Haemonetics Corp (HAE) 2008 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Haemonetics fourth quarter fiscal year 2008 conference call. At this time, all participants have been placed on a listen only mode and the floor will be open for your questions following the presentation. Let me introduce Julie Fallon, Director of Investors Relations for Haemonetics.

Good morning and thank you for joining Haemonetics fiscal year end earnings call. Today 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 discuss the highlights of the year. Chris Lindop will review our operating performance and fiscal '09 guidance, and Brian Concannon will share our progress on transformation. Before I turn the call over to Brad, I want to review a few items that affect our comparative results.

You may remember that in fiscal '07 four items impacted our results. First the favorable resolution of certain tax contingencies. Second, the restructuring of our Asian businesses. Third, the in process R&D charge related to our acquisition of Arryx. And fourth, a favorable legal settlement. These combined to negatively impact fiscal '07 net income by $3.5 million. For comparison purposes, we've excluded these costs from our fiscal '07 adjusted results.

Now moving to fiscal '08, we also had restructuring cost so our adjusted full year net income excludes $4.2 million associated with the ongoing restructuring of our European business. As is our normal practice, our press release and website include a complete P&L and balance sheet. Our press release also includes selected reconciliations between our GAAP results and our results adjusted for the items I just mentioned. But note that 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.

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 start by making a few comments regarding our Q4 performance. Simply put, I'm very pleased with our performance.

For the fourth consecutive quarter, we achieved double-digit revenue growth with revenues increasing 19% and that's 13% in constant currency. The growth drivers of our business were consistent during Q4 and all of fiscal '08. Plasma, red cells, OrthoPAT, equipment and software and services all grew very, very well,l. This year our geographies in Asia and Europe, showed outstanding growth. Let me turn to our full year performance and why this was such a critical year for our shareholders. First from a financial standpoint we're very pleased.

We overachieved the high end of our sales and gross profit guidance ranges. We achieved our operating income target and with EPS at $2.10, we finished the year at the high end of our EPS range of 207 to 212. This was a fine year on all parts of the P&L. In a financial marketplace that has been extremely volatile, Haemonetics' consistent operating performance is noteworthy. Now five years ago we set out to create and sustain shareholder value. Since then we have added more than a billion dollars in market cap.

Our success comes from a disciplined focus on two strategies. You know them well, strategy number one is leveraging the core business to improve profitability and strategy number two is expanding the business by leveraging our three core competencies. Fiscal '08 was a very strong year as revenues, operating income and EPS all grew double-digits for the first time in many, many years. Fiscal '08 was a pivotal year and here are some of the highlights. We added contracts with Haema AG and Octapharma Europe in our commercial plasma business. We expanded our business with the U.S. Department of Defense.

We launched seven new products throughout the year. We made two strategic acquisitions, Haemascope and Infonale. We completed phase one of ERP transformation, converting all geographies, sales, service and financial functions to our new Oracle based system. We're on time and most importantly we're on budget with this strategic $35 million project. We expect a complete ERP this fiscal year. We restructured our European, Japan and Asian operations producing strong results.

Asia and Europe had double-digit revenue growth for the first time in many, many years. We strengthened our management team and built on our strong succession plans. At no time in our history has the breadth and depth of our management team been stronger. We completed a $75 million stock repurchase, while making two strategic acquisitions amounting to $46 million and still finished the year with more than $130 million in cash and just $12 million in debt. We began implementing a long-term vision for your company.

Today Haemonetics is the global leader in blood management solutions for our customers. No one company can deliver the broad portfolio of products, information technology platforms and services that Haemonetics delivers. No other company can service the entire blood supply chain, from donation to transfusion. We believe the financial results achieved by your management team are an output of leadership. This was our strongest year in the last five years and really sets the stage for a strong future.

Now, why do I say this? Well, we believe that our future is best predicted by our past. Now, five years ago our market potential was only $900 million. Today our market potential is more than $2 billion. Five years ago our revenues were only $337 million. Today our revenues are $516 million. Our five-year compounded annual growth rate on sales is 9%, operating income is 23% and earnings per share is 20%. And these CAGR are despite some significant challenges.

We have really transformed from a niche medical device company, to a total blood management company. So in a volatile financial market, your company has and is performing very well. Fiscal '08 was a year to transition us to the kind of long-term revenue growth you should expect from a company like Haemonetics. Last year we shared with you a model for our growth. We said we had three ways to grow: First our core business, second, new products, and third, acquisitions. Through these we aspire to be a company that consistently sustains a five-year compounded annual growth rate of 10% to 12% in revenue.

In fact, if you back out currency from our fiscal '08 performance, we grew 12.6%, with core products, new products and acquisitions all contributing. Now, this was the model we shared with you last year and the model we believe is sustainable. As we look out five years, we aspire to a five-year revenue CAGR of 10 to 12%.

