've always stated that we wanted to find acquisitions that were nondilutive, have accretive gross and operating margins, have growth profiles greater than the existing growth of our base business, and this acquisition satisfies all those requirements, plus delivers strategic value to our hospital-base customers. So to sum up our acquisition of Haemoscope, it expands our strategic profile by meeting our customers needs in the hospital marketplace. It's a proven technology and it meets all our very, very high standards for financial performance. Most importantly, we have a great group of people joining Haemonetics.

As I said at the outset of our prepared remarks, Haemonetics today is a very different company. The business has been fixed and leveraged. We are now in a growth phase. Chris has made a compelling case for the sustainability of our double-digit revenue growth. We are no longer a slow growth business in a niche market. Our base business is clearly exceeding our expectations. The Haemoscope acquisition fits strategically, and adds $16 million in incremental revenues, with a growing product line. This is why we're now so confidence in double-digit growth into FY '09. New product revenues will build in FY '08 and FY '09. New products represent expanded markets of more than $400 million, and our team is executing very well.

Now, at the same time we accomplished all this, we've also been implementing ERP. Over the last 16 months, we have moved 16 countries into our Oracle platform for our total sales, service, and finance functions. The ERP implementation has required enormous heavy lifting by our people, and I want to take this opportunity to thank them for their dedication and commitment. They have performed to the highest levels of professionalism, and continue to make us very proud. In fact, some customers have already been reporting significant improvements in service. More over, because of our people's hard work, we remain on budget, and on schedule with Phase I. Now we'll complete Phase 2 of ERP in the next 12 to 18 months, freeing up significant expense dollars on the P&L in the future. All this and we continue to gain share and deliver 12% revenue growth. This is quite an accomplishment, and I want to thank all of our employees for the outstanding efforts.

Folks, this management team has performed admirably fixing this business, and now with simultaneously executing on numerous plans to grow the business. And that's really the theme of Q2 in this call. It's important for all of our shareholders to recognize, this is a turning points for your company. On any indices, we have simultaneously executed very well. I expect that performance will continue throughout the remainder of FY '08 and beyond. During the last four years we repositioned or fixed the business. Now we are growing or expanding your corporation. This will create a new phase of sustained shareholder value creation. Our future is very, very bright indeed.

Now, operator, I'll turn the call over for your questions.

Thank you. (OPERATOR INSTRUCTIONS) Your first question comes from Dave Turkaly from SIG.

Thanks a lot. Looking at the Haemoscope acquisition, could you comment, are there any competitors in that market today, and do they have intellectual property that surrounds that monitoring technology that they sell?

This Chris here. Yes, the company has an extensive portfolio of intellectual property that they've built over many years that defends their use. There are other competitors out there, but none with the broad array of hemostasis measurements that are capable under the TEG technology. TEG is monitoring the whole clotting cascade and giving a significant amount of data to clinicians about what is happening for the individual that is being mea -- whose blood is being measured.

David, this is Brad. I would add that when you think about this from a strategic standpoint, this is really the second application that you've seen in terms of acquisitions where we've moved beyond blood collection or separation markets, more into the diagnostic markets. Clearly, what we're attempting to do with Arryx, who is hopefully as we continue with that technology into a diagnostic market realm, and this, again, another play into the diagnostic markets.

Great, and congrats on the revenue growth and the geographic distribution. The restructuring in Europe and Asia, can you re can you remind us exactly where -- what was done and where we stand on both of those, looking ahead?

Sure. We consolidated our European operations around shared services in Switzerland, reorganized how we go to market in Europe, and how we support our marketing efforts in Europe, customer service, depot maintenance and other aspects. So, as we said at the beginning, it's something that's going on over the course of the year. Total cost would be around $4 million to $5 million and we're in the midst of doing all that.

David, I've mentioned for all the shareholders, we're frankly ahead of schedule and I congratulation our leadership teams in Asia, Japan, and Europe, and clearly want to congratulate Brian Concannon for his outstanding efforts to lead this. When you think about Asia growing almost 28%, Europe 11%, this is ahead of schedule, so we're clearly seeing substantial improvement. One other number I'd share with you is, in Japan we grew 1.7% over prior year, so that market is stabilized. In constant currency we grew 5% in Japan, so we feel really good about the efforts to restructure the businesses. They're growing faster than we expected, and the teams have done a fine job. Most importantly, our customers are continuing to see a higher level of service from us, so we believe our growth is sustainable.

Thank you. Your next question comes from John Emerich from Iron Works Capital.

Thanks. A couple unrelated questions I'd like to ask separately. I'm trying to track down the cash flow from operations number for the quarter, and I'm not sure where all the cash (inaudible). I appear to be missing about $6 million or $7 million. Could you just give me the highlights of the big sources and uses --?

