Haemonetics Corp (HAE) 2008 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Haemonetics third quarter fiscal year 2008 conference call.

At this time, all participants have been placed on a listen-only mode and the floor will be opened 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 the operator said I'm Julie Fallon, Director of Investor Relations. I'm joined by Brad Nutter, Chairman and CEO; Chris Lindop, CFO and Vice President of Business Development; Brian Concannon, COO; 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 as forward-looking. Our actual results may differ 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 the progress toward our vision. Chris Lindop will review the third quarter operating performance and Brian Concannon will share our progress on change management. But before I turn the call over to Brad I want to review a few items that effect our comparative results for the quarter and year-to-date. You may remember that through the first three quarters of last fiscal year, three items impacted our results. These were the favorable resolution of certain tax contingencies, the restructuring of our international businesses, and the in process R&D charge related to our acquisition of Arryx. These combined impacted fiscal '07 year to date net income by $7.4 million. For comparison results we've excluded these figures from our fiscal '07 adjusted results. Now moving to fiscal '08 we also had restructuring costs. So our adjusted year to date net income for '08 excludes $2.7 million associated with the ongoing restructuring of our international business. So when reviewing the business on today's call, in order to give greater clarity to our operating results, we'll be speaking about adjusted financial results.

As is our normal practice, our press release and website including a complete P&L, balance sheet, and sales by product line. Our press release also includes a reconciliation between our GAAP results and our results adjusted for the items that I just mentioned. With that let me turn the call over to Brad Nutter.

Thank you, Julie. Good morning everyone, and thank you for joining our call today. Let me tart by making a few comments regarding our performance in 3Q. Simply put, I'm very pleased with our performance. For the third consecutive quarter we achieved double digit revenue growth.. In Q3 sales increased 18.6% over prior year. Gross profit increased 18%. Operating income increased 21% and earnings per share increased 16%. We also completed the acquisition of Haemoscope. This acquisition is a great strategic fit for your corporation. Additionally, the acquisition met all of our stringent financial hurdles. Now the early stages of our integration are exceeding my expectations. The 3Q revenue impact of the acquisition was approximately $1.5 million.

Now as we turn our attention to our year-to-date performance, and outlook for the year, let me share the following observations. First, you'll remember in 2Q based on the strength of our base business we raised our annual revenue guidance to 10 to 12% growth. Now with three quarters behind us, our year to date revenue growth is 13.5% so we're exceeding our expectations. As a result, I want to update our annual revenue guidance to 11 to 13% growth. Now as you may remember, 4Q of last year was very strong, so we're running against some tough comparisons but we're pleased that this year will be the year of double digit revenue growth. Second, year-to-date growth regarding operating income is up 10% over prior year so we're right on track with this guidance. And third, year-to-date earnings per share is $1.53, up 15%. Our earnings per share guidance for the year remains $2.07 to $2.12 so we're making good progress toward this is guidance.

Now as I've stated I'm very pleased with the progress of FY '08 but as I reflect upon this year with just one quarter to go what I'm most pleased with is the consistency of our performance over the long term. Assuming we make our annual objective this year we will have a five year sales compounded annual growth rate of more than 9% and a five year compounded annual growth rate on operating income of more than 23%. Now many shareholders have inquired as to our growth expectations in the future. And we're striving to become a company that can sustain double digit growth in both revenues and operating income. Now having seen revenue growth of more than 10% for three consecutive quarters we are all very pleased, but I remind all of us that only three quarters does not make a sustained trend. Over the next few quarters if we're able to sustain net growth rate then we'll have become a double digit revenue growth Company.

Let me turn my attention now to operating income. We're very confident in our ability to sustain operating income growth as our 23% five year CAGR indicates. We've proven to be very disciplined about expense management which is one key strategy to leverage our core business. So with that let me turn the call over to Chris Lindop who will share with you the specifics of our Q3 growth and our performance throughout the year. Then Brian Concannon will share our progress on change management and a number of exciting initiatives that he and his teams are implementing to sustain our momentum. With that, let me introduce Chris Lindop. Chris?

As Brad indicated I'll give a quick overview of our financial performance, but rather than just review the numbers and I'll give you the reasons why our performance has been so solid. You may recall that in 2Q we shared a simple investment thesis, to repeat, we have a diverse product portfolio with multiple ways to win. We now participate in a $2.3 billion market and the competitive landscape is changing in our favor. We see little risk in our ability to profitably grow. Our cash flow is strong and our management team executes well to our strategies. So today we have many ways to win.

Let me explain why we're so confident in the strength of our business. First, plasma disposables. As you may remember, this is our largest business with annual revenues of roughly $150 million. In 3Q, plasma disposables revenue grow 27.5% and year-to-date global plasma revenues are up 19.3%. In North America, our plasma disposable revenues grew 29.6% in the quarter. In 2Q we shared the reasons why we're so bullish about the plasma market and indicated that we expect to sustain double digit revenue growth in plasma for the next three years. Just to review what we've said. First demand for intravenous immunoglobulin, IVIG is growing in high single digits and this demand drives market growth. Second, large plasma fractionators are expanding collection and manufacturing capacity to meet demand for IVIG and our customers are indicating that they expect plasma collection expansions over the next three years and third our contact with ZLB, Talecris, OptiPharma Europe, and Hema AG position us well to capitalize on strong market growth.