Now, moving to operating income, our five-year strategic plan targets a CAGR of 12% to 15%. Our past five year CAGR was 23%. Now, you had asked why our operating income growth rate will change. Well, recall that during our repositioning phase we really just fixed the business. Part of this, if you will, was grabbing some low hanging fruit to improve gross margins and reduce expenses, thus, our strong growth in operating income.

Now we're in a transformation phase. We are positioning for stronger, sustained revenue growth and we need to invest now in the business to achieve that long-term growth. Consistently achieving 12% to 15% in operating income will deliver significant shareholder value over the next five years. As all our shareholders know, this management team has been focused aggressively on growing operating income.

Our compensation is tied to operating income growth and it's our belief that by growing operating income in the 12% to 15% range, we'll continue to consistently drive shareholder value. Our FY08 performance laid a solid foundation to achieve these longer term aspirations.

With that, let me turn the call over to Chris Lindop. Chris.

Thanks, Brad. Before I review the numbers, let me repeat a very simple investment thesis for Haemonetics. We have a diverse product portfolio with multiple ways to win. We participate in markets that have more than $2 billion of opportunity, the competitive landscape is changing in our favor. We see little risk in our ability to grow profitably, neither market dynamics nor regulatory or reimbursement issues, will affect our future growth. Our cash flow is strong.

With that, let me move to the results. Regarding the fourth quarter, let me just say that we were pleased with a consistent and positive result. Briefly the Q4 highlights were 18.7% revenue growth, 20.2% gross profit dollar growth with 70 basis point gross margin improvement and 10% operating income growth and earnings per share of $0.58 in line with our expected finish. All in all, a very good quarter.

Now moving to our full year performance, revenue grew 14.9%, making the year one of our strongest revenue growth years in recent history. Now let me break this down by product. Starting with our largest business, plasma. For the year plasma disposable revenue s $155 million, up 22.2%, driven by U.S. plasma revenue growth of 26%. In Q2, we shared with you that we expected the plasma business to grow double-digits for the next few years. Our confidence stem from two areas, one, the fundamentals of the market and specifically the explosive growth in plasma collections and the increasing demand for IVIG and second our strong device placement.

Let me remind you that we placed 2300 devices in fiscal '08 and for every 2000 devices we will generate an incremental $26 million in annual revenue, when they become fully operational, 18 to 24 months after installation. We believe in the long-term growth of the plasma business for the reasons I just mentioned. So this was a particularly good year as we implemented the [Tela-Crit], Haema AG and Octapharma Europe agreement. We are very bullish about this business and anticipate that plasma will continue to be a growth driver. Now let me move to our software and services business which performed very well. Software and service revenue was $39 million, up 17.1% for the year.

Revenue growth is driven by the acquisition of IDM and organic growth in our plasma markets. I am pleased to announce that we have expanded our agreement with the U.S. Department of Defense. The revised agreement will contribute about $8 million in revenues over the next two years. We will leverage our information technology expertise, to manage the blood supply chain with the Department of Defense. This is a good piece of incremental business because it demonstrates our strength as a blood management company. This contract, as well as other contracts already in place, give us confidence that software will continue to be a growth driver for the company.

Our red cell business with $49 million in revenue, did well as revenues were up 12.6%. Now, this growth was a combination of equipment and disposables. Red cell disposable revenue was $46 million, up 6.8%. In the year we launched the Cymbal system. We placed 75 Cymbal systems driving some of our red cell equipment sales and positioning us very well for future disposables growth. This was a good start in a limited market release. The Cymbal goes on -- into full market release this quarter, so we expect new systems placements and growth at existing customer sites will continue to drive strong revenues.

OrthoPAT disposables revenue was $34 million, up 12.4%. In the year we placed more than 175 devices in the field. So, again, these equipment placements will drive future disposables revenue growth. The orthopedic market remains a growth market and it's underserved in blood management. And to close-out revenues, let me talk a little bit about equipment.

Equipment revenue, which was about $33 million for the year, grew 47.6%. These particularly strong equipment sales were driven by plasma devices in Europe, platelet devices in Europe and Asia and red cell devices in the United States. Equipment sales will decline to more normal levels in fiscal '09 after an extraordinary performance in fiscal '08. We are pleased with our fiscal '08 sales in as much as they are a leading indicator for future disposable sales strength.

Now let me switch gears. We have three ways to grow the business: Core products, new products and acquisitions. I have covered our core product line growth, so now I'll address new products and acquisitions. For the year new product growth was slightly below our expectations as our sales team capitalized on competitive market forces and focused on our core business growth. We are not disappointed with this because when you exclude currency, acquisitions and new products, our core business grew 9.1% for the year, and this is higher than our long-term growth plan for the core business.