Sure, let me -- sure, let me -- this is Chris. Let me run through, John, for you. On a net income of (inaudible) 11.2 we had depreciation and amortization of about 7.5, so compensation of about 2.4. We had a build in receivables in the quarter, which absorbed about $6 million, and our DSOs went from 70 to 74 sequentially, and actually year over year. And we -- overall working capital was about --uses was about $15 million in the quarter, and we had over $15 million of Cap Ex, which is about half Haemonetics equipment, and half PP&E investment. Now the Haemonetics equipment reflects this build in plasma devices that we've been talking about. When we've -- as we've taken our device plans up from about 1,500 for the year to 2,300, to the extent that we placed those devices, that's a -- big round numbers about $10,000 a device, or another $8 million of cash utilized.

Okay. I'll just throw out my last two questions and you can answer them as you want. Can you just, one, provide some tax rate outlook? And number 2, while it's great that you have increased optimism over top line growth going forward, do you have any plans to (inaudible) cash out of the operations as the business grows?

Sure. We are guiding to between 33% and 33.5% for the year on the tax rate. One of the things about our business that we touched on in the call, but I'll just reiterate, is that we tend to be back-end loaded with the sales modestly, but it's a seasonal trend that we have to contend with. Our expenses tend to be straight line. This year they're actually going to decline in the back half because our ERP spending front half was about $4.3 million and our ERP spending back half will be about $3.1 million, just reflecting that the rhythms of the ERP implementation. Remember that we put 17 countries on to ERP for our sales and finance and consolidation, et cetera, in this last six month period. So to answer your question, we see improving gross profits in the second half. The margin, I think, will be up about 100 basis points front to back -- or back from front, I should say, and that will be half currency, or a little less than half currency and the rest mix, and plant utilization. And then we'll see our operating expenses trending down modestly in the second half, in part due to the patterns of our ERP spending. Does that answer your question?

Your next question is coming from James Sidoti from Sidoti &Company

Good morning, can you hear me?

Yes, Jim. How are you?

How are you doing?

I've been better, but it has nothing to do with your quarter. (LAUGHTER)

Well, we're pleased to hear that. So what's wrong, Jim? Can we help? (LAUGHTER)

Must be that [theory].

Two questions. One, on the acquisition for the Haemoscope product, can you describe what their distribution looks like now and what you think it'll look like a year from now?

Well, now it is -- about a third of their revenues are international, and that is all third-party distributors, and obviously you know we have a large and growing international distribution business, so we'll be looking at all of that over the next year. And we also, of course -- domestically, they have a small sales force, which we're maintaining, and they have some highly-effective agents for the product in North America that we are hoping to maintain our relationships with, and we will be introducing the North American patient division sales force to the product over the next several months, in phases essentially.

Jim, this is Brad, I will -- excuse me -- share with you that Chris and I on Tuesday met with their sales team. I was favorably impressed with the quality of the people there, I think they have a good feel for their customer base, they have a feel for how hospitals utilize this. I think we can use that knowledge base to expand into our existing sales force, which, as you know, throughout Europe, United States, Asia, Japan, is fairly large, so we were impressed with their team and I think that they can provide us great training to explode this product line through our sales force with their help.

And my second question with regards to the comment Chris made on R&D. He said picked up a little bit because of a project at Arryx. Do you think it'll stay at this level for the next couple quarters or was that something that was more short term?

No, I think our commitment to Arryx is going to be consistent and actually ramping up over time. As we look at our five-year strategic plan we'll be increasing it.

Okay. All right, thank you.

Thanks, Jim.

Thank you. Your next question is coming from Joshua Zable from Natixis Bleichroeder.

Hey, thanks very much for taking my call.

Thanks, Josh.

Congratulations on a great quarter, again, great work. Just a couple of questions. Guess related to the acquisition, can you just give us little bit more color on -- obviously this business seems to be a good one growing. The Haemonetics brand is obviously a strong one, and I can see where your distribution would benefit that, but maybe you can talk about what -- if you any idea of rationale of getting rid of it and where Haemonetics brings an advantage to this business that didn't have before?

First, Josh, thanks, it was a very good quarter. You're right, we;re pleased with the performance on a number of product lines and geographies, specifically areas where we've grown very well. In terms of Haemoscope, it fits so perfect into this whole concept of blood management solutions for our customers. Hospitals today really struggle to determine how much blood they need, and why they need to use that blood on a per patient basis. And so this device really gives us the opportunity to help hospitals determine their blood supply demand needs. Most hospitals just get a standing order, so all of the sudden just blood comes to the door, and hopefully it's the right blood type for the right patient, and so forth. So when we sit down and look at this, this is really the points of the spear strategically of determining blood needs in hospitals. And once a hospital knows how to -- how to determine what the blood need is, then they can determine how much blood they should buy.