In Q2 we also shared that we're investing $10 million in our plasma disposables manufacturing plant. Much of our focus is to increase automation which will improve productivity and is part of our efforts to take structural costs out of manufacturing.

Now let me move to our software and services which are performing well in the quarter. With software's rapid growth over the last couple of years, this business is roughly $40 million in annual revenues. It's larger than our OrthoPAT business and almost as big as as our Red Cell business. It's one of the fastest growing businesses in Haemonetics portfolio. In the quarter we received FDA clearance for another module for the software system we call Symphony. This product enhancement is significant because it allows blood collectors to automate critical processes of their manufacturing and distribution operation. The Symphony software is now a comprehensive product suite that can automate operations from the point the donor comes into the door until the blood is shipped to the hospital.

Remember our Company's vision is to be the global leader in blood management solutions for our customers. And let me take a few minutes here, clearly Haemonetics software solutions is critical to this vision as it adds to our value proposition. With our IBM acquisition last year, we now have information technology to implement the blood bank customers just as our 5D product portfolio targets plasma customers, so we have IT strength in two of the three key areas of blood management. In addition to being a growing market our software offerings have strategic importance. Software differentiates Haemonetics from our competitors and will continue to be a revenue growth driver for the Company. No one has the product portfolio of devices, services and software that Haemonetics markets today.

Now let me talk about our $47 million Red Cell business. In the quarter, red cell revenues grew 15% and year-to-date Red Cell revenues are up 12.7%. This is a combination of equipment and disposables. And equipment growth was driven by sales of the next generation Cymbal system and our legacy MCS product. Year-to-date we've placed 43 Cymbal systems. And Red Cell disposable sales increased 12.1% in the quarter. As expected, we are seeing demand for disposables recover in the second half of the year. And year-to-date, Red Cell disposables growth is 6.7%.

Now let me turn to OrthoPAT, a $35 million business. In the third third quarter OrthoPATs disposable sales grew 21.3%, our strongest revenue growth for OrthoPAT this year. Year-to-date revenue growth is 13.5% and year-to-date we've placed more than 130 devices in the field. The global OrthoPAT market potential is $650 million and orthopedic surgeries are growing at more than 8% per year. Most of the market is unpenetrated and so we're creating the market for surgical blood salvage in orthopedic surgery. Last year was a year of transition and this year we're making progress placing new devices and growing disposable sales. This year's growth is coming from disposables unit increases. Our blood management value proposition is gaining traction and we're excited about it.

I'll close my revenue view with equipment which is running to about $28 million in annual sales. In the quarter, equipment sales grew 63.4% and year-to-date equipment sales have grown 46.6%. Strong equipment sale have been driven by platelet and plasma equipment sales in Europe and by plasma equipment sales in Asia. As we've said before, there are three fundamental pillars for growth in this business.

The core business, new products, and acquisitions. With a core business growing so sharply and acquisitions beginning to contribute to our growth, let me touch on new products. While Cymbal is doing well, we're not doing as well with other products. With almost all of our new products we're building new markets and simply put, new products will be a building momentum story into fiscal '09 and '10 and beyond.

As Brad indicated in Q2 Haemonetics today is a very different company operating in an expanding market. With the addition of Haemoscope to our product franchise, our market potential exceeds $2.3 billion and given our diverse product portfolio we're no longer dependent on one or two products or one or two geographies to make plans and that really summarizes our revenue performance. Products representing 56% of our business continue to grow in double digits. Plasma, red cells, and software remain strong revenue contributors and OrthoPAT is on track. Platelets are contributing moderate group and Europe and Asia are growing double digits while Japan is stable. Acquisitions contributed to $4 million to revenue growth in the quarter. Currency is at our back, we like the market trends we see and we like our position in the market.

Moving to the rest of the income statement, gross profit grew a healthy 18% in the quarter and 11.2% year to date. Q3 gross margins at 49.5% is down from 49.7% last year, reflecting the product mix shift we're seeing with the incredibly strong growth of our plasma business. Year-to-date gross margin is 49.8%, down from 50.8% last year.

Now turning to operating expenses. In the quarter, operating expenses growth was 65% of incremental gross profit dollars and on a year-to-date basis we grew at 74% of gross profit dollar growth reflecting positive drop through for both the quarter and year-to-date. As we shared in 2Q, because our operating expenses tend to be straightlined, this puts pressure on our expense management metrics in the early quarters of the year and we see improvement in the later quarters and as you can see from our 3Q performance, we're gaining some improved operating leverage in the third quarter. And by the way, for the year, expenses will include about $7 million of ERP spending and our ERP implementation remains on track. Earnings per share was $0.57 in the quarter, up 16.4%. And $1.53 year-to-date, up 15.3%, reflecting strong revenue growth in the business.

Now let me move to the balance sheet. In Q3 we generated $25 million in cash flow from operations and invested $15 million in capital expenditures. After the Haemoscope acquisition we have $117 million in cash for use in future acquisitions or share repurchases. Before I turn the call over to Brian let me reiterate the trends which make me very confident about the growth profile of your Company. First our diverse product line growth has never been stronger and we continue to take share at premium prices. Secondly our new products continue to have great growth potential. Third the Haemoscope acquisition strategy fit which complements our blood management solutions value proposition and integration is going well. Fourth our geographic restructuring is producing good revenue growth in each of those markets and fifth, and this is key, the fundamentals of our business are not impacted by many of the issues creating uncertainty these days in the broader economy. So with that, let me turn the call over to Brian.