Let me remind you that we are creating new markets and the process of changing customer behavior takes time, but we have confidence in our ability to penetrate these markets. We finished the year with more than $4 million in new product sales. Highlights from new products include the placement of 75 Cymbal systems and 50 CardioPAT systems and the FDA clearance of our eLynx and Symphony software. So we had a good start but we have higher expectations. Fiscal '09 growth -- fiscal '09 will be a growth year for new products and more on that in a minute.

Now let me just comment on our most recent acquisition, Haemoscope. The integration has progressed smoothly and revenues are growing at more than 15% as expected. So let me state turn to the rest of the P&L. Gross profit was $258 million, up 13.4%. In the year, the substantial growth of our plasma business affected mix.

As a result, gross margin declined from 50.6% to 49.9% year over year. We expect margin improvements in fiscal '09 and I'll cover that later. Operating expenses grew at 77% of incremental gross profit dollar growth, higher than our plan due to ongoing investments in the business for future growth. But nonetheless, expense management still drove 10% operating income growth and earnings per share finished at $2.10 for the year, up 10.5%.

Moving to the balance sheet, we generated $76 million in cash flow from operations and invested $57 million in capital expenditures as we invested in ERP, plasma equipment and software development. After our $46 million investment in Haemoscope and Infonale acquisitions and a $75 million share repurchase, we have almost $134 million in cash and just $12 million in debt. So all in all, fiscal '08 was a very good year.

With that, let me move to our fiscal '09 guidance. Our guidance is revenue growth of eight to 11%, operating income growth of 14% to 17% and earnings per share ranging from $2.31 to $2.41. And we have posted income statement and product line growth scenarios on the website that you may find useful. The revenue growth drivers of fiscal '08 were solid and provide as a strong base for growth in fiscal '09. There have been no fundamental changes in our market.

The plasma business will benefit from ongoing growth from the fractionation market and from key contracts we have signed in the past two years. The software business will grow as we implement contracts sold in fiscal '08 and as we launch eLynx and Symphony. The OrthoPAT business will continue to strengthen as disposables use increases on devices placed in fiscal '08. OrthoPAT will also benefit from product line extensions that we believe will speed adoption of the technology.

Finally, the red cell business will grow faster as blood shortages become more routine as we ramp disposable usage and as the Cymbal moves into full market release. With regard to geographies, we continue to expect that North America, Europe and Asia will grow double-digits in fiscal '09.

Now let me address Japan. As reported last quarter, we are seeing variability in Japan sales quarter to quarter with revenues both up and down. And because of this variability, we plan Japan revenues to be down modestly in fiscal '09. We also expect equipment sales to be down in fiscal '09.

Okay. Moving down the P&L. In fiscal '09 we have seen significant improved -- improvement in gross margin and operating margin. Gross margin is planned to increase from 49.9% to about 51.5%. Now, that's more than 150 basis points and it will be driven by mix, structural cost savings, business transformation and currency tail winds.

As we look at expense management, we have done a great job of leveraging the P&L over the past five years and fiscal '09 will not be an exception. We expect expenses to grow at a rate of 65% of incremental gross profit dollar growth, driving operating income growth of 14 to 17% and we expect fiscal '09 operating margins to increase about 70 basis points from 14.8% to 15.5%. Earnings per share will grow between 10% and 14% in fiscal '09. Now, this is lower than the operating income growth and reflects a declining interest rate environment. Simply stated, we will earn less interest income on our invested cash balances in a lower interest rate environment.

As a result, in the short term our EPS growth will be moderately constrained, but we continue to believe that operating income growth of 14% to 17% is the best indicator of the long-term health of your company. With regard to our fiscal '09 expectations, we will take a restructuring charge of $7 to $8 million to support our global transformation efforts. Our guidance excludes these costs.

Brian Concannon will review the strategic significance of the restructuring and the ongoing benefits in a minute. To close out my financial comments, we expect to generate over $40 million of free cash flow after did you telling the cash cost of the restructuring. This position us well to fund future acquisitions and a stock repurchase and I am also pleased to report that the Board of Directors has authorized us to purchase $60 million of Haemonetics stock.

So to close, if you like fiscal '08, you're really going to like fiscal '09, briefly here's why. Revenue growth of 8% to 11% dropping through to 14% to 17% operating income growth with EPS growing between 10% and 14% and gross and operating margin expansions with strong cash flow. Two years ago we set out to transform this business. In fiscal '09 is the final phase of that transformation with a completion of the ERP manufacturing plant automation and the restructuring, we will provide significant benefits in revenue growth and margin improvement in fiscal '10 and beyond.

Now with that let me turn the call over to Brian.

Thanks, Chris. Chris just talked about the numbers and how we're building the business. I'm going to talk about how we're changing the company to deliver these results. As you've listened to these calls before, you've heard us talk about what we call transformation. I can assure you, positive transformation is the right description for what has been going on at your company. Let me explain.