Now if you think of any med-surg supplies or if you think of any drug, they have great data as to why this should -- they should bite a certain amount of product lines, but in the bloody supply chain that doesn't exist, so this helps a lot. And if you add on top of this acquisition of Haemoscope, if you add on the acquisition we did earlier this year of Infonalé, which has a very strong data base to help hospitals determine best practices of blood usage, you can see how they fit hand in hand to this vision of determining blood usage on a specific patient basis so they then can purchase the right amount of blood from the blood banks. So when you link that all the way through from a patient back to the donor in the blood bank, we're really developing this, if you will, supply change for blood management, and this fits perfectly as the point of the spear in the hospital marketplace for that.

Great, that's very helpful. And then just -- I know you guys talked about strong top-line growth and you kept mentioning your underlying business. Obviously this is an acquisition, but you've done a number of deals which obviously are underlying, but will benefit you over the longer term. How much of the new business development that you guys have done over the past six months really are driving this higher revenue growth?

It's really very, very little. As a matter of fact, the real drivers of the business today, which is why we are raising revenue guidance and we feel so particularly strong about -- and without giving you too many numbers, I'll give you a sense of it. Our plasma business is growing 15% over prior year on a year-to-date basis, Asia's 28%, Europe is 11%, red blood cell business is up over 11%, our software and service business is up 32%, our equipment business is up 38%, OrthoPAT is almost 10%, so you can see when you look at all the different product lines in our base business, that's what is growing this business.

Now, to be fair, if I look on the downside, we're growing our cell salvage business -1.2% over prior year, but that is because as we've said over the last five years, we expect that to be a flat growth market. I'm particularly excited about our platelet business, which we planned to have zero growth this year, and on a year-to-date basis is growing at 6.6%, and most of that growth is coming from outside the United States. So when you look at our base business, no matter where you go -- this is the point of Q2 call -- we have a very diverse product portfolio today, and we're growing double digits on virtually every aspect of the business. And as we launch new products, and as we acquire new businesses, that'll only be additive or accretive to that strengthening that double-digit growth.

Now, having said that, let me make one quick comment on new products. We've placed 67 new HARMONY devices through the first six months of the year. We've placed 43 CardioPATs, we've placed 39 Cymbals, and if you were to consider OrthoPAT still a new problem, we've placed more than 100 OrthoPAT devices into the marketplace through the first six months of the year. Now those new product placements total up to 240 new devices in the first six months of the year, and assuming if we do the same thing in the back six month of the year, that would be 500 placements this year with relatively new devices. We are totally pleased with that kind of effort. That is a wonderful performance. Now, as you know, getting these devices up to speed and burning disposable bowls and so forth takes some time, but doggone, we're pleased with 500 -- on track to do about 500 placements this year. That indicates to us that there is great growth opportunity in FY '08 late in the year, and '09 and '10, wit these new product placements. Just as we've seen in plasma, for every 1,000 plasma devices that we place, we see about $13 million and 500 placements with these new devices is really a world start for us.

This is Lisa, Josh, I think it's worth adding that in addition to the future revenue from the new product or new business development acquisitions that you mentioned, there will be opportunities for cross-selling, and therefore seeing increased revenues of our base business that are indirectly attributable to those new business acquisitions.

Thank you. Your next question is coming from Larry Solow from CJS Securities.

Good morning. Just -- and I appreciate the outlook for gross profit margin growing and going up a little bit, but was there a little -- are you seeing a rise in material costs or anything else other than the increased plasma sales that impact (inaudible) margins?

It's mostly mix and facility utilization that goes along with the mix.

Yes, Larry, Bob Ebbeling and the team in operations -- as you know we have a core program -- has done a great job of mitigating cost increases over the years taking significant amounts, $35 million of structural costs out of the business and mitigating those raw material increases. We did that last year and we're doing it this year, so that's not had an impact on our business. It's really, as Chris said, the mix on plasma.

Right, okay. And then can you just put the OrthoPAT placements or the 100 placement year to date in context of what the established base is right now so we can get an idea of how that base has grown year to date?

Off the top of my head, I don't have that information in front of me, Larry. I'll have to get back to you. But we're pleased that our U.S. sales force is maturing a little bit on OrthoPAT placement. The number I gave you of those 100 is a global number, I would also give you some additional color that some of that growth is coming from Europe, which we're pleased to see that beginning to have an uptick, but I don't have that number handy in terms of the base right off the top of my head.

Thank you. Your next question is coming from David Lewis from Morgan Stanley.

Good morning.

Morning.

Hi, David.

Couple of questions. I guess just starting with Haemoscope , Brad, one of the problems with the platelet function market has been the lack of clinical data. The technology is clearly superior to some hemostasis testing, but people don't really know about it and that -- is there is a sense of why this company only has $16 million sales over 7 years, plus the distribution. So I guess the question is, what are you prepared to spend to dramatically improve the branding around platelet function testing, because it largely doesn't exist today?