Thanks, Chris. Today I want to comment on change management and the changes we've made through the first three quarters of the year that have contributed to our growth. Now as you may know, we believe there are two strategies to create and sustain shareholder value. One strategy is to expand the business by leveraging our core competencies. Under Chris's leadership, we've made three acquisitions in the last three quarters, Haemoscope, IBM and Infinale. Two of these are software businesses and one is a device business. All three strengthen our position as the global leader in blood management solutions for our customers.

What I want to concentrate on today is our second strategy. That is to leverage our core business to improve profitability. Some of the changes I'm going to share with you are geared toward the continued implementation of that strategy to leverage our core business. So here is a quick update. Let's start with Asia. A $37 million business where year-to-date revenues have increased 20.3%.

Our business transformation initiatives in Asia have been focused on our distribution channel. We believe that the closer we get to our customers, the greater value we can deliver to our customers, therefore, in markets where it makes sense to to go direct, we have. China is a great example of a market where we've gone direct and seen strong sales growth. But even in other Asian markets where our competition is selling on low price, we're improving sales because of our value proposition of a broad product portfolio, qualify, and service. This is working and I'm pleased with our year-to-date growth throughout this market.

Moving to Japan where our annual revenues are approximately $90 million. As you may remember, given our high market share, our game plan is to simply retain our market share and keep the business stable. Approximately 1 year ago we restructured our Japanese organization to Lean our sales force but expand the service organization with the goal of ensuring the highest level to our customers. In constant currency Q1 revenues were plat to prior year. Q2 revenues grew 4.8% and Q3 revenues declined 5.5%, leaving us essentially flat on a year-to-date basis and right where we want it to be. However, as these results indicate, we are beginning to see increased sales volatility quarter-to-quarter in the Japanese market. At this point we've not observed any particular trends regarding the volatility of this market but we're going to continue to closely monitor our progress in this marketplace. I'm pleased to announce that we hired a new president for our Japan operations Keiko Hattori. She comes to us from GE Healthcare and is replacing Ryoji Sakai, our current President who is retiring at the end of the fiscal year.

Now let me turn to Europe, a $148 million business. European revenues grew 26.5% in the third quarter and 16.3% year-to-date. We are pleased with this growth. Let me comment on some of the structural changes we're making throughout Europe. Again, our objective is to provide better service to our customers. We have gone from nine country specific subsidiaries, each with its own operations, to a centralized location in Switzerland which provides customer service, distribution and inventory management to all European customers. This restructuring will reduce costs and improve service and the results of our efforts are beginning to pay dividends. Revenue growth is well balanced across the product lines in European markets. This is new and we are very pleased.

While we have completed much of the restructuring in Asia and Japan, we are only about half done in Europe. We expect to complete the transformation within the next year. The second half of the European restructuring will be led by Mikhail Gordon, our new President of Europe who will continue to assess this market and make the necessary changes to maintain double digit growth in the future. He joins us from GE Healthcare as well.

Now let me comment on our competition. We are beginning to see some of our competitors compete on two levels. The first is that some of our competitors have begun trying to reposition themselves as blood management companies. Now Brad will talk about this in a minute so I won't steal any of his comments. We're also starting to see some of our competitors compete on price. As shareholders, I want you to understand clearly that this is not having a negative impact on Haemonetics. For example, we negotiated two large plasma contracts earlier this year. Both of those large sophisticated customers chose to do business with Haemonetics because of our value proposition, not because of our disposable prices. With our service, product quality, and software solutions, we provide more value to our customers.

So to summarize, our restructuring outside of the United States has gone well. U.S. year-to-date sales growth is 18.9%. Europe and Asia are also very strong with constant currency revenue growth of 11.6 and 17.7% respectively. This growth is stronger than any we've seen in Europe and Asia over the past five years. We continue implementing our restructuring in Europe. The important point I would like to stress is simple. For the last three quarters, we have been growing revenues double digits while simultaneously transforming our operating structure. We are providing better service and more value to our customers. To do this, while growing revenue 13.5% year-to-date, is a credit to our operating discipline and to the value proposition we present to our customers. To the Haemonetics employees who are listening to this call. Want to thank you and the entire team. With that, I'll turn the call back over to Brad for closing comments.

Thanks, Brian. Let me close our prepared remarks with just a few comments. Clearly this was a very good quarter. We have revenue growth that exceeded our expectations in all geographies and product lines and we're raising our FY '08 revenue guidance. We're reinvesting in the business and our progress with ERP and the geographic reorganizations that Brian talked about has gone very well. In a volatile market, Haemonetics continues to focus on creating shareholder value for the long term.

The stability of our growth, the conservative nature of our investments, the tremendous cash flow generation and the competitive barriers to entry, plus our year-to-date performance indicates to us that Haemonetics continues to be a quality investment now and in the future. Your management team has executed on its strategy very effectively. Both Brian and Chris share a building confidence in the revenue and earnings power of this business. Now I would like to share three strategic reasons why Haemonetics's future is so extraordinarily bright. Number one our base business growth is strong and now sustainable. Number two, our second avenue of growth is growth through acquisitions. And number three, our new products expand our markets. So let me add some additional detail on each one of these points.