Five years ago we set out to fix the business and we did that. This was our phase one, repositioning for success. First, we restructured the U.S. business into the leaner, donor and patient operating structure we have today. This reduced structural cost and got us closer to our customers. Then we rationalized product lines, raised prices and reduced our manufacturing costs and what happened? The North American business has a three-year revenue CAGR of more than 20%.

Next in fiscal '07 we transformed Japan, resizing our structure to align it with modest growth expectations going forward, given our 70% plus market share. At the same time, we strengthened and grew our Asian Pacific structure to align it with our expectations for significant growth in that market. Frankly, these changes were very different for each of these markets, but they paid significant dividends.

Then we moved to the toughest job yet, we transformed our European operations for growth. This included moving to a shared services model of centralized customer service, finance, distribution and warehousing. We reorganized the sales and marketing organizations, adopting a new model of pan European sales and global marketing. We changed our distribution models too, going direct in some countries and streamlining our distribution channels. And at the same time that all of this was going on, we began implementing a single platform, enterprise wide ERP system, we knew would be critical for growth.

Did we take on a lot? Yes, we did, but it was necessary and it was worth it. Since we began this transformation five years ago, we have increased revenue $179 million.

Last year Europe delivered 18% revenue growth and Asia did even better with 22% revenue growth. That's the double digit growth we were targeting, but about 12 months sooner than we planned when we began the transformation. And over the past five years, we have improved results on more than the top line. Our gross margin improved from 46% to 50%.

Operating income, our favorite line on the P&L, increased nearly $40 million to $76 million. As an output of all that we've accomplished, our share price improved from $22 to $57, translating into market cap appreciation from $500 million to $1.5 billion. Now, as important as all of these financial results are, there's something else. The organization learned how to implement and accept change fast. These five years have been an incredible journey, but remember, we said we would take three years to fix your company and then three years to transform the company.

So in fiscal '09, the last year of transformation, there is some unfinished business. Once completed, it will position us well to sustain the results you have seen and to deliver on our vision of being the global leader in blood management solutions for our customers, while creating increased shareholder value. The areas of the business will restructure or transform next include manufacturing, quality, R&D and Europe phase two. To put it simply, the benefits of these changes will be significant.

We expect margin improvement by more than 150 basis points in fiscal '09 and another 150 basis points in fiscal '10. And we will take those margin dollars and invest at the rate of 65% of incremental gross profit dollar growth, to fuel our blood management solutions vision. This will result in more products and more services to help our customers reduce blood costs and improve patient care. We will expand operating margins by 70 basis points in fiscal '09 and another 70 basis points in fiscal '10.

We will provide more detail on some of our ideas for new products that support our vision, at our investor day scheduled in New York for later this month. The transformation actions we take this year will require restructuring charge of approximately $7 to $8 million. For competitive reasons and out of respect for our employees, I'm not going to share our detailed plans on this call. We will give you more visibility into specific actions at our upcoming investor day. But remember, this is not our first foray into transformative change. We have significant experience at this.

We have completed phase one and achieved outstanding results. We have confidence in our performance proves that we know what we are doing in change management. Our confidence stems from our belief in our people. They have worked very, very hard. They believe in our vision. They are energized, they are committed and they have delivered. I'm enormously proud of their performance this year and want to thank each and every one of them.

Now with that, let me turn the call back to Brad for final comment.

Thanks, Brian. I've had an opportunity to visit with many of our shareholders and many of you have commented on the consistency of our message and performance. Frankly, we take great pride in our consistent leadership. We firmly believe that the future is best predicted by our past performance. Fiscal '08 was an excellent year. Fiscal '09 will be just as positive.

Our revenue growth drivers remain very strong. We will see both gross and operating margin improvement. Operating income in fiscal '09 will grow slightly higher than our expected five-year compounded annual growth rate for the future. We expect operating income growth in the range of 14% to 17%. We'll generate over $40 million in cash and have plenty of cash to expand through possible bolt on acquisitions or stock repurchase.

The investments in restructuring to complete the final phase of business transformation, will solidly position this business for growth and improved profitability as both Brian and Chris have said in fiscal '09 and fiscal '10. In other words, in a volatile financial market, our consistent drive towards our vision to become the global leader in blood management solutions for our customers, continues to create long-term shareholder value. Fiscal '09 will build on a very strong base of performance in fiscal '08.

Let me share with you one recent comment from a shareholder. When I described our past five years and our consistency of execution regarding our performance, I made the comment to the shareholder that perhaps were becoming maybe a slightly boring company and his response was, Brad, you tell us what you're going to do and then you and your team do it consistently. That's not boring. That's great.