This is Chris. Let me take the first cut of that, and Brad can answer as well. One of the things that impressed us about Haemoscope and the work of Ali Cohen, the entrepreneur who's been the heart and soul of the company is the amount of effort that has gone into getting good clinical research done -- and there is literally a mountain of collateral material that we are the inheritor of -- and really it's a question of getting out there and leveraging the relationships we have in the marketplace and getting this information in front of people and driving change. We will continue to support the clinical efforts, but we are really the recipients of an enormous amount of clinical data that supports this proposition.

I would add, Chris, that I would invite all our investors to look at their website because they have a lot of data on their website that's very impressive, number one. Number two, we -- when we first visited with the team from Haemoscope early on they recognized that they had a talented organization, but for them to get this really to their next phase and really expand this that they needed to partner with someone who had tremendous resources and dedication into the blood space. And basically, we are a very, very good fit for them because of the extension of our global marketing efforts, our extensive sales force. We don't expect that we're going to have to spend a lot of money. We can leverage the resources we have with their help to really expand the market. When you think of 100 sales person organization, in Haemonetics coupled with the platform that they have and the smaller organizations in terms of sales talent, we really think we can leverage those two together without spending a lot of incremental dollars.

Okay, that's really helpful. And Brad, you've given market sizes for almost every one of your business ventures, but what are you viewing in terms of the three to five-year market potential here for this product?

We're modeling -- it's about at $240 million market over a five-year period. And I would comment -- it's a very interesting question -- I would comment that as we see this business we really look it is that, although it's been in the marketplace and there's a $16 million base of business and about -- just under 2,000 devices In the market, we really see us pioneering this market and building this market as the tip of the spear, if you will, regarding the blood management solutions portfolio that we've talked a lot about. So we feel very comfortable that this is going to be a market that we'll create, with Haemoscope, to a large scale, just like we've created every market that we have in a -- in portfolios today.

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

Thank you. Just to follow up on that, the 2,000 units, how many hospitals would that represent? And can you give us a little bit of understanding of the cost of the device to the hospital and the disposables involved?

John, this is Brad. They are about 600 hospitals, so when you think of the scope and scale, what that indicates to you is there's a big market opportunity out there for us. In terms of the costing of it, we have some work to do on that. We think that there may be opportunities when we provide our total product portfolio that we could come up with a new model on pricing and margin improvement here. I would tell you that the margins on this business are very similar to our OrthoPAT business, so we're excited about that margin opportunity.

And to follow up, the red cell business still seems to be below expectations and I think I heard you say that you'd placed 24 Cymbals in the first quarter, and 15 in the second quarter?

That's right.

Is that disappointing or --

John, it really isn't.

-- going with that?

We're very pleased with that. Our plan is to place 80 for the year, so we're really right on track with where we want to be for the full year. I know Pete Allen and the team in the donor division are working hard with some very large customers now to insure that we hit that 80 target by year end, so we feel really good about the placements of Cymbal, point 1. Point 2, in terms of the disposable use in the market, we've seen that market, as we reported in Q1, a little slower than we anticipated, but we're really excited about the uptick of Cymbal, and its not cannibalizing our MCS placements. So we continue to be up on MCS, our existing product line placements this year as well. And the team is expecting to place 50 units of MCS devices into the U.S. market this year, and they;re right on track with that, as well. So I feel really good about the red cell market.

Thank you. Our final question is coming from John Emerich from Iron Works Capital.

Hi, I got cut off in my call (inaudible). The question was, do you have plans to generate more cash from the business than you've been generating, and did your decrease in free cash flow guidance, which I think it to be (inaudible), was it lower cash flow from operations or higher CapEx? Thanks.

It's a function of higher CapEx, the increased plasma device placements that are referred to. And yes, we will see --as we often tend to, we will see improved cash flows from operations in the back half of the year. And some of that will be related to working capital, some of it relates to how we -- the sequence of how we pay our taxes versus providing the taxes, and some of it will just be -- to do with the phasing of CapEx.

I would just make one final comment for you, John. If you go back over the last four years, this business certainly has been a cash generation business. We expect it continue to be going forward, so we've utilized our cash, we think, effectively. As you know, there've been two stock buy backs and a couple of acquisitions over the last couple of years, so we feel as if we're being very prudent with shareholders' cash.

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

Thank you, operator. To all our shareholders it's important for to you recognize that we believe this is a turning point for your company. On any indices we have simultaneously executed very, very well. During the last four years we really repositioned or fixed business, and now we're in that most exciting phase, and that is expanding or growing your company, and two quarters of double-digit revenue growth are really a milestone for us. We hope that this will create a new phase of sustained shareholder value creation. We believe our future have very, very bright, and we're looking forward after this very good quarter to update you on our success in Q3 in the January timeframe. Thanks so much. Take care.