First, our base business growth is strong and sustainable. Haemonetics has demonstrated the ability too grow its business and gain market share at premium prices. Specifically this growth has been in our core or base business. As we've indicated in the past and will continue to indicate in the future, our base business should grow 7 to 9% each and every year. Fortunately this year, our year-to-date basis we're growing our base business by more than 10% and this is very solid performance as Chris indicated.

The second avenue of growth is growth through acquisitions. Acquisitions expand our total value proposition for our customers. We're proud of the fact we've made three acquisitions this year and we've integrated those acquisitions during the last three quarters. They're strategic in nature and most importantly meet our very aggressive financial models. Now for Haemonetics to continue to be a double digit revenue growth Company, we simply need to see our base business grow only 7 to 9% per year and acquire new opportunities that complement our strategic vision and represent approximately 10 million to $20 million of incremental revenue. Now as a matter of fact we've done more than in a in FY '08, as our base business is growing more than 10% and the acquisitions have contributed about 2% of the 13.5% on our year-to-date revenue growth.

Strategy number three involves new products that expand our markets. So this is the last area for us to ensure double digit revenue growth in the future and that is involving expanding our product portfolio with devices, services and software through the introduction of new products. This year we're launching 7 new products and have made reasonable progress. We're achieving some but not all of our in ternal plans on new product launches. But because of the strength of our acquisitions and their proper integration and the growing strength of our base business, we're not dependent this year on new products to overachieve our revenue plans. Our strategic portfolio is very diverse and is growing. Yet, what we've learned this year is that through new product introductions we'll continue to gain momentum in FY '09 and '10. We believe our new product launches in the future will be a solid contributor to our overall growth. So in summary, the combination of our base business growth, well integrated strategy acquisitions and new product positions us very, very well in the future. I do not believe we have to, nor do I expect to overachieve all three of these strategies same simultaneously in order to be a double digit revenue growth Company in the future.

Now one last topic. It's important to communicate one aspect of the success that Haemonetics has enjoyed this year and that involves the competitive landscape. Now both Chris and Brian have indicated that we continue to gain share at premium prices. We can give you multiple examples of that, but the bottom line is simply this.

We created a vision to be the global leader in blood management solutions for our customers and when you look at today's supply chain from the time a person donates blood until blood is consumed in a hospital, that supply chain is not streamlined or sophisticated. When you compare the delivery of drugs or medical surgical supplies for use in a hospital environment, direct from the manufactures all the way through the distribution channel, that supply chain is in fact very stable, very predictable and cost effective . Therefore our vision is to be the global leader in blood management solutions for our customers and that means we can have an impact on the total global blood supply chain.

When you think about the Haemoscope acquisition, hat device helps the hospital determine how much a patient may bleed during surgery and therefore for the first time a hospital can determine demand for blood. Now if you back through the supply chain of procuring blood for hospitals, salvaging blood in hospitals or collecting blood in blood banks, through not only our devices but our information technology and services, Haemonetics provides a streamlined integrated supply chain management effort that is unparalleled in our industry. As a matter of fact, as Chris indicated, we serve a $2.3 billion global blood supply chain market and our competitors are niche in one aspect of the supply chain.

So when you think about why we're able to sustain double digit growth in our base business at premium prices it's because our customers are rewarding us with business because we're providing them simply one thing and that is more value. Haemonetics is providing a better value proposition than the niche players in our markets. Now this is a strategy competitive advantage that can't be replicated in the short-term. Haemonetics is uniquely positioned in our markets and this is why Chris, Brian, and I are so darn confident in the growth pluses -- prospects for your corporation. The vision is a competitive advantage to Haemonetics and we are providing unparalleled value for our customers and that's reflected in the performance of your Corporation this quarter. With that I'll turn the call over to operator for questions.

Thank you. The floor is now open for questions. (OPERATOR INSTRUCTIONS) Your first question comes from [Dave Turkaly] of SIG.

I didn't realize you were creating such a growth juggernaut up there.

Thank you, David. It was a great quarter.

As we look at it and then the guidance, we're looking at a quarter of 13 million in sequential revenue you put on the second quarter -- is there anything, if we look at plasma and software as the two that really outperformed what we were looking for, pricing. pricing, increases, spikes that we can point to and any reason why in those two businesses, particularly, we should see anything really slow down significantly looking ahead?

No. As we look at plasma, David, that is a great business for us. It's our largest product line as you know and it's growing on a year-to-date basis at 19.3% over prior year. And in our long term contract with the key suppliers of IVIG, what we've seen is that these contracts allow us starting mid next year to go ahead and have price increases, so we expect that to provide two benefits, one continuing revenue growth but also gross profit increases for us. So that's a stable business. In terms of a comparison to Q4 overall for last year versus this year, in Q4 of last year, we had, as you remember, a very, very strong quarter, so we're up against some tougher comps than our 11 to 13% growth range, we just think is the right growth range based on what we're looking at versus the tough comps of last year. I would ask Chris or Brian to make any additional comments they feel are necessary. Chris?