That's why I believe if you like fiscal '08, you're really going to like fiscal '09. It is very consistent both strategically and operationally. We have and will continue to build your corporation and to leverage our leadership position as the global leader in blood management solutions four our customers. Fiscal '09 will be another great year and with that, we'll turn the call over to your questions.

Thank you. The floor is now open for questions. (Operator instructions). Your first question is from Steven Crowley with Craig-Hallum Capital. Please go ahead.

Good morning.

Good morning, Steve.

A couple questions for you around the software and services business. You're telegraphing continued nice growth in that business. The performance of the business in the fourth quarter might represent really the only, first blush -- blemish on a nice Q4 performance. Can you tell us what's going on there and what drives some of the variability of the business and how we should think about the consistency of that business in 2009?

Hey, Steve, this is Brian. I'll take that question for you. What you saw happen in the Q4 was the comparison to the services part of our business, a contract with a large blood bank customer that will not repeat itself, worth about $1.6 million. So we continue to remain very positive and very bullish about this business independent of that.

In your commentary about the department of defense, Chris, and a sizable incremental piece of business, I want to understand how incremental that is. My sense is that you've had some run rate business with the Department of Defense and how much of this is really a step up versus a continuation? And did I hear that blood bank service contract was $1.6 million annualized?

Steve, this is Brad. The Department of Defense contract you know we've had for some time. This as an extension and an addition to that contract, so it's going to be $8 million incrementally over the next 24 months. What's important about that, and the reason Chris mentioned it is not the fact of that particular $8 million contract, but it does show the fact that we're transforming this business from being a medical device company to a blood management company. Specifically if we're able to help the Department of Defense, a governmental agency, manage their blood supply chain in a time of war, all the way through that blood chain, that really speaks to the software, the services, the product lines and the consulting services that are a great value not only to this customer, but to many customers in the future. One thing I would also mention in terms of our software business, we're expecting revenue growth in FY9 of about 15% to 20% and we have that on our website, so you would expect this business to perform just as well in FY9 as it did this year.

Okay. And the one contract that's no longer recurring or progressing that Brian mentioned, is a blood bank services contract that was $1.6 million on an annual basis that's now fallen off?

It was actually, Steve, in Q4 last year and it was a consulting services contract providing Six Sigma consulting to a large blood bank customer where we're actually helping them to think about how they operated their business and how they could be more efficient and it was a very successful contract. That was an episodic contract that occurred last year. We don't have an equivalent contract in this year.

Thank you. Your next question is from Larry Solow with CJS Securities. Please go ahead.

Good morning. Good quarter.

Thanks, Larry.

Thanks, Larry.

Just to look out into '09, I know my questions are limited so I'll just jump right to '09 on your guidance, could you just elaborate a little bit more? It looks like operating expenses I guess will continue, will be rising and kind of eating a little bit into your actual gross profit expansion?

We've always said, Larry, that we're going to invest in the business for the long term and of course we continue to do that, and the metric that we're using is 65% of our gross -- gross profit growth is committed to those investments, but, when you look from top line at 8 to 11% down to operating income at 14 to 17, we feel pretty good about that.

Yes, that's the positive drop through, Larry that we have expected and you've seen over the last five years and we continue to expect into FY09 and as both Chris and Brian said we expect 150 basis point improvement in gross margin in FY09 and we'll see about a 70%-basis-point improvement in operating income. So you're going to see the traditional positive drop-through that we've become used to performing to over the last few years.

And your target historically, right, has been 50% of gross profit being spent; is that right?

In the past, in the first three years when I joined the company it was 50% because we were really reorganizing the business in ways that we could get that low hanging fruit I reverend in our prepared comments, Larry. Now, as this business transformation goes on, we're finding that with the new product launches and with the competitive markets in the state they are, we're able to invest more into the business to sustain that top line growth of the 10% to 12% we hope to aspire to over the next five years. So we have to invest a little bit more in expenses and a new ratio which will be characteristic. Next few years will not be 50% of incremental gross profit dollars but 65% of gross profit dollars which will still provide tremendous leverage as you're seeing in our FY09 guidance from sales all the way down to operating income.

Thank you. Your next question is from John Putnam with Dawson James Securities. Please go ahead.

Thanks a good morning. I think you've done a great job from transforming the company from a device company to the blood management company that you have become. But I guess what I wonder is, Brad, if there are other areas in terms of blood management that you need to, I guess, add to your product offering and round out your current product offering.

Yes, John, it's a great question and at our investor conference we're going to talk a little bit about Arryx, the tremendous progress we've made in Arryx. We're also going to show you some new opportunities to round out that entire area of blood management. There are a couple of exciting things and I don't want to steal a lot of thunder for our investor conversation or Concannon will have nothing to say. But beyond that we see a couple of really exciting things.

We anticipate, excluding Arryx, but we anticipate that there's about $2 billion of area in blood management that we can go after and we will share with you a targeted game plan to go after that with new devices and new services for our customers at the growth conference in -- on May 29th. So you're exactly right, there are still plenty of ways for us to take this $2 billion market and expand it to close to a $4 billion market.

I guess my follow-up question, Brad, is are you satisfied with red blood cell growth or could we expect it maybe to accelerate in '09?

John, you know I'm never satisfied with double-digit growth. I want it to be higher all the time. I think this year was a transformational year on that product line for us as we launched Cymbal.

That took some heavy lifting. We're expecting our RBC market, our red blood cell market in FY09 to grow at the rate of 10% to 15% which is very consistent with our five year CAGR of that business so we feel very good about 10 to 15% growth in the red cell business as we look into FY09 and that's the model that you'll find on our website.

Thank you. Your next question is from Victor [Gazuntermun] with Morgan Stanley. Please go ahead.

Good morning, guys.

Good morning, Victor.

Hi, Victor.

Looking at your blood bank number it seems like it was up sequentially quite a bit. Can you maybe talk about that, what you think in terms of -- what you think for this business for 2009. I'm sorry.

Yes. Our blood bank business has been a real pleasant surprise for us this year. As you know, last year when we began the year, we expected zero growth in blood bank because that's primarily our platelet business. Yet in Asia should year we grew 22% over prior year, in Europe we grew 17.7% over prior year. Those are reported sales growth and a lot of that growth was in platelets.

So we really saw our blood bank business do better than we expected and it grew more than 6% over prior years. So this was a particularly good year and -- from a competitive environment standpoint. We took advantage of growth in those particular markets and they really grew our platelet business very well.

And what is your outlook for blood bank in '09?

We are estimating around 2%.

So we've been able to harvest in a competitive marketplace that's changing some real good growth in Asia and Europe and we expect that it will be -- that's really a non-growth market. The market is not growing so we don't plan for it to be a significant impact, but this past year in FY08 it was the strongest year we have seen in the last five years in terms of the platelet growth.

Thank you. Your next question is from Phil [Steckle] with William Blair. Please go ahead.

Good morning, everyone.

Hi, Phil.

Hi, Phil.

Thanks for taking the call.

Glad to.

I was wondering if you could elaborate on the variability you're seeing in Japan and the outlook for that to continue and then the follow-up would be. yes, what implications you might expect connected to the selection of Gail McGovern as the new Red Cross head.

Let me take the first part of your question, Phil. Japan, as you know, for the last five years as I first joined the company five years ago, we shared with you that we had 70% market share in platelets and today we have 70% market share in platelets and we have 80% market share in plasma and five years ago and we have that today. So it's been one of our most highly penetrated markets and it's a very profitable market for us. What we have seen is a little volatility over the last couple of years, frankly.

We had some quarters that were up this year and some slightly down and we've seen some rebalance in the Japanese market. When our only competitor had some product quality problems, we were able to capitalize on that a couple of years ago and then we rebalanced a year later. So we really look at that business as being pretty stable. That's our intention. Brian did a magnificent job with the team in Japan to right size that for stable growth. So over the next four to five years, we don't expect that to be a growth market.

Our whole objective there is to make sure that our product quality is high as possible to the standards that they -- that they require of us and other manufacturers and, frankly, they have rewarded us for our high quality with tremendously high market share. And to maintain that business at about the same market share levels we have. So that's our overall game plan there.

In terms of the ARC, we've seen a number of changes going on in terms of senior leadership at the ARC so we always welcome the opportunity to work with, new leaders in that organization. I think Pete Alan and our team in the donor division, have done an excellent job of developing a relationship with the ARC. I can remember joining the company five years ago. We did less than $4 million a year with the ARC. Today we're doing more than $16 million a year. So we have seen some tremendous improvement in five years with the ARC.

They're excited about working with us on information technology platforms and devices and so as we work throughout that entire organization, we're looking forward to continuing that kind of growth rate well into the future.

Thank you. Your next question is from Dave Turkaly with SIG. Please go ahead.

Thanks. I think you mentioned on the call that ERP spend, all in was at like 35 million. How much of that was in 2008 and is it complete? Did you say that on the call?

It's not complete. There's -- the last year is '09 and that's when we're going to do what we call phase two, which is manufacturing and HR and the spend this year was around in the P&L was around seven to $8 million.

So, David, that completes the three-year process of ERP, about half of that money is capitalized and half is an expense, but this is the second time I've gone through an ERP implementation and I'll tell you that being on time and on budget halfway through. I'm very, very proud of Dotty Barr and her team have done an excellent job of making sure that we integrate from multiple systems and multiple countries and it's a tremendous effort.

And when you really think about the impact for our shareholders, it goes to the point that Brian raised in the call. Here we are, we're transforming this business while simultaneously implementing ERP and still drawing double digits on sales, operating income and EPS in FY08. So that's a tremendous example of focus and execution ability by this tremendous operating team.