Sure. One other point to observe is that we had some currency tail winds related to spot rates, unhedged spot rates in our top line sales. Of that 18.6% probably close to 4% of that was related to FX rate movement.

And it's also important to point out that about 4% came from acquisitions, Chris, so our core business grew about 10.8% in the quarter which we're delighted with.

Right.

Thanks. That's helpful. And then one last one for me, would be the $25 million in cash from operations in the quarter, can you just walk us through that number and how you get to $25 million in free cash flow for the year?

Well, obviously we're stronger in the back half of the year than in the front half of the year in our cash flow generation. We have about $7.5 million of depreciation, amortization, about $3 million of improvement in working capital on top of the net income number. That's what gets us to the $25 million of operating cash flow. And so we, in the quarter, generated about $11 million of free cash flow after CapEx.

Great. And one last one. For the New York contingent here, I guess it would be nice if you guys keep one of those OrthoPATs on the side line for Brady this weekend. Talk to you later.

Well, I have to respond as a Patriots fan. Almost 19% growth in sales is indicative of going 19 and 0 for the Patriots for the New York Giants fans. Next question.

You're next question comes from Larry Solow of CJS Securities.

Great quarter.

Thanks, Larry.

Can you talk a little bit more about, you mentioned briefly the new products and all that. I see surgical had actually a nice little uptick sequentially and year-over-year. Was there anything -- was that mostly related to new products.

It's a bit of a classification issue. We rolled our acquisition in there.

Okay. So that's why Haemoscope is--?

Same end market.

Got it.

It's also important just to point out that the surgical market on a quarterly basis was up 11.7% or 3.3% on a year-to-date basis so that might give you more visibility.

Okay. And then I know OrthoPAT has been picking up but is there anything one time or anything that related to this -- you had a pretty nice pick up, over 20% revenue growth and unit sales.

Larry, this is Brian. No, there is nothing in particular. It is really the focused strategy that we've been implementing over the course of the last several course is starting to pay dividends for us as we really drive the penetration within each of the hospitals where we have contracts today.

Larry, this is Brad. You might remember that earlier in the year, we indicated we wanted to be a double digit growth Company in OrthoPAT and on a year-to-date basis we are up 13.5% and clearly the 21% in the quarter we're very pleased with, but I think Brian is right it's taken us a little bit more time to make sure that we can get that growth rate going as we trained ourselves for, that have plenty of time to get comfortable with the product line under Brian's leadership, and with the rest of the team's leadership we've done a good job of trying to make sure that we grow in the existing base of accounts that we have and so that's not a change of strategy but I think we executed particularly well in the quarter and we believe we can continue to execute well with that product line.

Okay. Great. And then just lastly, Red Cell, disposal cells actually looked pretty good but just a question, to play devil's advocate a little bit with the Cymbal placement at 43, that seems to be a little bit below I guess your full year guidance or your goal of 80 placements I think you were expecting?

That's right. We expected 80 placements so with 43 we are a little bit behind of the we had a great start in Q1 and Q2. A little bit slower start in Q3, but we expect -- Pete Allen would tell you that we expect to come in somewhere around 65 units I think at the end of this year. So we're expecting a pretty darn good Q4. We have a number of opportunities or trials that we're working on presently. But I think that's a pretty realistic number.

Great. Thanks a lot.

Thank you.

Your next question comes from Steve Crowley of Craig-Hallum Capital.

Congrats on the nice quarter.

Thanks so much.

Maybe I could drive you down the path of a little more color on the plasma business which is doing so well. You mentioned there are some forthcoming likely benefits from better pricing as we get to next year. You also mentioned that you're making some rather significant investments in driving operational improvements and I trust profitability improvements in the business with your investment in manufacturing, the question is how long do you think it will take for the benefits of those investments on the manufacturing side to trickle through? And the related question is, the success in that business, which is slightly lower gross margin than the other portions of your business is presenting an overall gross profit margin decline due to mix but can you comment a little bit on the gross profit margin trends year-to-date in the plasma business versus a year ago?

Yes. The growth profit trends within the plasma business are pretty stable but it is, as we've often said, a business with lower overall gross profit margins but very, very healthy operating income margins because it's a highly leveraged business. It's -- there's several very large customers so it's a very efficient market to address. In terms of the productivity coming out of our manufacturing that's going to be a late '09 and really a fiscal '10 story as we sort of led you to believe in terms of the time frame of that capital investment.

That's that $10 million investment, Steve, that we're making to expand automation in our Pittsburgh plant and our operations team is working hard on that but we're about 12 months away and we would think it would have an impact of about 100 basis points as we look to a full year once that plant is up and operational so I I hope that gives you some more specificity.

I think the way you have it staged, is you have got good stability here, you've got some price increases built in the situation, six, nine months out and then 12, 18 months out you have the benefits of your automation investment?

That's correct. And it's a long-term plan. When we went into these long-term agreements and we saw the opportunity to invest in this plasma business, we've just been very, very planful of how we do that and so we expected the profitability of that business as we leverage our manufacturing capability, leverage the existing contracts we have and let's not forget that the IVIG market is in fact continuing to grow as we see, our customers continue to do well in that market. We really are very, very pleased with the decision we made about three years ago to aggressively go after this market.

Great. Switching gears on my second question, I'm thrilled to hear that your early read on the integration of Haemoscope is going well. Can you give us some feel for the reaction of customers given the rich cross-sell opportunity you have with that product and your own products into their base?

Steve, this is Brian. Our customers have responded very positively to us because I think there is a a growing understanding and appreciation of our vision and strategically how we expect to approach that. This product fits very, very well into our strategy and their particular needs about understanding their blood demand within a hospital. The fact that it is now part of a -- a company that has a total vision that drives from a product process and software solution standpoint to getting at that for them, I think has given them a greater level of comfort and confidence.

And in terms of how you're rolling this in to sales force and cranking up sales effort, maybe you could just diagram that play for us?

Sure. We have as part of the acquisition, some very good relationships with existing distributors today so we are embracing those distributors as we move this process forward understanding how we are approaching the markets elsewhere and determining the best way to integrate this with our existing sales organization. But at the higher levels of selling within our corporation, we're carrying the blood management vision, these folks have now all been trained on the product, they have embraced the product and they are already carrying that message forward into their accounts.

I would just add, Brian, that we've met with all the team at Haemoscope and this is a great organization. Their national accounts team is really sensational and they have done a tremendous job and they will fit right in and are fitting right in very nicely with the Haemonetics team so we are really pleased with the -- knew this going in, but we're really pleased with the quality of people and their ability to really focus and drive the value proposition.

They're a great product fit and a great cultural fit for us.

Your next question comes from Joshua Zable of Natixis.

Thanks for taking my question.

You bet, Josh.

With so many great things going on, its guys like me that have to pick on the little things. So I apologize here. But just asking about the new products, just in terms of your outlook from an internal perspective, have you taken down the outlook in terms of the newer products to make those numbers in the fourth quarter or are you still -- are you expecting a step up?

Josh, what we're looking at is you may remember at the beginning of the year, we planned to do about 6 million to $8 million in new product sales and on a year-to-date basis, we've done just shy of $3 million, so as we look going forward into the remainder of the year, we think we'll do somewhere between 4 million and $5 million of new product sales. So that's a little bit less than we anticipated. On the other side, our guys have been pretty darn focused at driving OrthoPAT to a 13% increase over prior year, Pete Allen and the Donor division has been driving RBC growth of 12.7% over prior year so I cannot whack our sales force for failing on all counts when we're doing a pretty good job of implementing new products, slightly below our internal plans but on the other hand we're doing so darn well in other areas I can cut ourself some slack on that.

And I'd certainly reflect, Josh, as well, in our markets outside of the United States, this is a team in the last 12 to 18 months has been very focused on repositioning themselves in front of the customer and I couldn't be prouder of the job that this group has done and at the same time drive to a double digit growth profile. You may recall when we talked about our restructuring efforts we expected -- it wasn't about saving money, although there was going to be some savings but it was about getting us to that growth profile. We expected to be a double digit growth profile within about 24 months. We're well ahead of schedule on that.

That's a good point, Brian. As matter of fact it's probably good to put some perspective on the whole concept of us being a double digit growth company. On a year-to-date basis, our revenue has increased 13.5%. You have to go back to 1994 before you would find a time when Haemonetics was a double digit growth Company on the top line. So it's the base business that is clearly doing well. It's the well integrated acquisitions and the new product story is really in FY '09 and '10. We're not feeling the pressure of having to produce for new products quarter to quarter this year because we're doing so well on the other aspects of our growth.

Josh, this is Lisa, just to be clear, we remain just as bullish as we were at the outset of the introduction of these new products on each and every one of them, but as in the case of our previous products, we're creating new markets, we're building markets and we recognize that that takes time to do a good job of it.

Great. We'll cut you some slack too. Don't worry about it. Just in terms of acquisitions, I know obviously you had some recent activity here. Just looking forward, do you guys expect that sort of there is a digestion period or sort of as we think about '09 you're continuing to look. I realize that's part of your long term strategy but you have sort of done a few quickly here so just trying to think of your thought process at this point?

We'll continue to look. It's a key part of our strategy and you really just in that business of business development, you can't turn it off and on. You really have got to keep looking for great opportunities when they -- so that when they show up you can capitalize on them. And I think looking at the bandwidth of the management team and the way that we've handled the acquisitions that we've had so far I think we still have some capacity to do certainly these bolt-on acquisitions that we've been looking at of relatively modest size. We're not going to bet the farm on them but I think we can handle some more and we keep looking.

Chris, I would just offer to our shareholders that this team going through a great learning and that is how to integrate business as well, while simultaneously growing our business in double digits. Many companies stumble in integrations and we've done one acquisition per quarter over the last three quarter's under Chris's leadership and between Chris, Brian, and the rest of the teams here we're integrating these businesses very well. I'm not yet convinced that I can say that we're perfect in integration and no one ever is, but I think we're learned a lot about how to integrate companies well and as we talk to the teams that are now part of Haemonetics, number one they are excited to be with us, they understand our vision, they are Haemonetics employees and we're all focused on better serving the customer and to really drive our vision. So we've really learned how to integrate very very well in the short term.

To that point, we're really targeting organizations for acquisition that represent a very strong cultural fit with who we are today. So we have an advantage at the outset of every integration.