And in fiscal 2009, the ERP spend will be?

About the same.

About the same. And that will be the last year.

Thank you. Your next question is from Joshua Zable with Natixis. Please go ahead.

Hey, guys, thanks for taking my question and congrats. I it's obviously very difficult delivering on any plan but five years especially, so congrats on that and we really appreciate it.

Thanks, Josh.

Thanks, Josh and we're really pleased with FY08 and our whole communication with you today is if you like '08, you're going to really like '09. Because we're pleased to see that positive drop-through in our P&L from sales to operating income and double-digit growth on EPS is a continuing effort.

Great. Well, just a couple of quick ones here. First just a clarification on the share repurchase.

Yes.

There's 60 million left right now. Is that correct?

This is a new incremental allocation, so we -- yes, and there's 60 million left. We are going to start when we come out of that blackout phase.

If it's incremental, is there anything left over from the previous one?

No, we did that quickly.

Great.

That would be our plan going forward, Josh. You know, a lot of times people announce stock repurchases and then they hang on for a while. We've been very, very consistent in the last two we have done and we'll be consistent in this one. When we announce it, we'll move forward with it and transition.

Great. And then just looking through your FY09 revenue scenarios, just a couple of questions here. The first one or the most obvious one sticks out to me is the surgical and diagnostic products.

Right.

Obviously, 18% growth you're looking at. Can you just give us a little bit more color. I know you have some new products there and I guess I'll follow up on the new products in a second.

Yes, sure. Okay. That really just includes the Haemoscope business, it's a diagnostic that was sold into our hospital arena. So it's lumped because it's a new business.

Remember, that was a $15 million business and we're anticipating growing somewhere around 15%, I believe, is in the model, right, Chris?

Yes, and so we only had about $5 million of that revenue in last year and we've got about 18 this year.

Okay. That's very clear. And then just on the plasma business, obviously, it's been very strong, continues to be a growth driver. Don't get me wrong, 10% to 15% is obviously still very, very impressive what you're looking at. But, I guess, A, do you think -- can you just kind of frame out how you get to that relative to kind of how strong it was this year. And B, from a mix standpoint, relative to equipment and disposables, how you think that's going to shake out.

Sure. We expect a place of somewhere between 1500 and 2000 new machines as we go into next year, point one. Point two that has been a tremendous growth business for us and I'll pas on to Steve Swenson that you think he's a sandbagger on his 10% to 15% growth. But it really is based in fact, Josh, that we have pretty much implemented ZLB, we're in the phases of implementing [Tela-Crit], that was a new agreement and then what we'll continue to spur growth will be that Octapharma Europe and Haema AG agreement. So we feel very comfortable with that number.

I want to reflect back for all of our shareholders, it was about three and a half years ago, four years ago that Alpha Therapeutics was purchased by our only competitor in that marketplace which is now Fenwal. And we had about 6000 devices globally in the market. Today as we look at our marketplace today, we have got more than 12,000 devices in the market. So in a three and a half, four-year period, this $90 million business has grown to $155 million business and is now the largest business of the corporation and really that plasma growth of 10% to 15%. We feel very confident in as we indicated on the Q3 call we expect the next three years to have double-digit growth. So we feel very, very confident in this business.

And I would also remind all our shareholders that we're spending $10.5 million to complete an automation project in our Pittsburgh plasma manufacturing facility which, as Brian indicated, as did Chris, in FY10 we should see about 150 basis points improvement in gross margin. And that's partially because of the automation of our manufacturing plant and partially because our contracts call for price increases that start this year and go into the next four or five years. So we feel very, very good about this commercial plasma market and it's been a tremendous success story for Haemonetics.

Thank you. Your next question is from James Sidoti with Sidoti & Company. Please go ahead.

Good morning, Brad Hi, Chris. Two quick questions on the income statement. One, can you tell me what options expense were in F09 and what you think they'll be in F09.

It's around ten in both years.

Stay even?

Yes.

And in terms of the investments you're making to help keep the business growing. Can you break it out in terms of R&D and sales and marketing? Is it weighted more towards one than the other?

Jim, this is Brad. We have continued to spend about $20 to $25 million on R&D. That is the right spend for a company like us. Now we're also acquiring R&D when we acquired the TEG business, the Haemoscope business. We've invested substantially in the Arryx technology which you're going to see at the investor conference. You'll be very, very pleased with our progress as shareholders, with what we said we were going to do last year is what we've prepared to show you this year. So we've made some good investments there and we think the $20 to $25 million range is the right kind of investments, because we've been able to acquire product lines as a growth driver. So we feel very good about our R&D spend, number one..