I would also remind our shareholders that we've been very conservative regarding our investments. We have some very strong financial hurdles that we look at when we acquire businesses and if you take Haemoscope as the most recent acquired company, it was a business that was about 15 million to $16 million in sale sales with accretive gross margins, accretive operating merges. It has not dilution effect this year. It will be accretive next year. So we're really looking that strong financial profile and if we look back at the five years I've been with the Company we haven't done acquisitions just to do them, we have strong financial metrics that we try to find in any company we bring on board to Haemonetics shareholders.

And I good strategic fit.

Absolutely right.

Your next question comes from James Sidoti and Sidoti & Company.

Good shall mog. I'm glad to hear you let Brian back in the country.

Well, he's here only on a short term basis.

Rumor has it there's a game this weekend, Jim.

Just let me remind you, football is like stocks. Past performance is no guarantee of future success. Spoken like a New York Giants fan.

You said you did about $1.5 million during the quarter.

Yes. Couple questions on Haemoscope, or the acquisition. You said you did about $1.5 million during the quarter?

Correct.

Where is that revenue booked in terms of the product break down?

We just put it in with surgical because of the same end market. It was kind of an orphan.

With diagnostics.

It's surgical, diagnostics as a reference.

Can you break out -- was that primarily consumable revenue or was it equipment type revenue or?

It was a mix, but there was a strong consumable slope.

And are the margins on the consumable--?

They're comparable.

Their comparable. And were there any integration charges related to the acquisition, one time charges in the quarter?

No.

And then on on the OrthoPAT you said there were 130 placed during the quarter?

Yes.

Can you tell me approximately what the worldwide number of units are out there now?

Jim, we're going to have to get back to you. I don't think we have that number handy. But in terms of units in the quarter. We sold in the United States about 12,500 disk units, disposables which is up significantly from the 10 to 11 range that we had. But we'll have to get back to you with exact number on the number of placements. I don't know, Brian.

I can tell you in the U.S. it's roughly about 1550.

And I'm sorry -- it's what.

Roughly.

That's 130 so far in the year you've placed, right.

Yes.

All right. Great. Well good luck this weekend. But just be careful. The younger brother can surprise you sometimes.

There's a lot of experience with that family.

(OPERATOR INSTRUCTIONS) Your next question comes from David Lewis of Morgan Stanley.

Good morning, guys.

Good morning, David.

First, I have a few questions here. On the gross margin topic, there is a lot of things moving around from plaza to higher software being pulled forward this quarter to obviously the acquisition to equipment. Can you help us tease out, Chris, exactly what is positively affecting GM and what is negatively affecting GM and maybe give us a sense of how much plasma impacted the gross margin in the quarter or for the year.

Okay. Everyone is saying, I'm glad Chris got that question. Generally I would say the things that are positively affecting gross margin were the strength of our OrthoPAT and the strength of our Red Cell disposables so our Red Cell disposables gross margins are in that 50 to 60 range of 50 to 60 range and the OrthoPAT is even higher than that. On the negative, it's the strength of the plasma business which has margins on average across the whole organization of in the low to mid-40s. So -- and in terms of giving you a weighted balance and all of that, I'm not sure I'm quite prepared to do that at the moment.

Okay, that's helpful. And Brad, obviously plasma is very, very strong. Which contract is more responsible for this growth right now? Is it Hema, is it Talecris, is it prior contracts, is it share gains?

David, it's clearly balanced across all of the contracts, that's the great thing about where we have come from, you may remember the first one we signed with ZLB, that has an impact over the little last year and clearly going forward this year. Clearly the most recent ones of Octapharma and Hema AG both in Europe are beginning to start to see some impact. Talecris has had impact so it's really staged out and very balanced in this growth.

And two more quick ones. I'm trying to understand, Brad, your comments around competition. It seems as if the competitive landscape is increasing but you're not seeing an impact. Does that simply mean you're not seeing an impact but it hasn't been as easy to gain share given the restructuring?

When you think about the fact that only in the -- let's take a couple of markets. Only in the plasma market that is growing about 8%, on a year to date basis globally we're growing 19.3% over prior year. So obviously we're taking share. If you think about other marketplaces, generally, many of them are flat. For example platelets is a flat growth market yet we're growing on a global basis 6.8% over prior year. So we're obviously taking share gain. What we have seen, and Brian can comment on this, we have seen some of our competitors in an effort to try to stop our ability to pick up share that then lowering price yet our customer have in fact chosen to give us large chunks of business as we've continued to gain share and we're not dumping price. So there is a reason why these smart customers are doing business with us and that is that we're providing a value proposition that is greater than the delta between those price points.

Okay. That's very helpful. And so lastly just on blood management strategy, one thing that is clear over the last 9 months the depth of your product offering in broader blood management, whether it be surgical salvage or software and obviously now with TEG, it is increasing. My sense is that it's going to require your average rep to be spending a lot more time on a per hospital basis meaning his average territory would likely have to shrink but we haven't heard you make any conversations about increasing the size of your broader sales force. So I'm having a hard time understanding as your product breadth increases, if you don't dramatically increase sales how do you execute on this blood management strategy given it's a highly complicated sale?

David, that's a fair question and one that we'll talk a little bit more about when we have the opportunity to tell you about our future plans for FY '09 and beyond. But I would tell you just in a general sense, our focus on blood management as it relates to the individual businesses today within the patient businesses within the donar businesses is being very very well received. The strength of these products and services and particularly our software solutions is taking hold. We're going to be building that bridge as Brad talked about and the entire management of the supply chain that connects those two businesses and that's the real strength of our story and that's where I think you'll get a little more color from us for the future.

Your next question comes from the [Justin Fareonie] of Tamarac.

Just a couple of questions on the nit-picking category. You talked about fourth quarter last year being a difficult comparison, but I'm looking back over the last several years and your fourth quarter is traditionally your strongest quarter from a revenue perspective and last year it wasn't as strong as the previous three quarters so I'm just trying to understand where -- the context is of those comments as we are going into the fourth quarter of this year?

When you look at the detail numbers, we did have a very strong performance in Q4 versus for instance our Q3 comp which was easier last year. So we continue to feel that we'll achieve our growth targets in the guidance that we provided and which is on our website. So from where we are at the end of Q3 and through our growth scenarios that we've provided on our website, which will be updated this morning, you can get an idea of where we think Q4 will end.

Sure. But to get to 13% revenue growth for the year, you need down sequential $5 million.

Well, remember that--.

So I'm just trying to square the two.

Remember that the way FX works in the financial statements, we had in the quarter almost $4 million of positive impact on the top line, which is unhedged spot rate movement related to the foreign currency exchange. So we tend to hedge net long positions. So we have naturally, we have euro sales and we have euro expenses, but -- so we only hedge at a level of about 60% of our euro sales just as an example and that leaves us with a certain amount of euro sales that float and give us spot rate volatility in the revenue lines. That's why we tried to highlight the fact that constant currency, our growth rate was 10.8% in the quarter, and 10.3% year-to-date and we just do not want you getting ahead of us is the best way to put it.

Fair enough. Was that foreign exchange benefit or impact to earnings this quarter?

Good question. In terms of the quarter, at the earnings line, if you wanted to look at constant currency, EPS would have been about $0.02 higher.

Okay. As far as Haemoscope is concerned. I assume there was a degree of purchase accounting inventory that ran through the income statement this quarter. Could you quantify that for us?

It was a nominal amount. This is a company that basically turns inventory very quickly. They have a virtual manufacturing process. Their reagents are supplied by third parties. Their equipment is made by third parties. And so they just get it in and ship it. So she do not have large inventories and therefore there wasn't -- and there's not a lot of manufacturing value add, if you will, that you would associate with most manufacturers so it was a nominal amount.

Your next question comes from John Putnam of Dawson James Securities.

Let me follow-up on that. Is there an opportunity to take that manufacturing in-house?

Sure. There is always opportunities. We're in sort of the stabilization phase. We got -- we're sort of committed to the status quo but we constantly reevaluate and certainly with these third party manufacturing arrangements. Probably not with the reagents in the short term, but with the equipment, certainly it's a possibility.

Okay. And then just following up on plasma, are there any other potential large contracts that could still be signed or have you pretty much penetrated the large plasma fractionators?

John, this is Brad. We've done a real good job with the existing contracts. As you may remember, Fenwall was spun out of Baxter, obviously we did no business with Baxter because they had a company similar to ours for many, many years.

Right.

So with that purchase by the Texas Pacific Group of Fenwall, potentially some day Baxter could become a customer of ours so we would have to look at that as an opportunity.

Then one final question. I noticed that R&D was down sequentially, is there any reason for that or could you go into that a little bit more?

That was as much as anything, timing. As you may remember as Chris indicated in the 2Q call, we see some of our expenses flat lined over the year or in the first part of the year and then streamlined as you look in the back half of the year, so that's just a timing issue. You may remember last year that we tightened down expenses in the last two quarters of the year as well. So it's a timing issue, not an R&D specific issue.

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

Thanks, operator. In a very volatile market and all of you investors have seen the volatility in this market, I would share that Haemonetics continues to be focused on creating shareholder value for the long term. The stability of our growth, the conservative nature of our investments, the tremendous cash flow generation of this business, the competitive barriers to entry plus our very strong year-to-date performance indicates to us that Haemonetics continues to be a quality investment now and in the future. Your management team has executed extraordinarily well in all strategies and both Brian and Chris share they are building confidence in the revenue and earnings power of this business.

I think FY '08 is turning point for your Company. When you consider the fact we're implementing Company wide an ERP system and we're on time and on budget with that, that we're launching 7 new products simultaneously, that we've acquired three companies and integrated those companies during the last three quarters and that we've done a tremendous job of increasing our growth profile with our reorganizations in Asia, Japan, and Europe, I think the turning point for your Company is not just double digit growth in the top line, but the ability of this management team to simultaneously do a number of things while in fact getting a growth profile that we have not seen in 13 years. So we feel very, very good about the ability of the management team to juggle many things simultaneously when many management teams would drop the ball on any one of those challenges in any one 12-month period of time.

So with that, to our shareholders, we're proud of our accomplishments and I would like to thank the employees of Haemonetics for their outstanding focus on delivering outstanding results this year. We'll look forward to visiting with you in May on our conference call for Q4 and our investor conference will be in New York in late May and we look forward to seeing you all then. Thank you so much and thanks for joining our call.

Thank you. This concludes today's call. You may now disconnect.