Number two, in terms of new products, let me just make one comment, that we expect to do $7 to $9 million in new product sales, which is more than doubling our growth rate of this year, as we look into FY09. So doubling our growth in new products, it will be about 10% of our incremental revenue. Next year will come from new product. I really like the fact that new products are beginning to have a substantial impact on our incremental growth, so we feel very, very good about that as well.

So in terms of R&D and our product spend as we transition to a blood management company, we're investing also in new IT software, Symphony surround and some of the things that we introduced this year. So you'll see us spend less on devices and more, frankly, on some of the software programs.

Thank you. Your next question is from Kevin Casey with Casey Capital please go ahead.

Hi guys I'm trying to reconcile the net income growth don't we have tale winds from the benefits in Europe and also Japan coming through this year?

We will.

I'm sorry. Could you clarify your question, Kevin. You mean --

I'm curious why you're not seeing more flow-through to the operating income line.

In '09?

Yes.

Going 14% to 17% growth on 8% to 11% top line growth?

Yes.

It's really all about the decisions we're making to invest in the business.

And then how much is the ERP expense?

(overlapping speakers).

Same as this year between seven and eight.

$7 to $8 million in next year, '09.

Thank you. Your next question is from Andrea [Beachy] with Schroder's. Please go ahead.

Good morning. Can you walk through next year's restructuring and kind of break down the cost a little bit.

Andrea, this is Brad. We're sharing with our shareholders today this restructuring for the first time before we have had a chance to share it with our employees and roll out a detailed plan. So out of respect to our employee group, we don't want to go public with this until we've had a chance to share our plans with our employees.

However, having said that, I will share that our manufacturing operations area is the last place that we are going to transform. When you think about going five years, we transformed ourselves into the donor and patient division five years ago, we transformed our sales and marketing structure.

Under Brian's leadership we have transformed all our geographies, Europe, Asia and Japan, and the last area in this broad plan of transformation, involves the internal functions of operations and manufacturing. And some R&D, so when we look at our transformation phase, those will be the areas that they will involve. And our investor day, Brian Concannon will give a lot more detail as to the specific actions that we hope to take and what the benefit of those actions will be going forward.

And this will be the final year of our six-year plan.

Okay. Thank you.

Thank you.

Thank you. Your next question is from John Putnam with Dawson James securities. Please go ahead.

My follow-up question was answered. Thank you.

Thank you, John.

Thank you. Your next question is from Steve Crowley with Craig-Hallum Capital. Go ahead.

I want to come back and ask for additional color on two of the important areas of your business. You talked about Cymbal moving to a full market release mode in 2009. Can you compare that or contrast that to what you've been doing so far and maybe help us understand what the significance of that step function could be?

Sure, Steve. This is Brian. What we do when we launch a new product, a new device, we take it into customer acceptance trials, which really speaks to the efficacy of the device. Once we complete that, we then go into limited market release which looks at our printed materials, our promotion materials how we interact with the customer. That's complete. In fact, frankly, this week we just passed 5000 procedures on the Cymbal. So in Q1, we will go to what's called a full market release which means we will begin selling this in all markets that it's cleared for sale.

And in the context, I guess, of a limited market release, you placed 75 units last year. What are the implications of going full market release? Is it 50% more than that this year as a reasonable bogey, or am I out in left field there?

Well, our growth as we've given it to you is about tone 15% on the red cell business and that's our target for that business going forward. We feel very good about what took place in the limited market release. The limited market release focuses on specific customers to test the launch of that product. As I said, that's gone well.

Getting the 5000 procedures on this new device is a milestone. That's significant and that means that we've used this device 5000 times successfully to this point. So it really does make us feel good about that 10 to 15% as we go to full market release.

And as a reminder, this is a product that is in the smallest in the marketplace, it's battery operated, it's uniquely positioned to take advantage and penetrate the 70% of (inaudible - background noise) collections, in the United States that are performed in a mobile environment. And the community and schools, churches, it's precisely fit for that market and our customers so far have been delighted with its performance.

Yes. I would just add, Steve, a little bit more color on the new products. I was delighted with the donor division leadership team's efforts with Cymbal. This is a product line that we've said to you at the beginning of the year we wanted to place about 80 units and we've placed 75. So they're right on plan and on budget and on time with that in this limited market release. And I felt very good about that, frankly, I think it's going to be a product line that's going to be a winner for us.

I also feel particularly good that we've placed 150 incremental OrthoPAT units into the marketplace. Excuse me, 175 incremental OrthoPAT units into the marketplace this year. So I would congratulate our patient division leadership team in the fine job that they have done. So placing new equipment has been a particularly good year this year.

We hope to reap the benefits of that and therefore, that's why you're seeing our new products expected to grow $7 to $9 million over -- or doubling the run rate of what we did this year. So we feel very good that 10% of our incremental operating income will come from new products. That's a wonderful position to be in.

Thank you. There's no time left for further questions. Here is Mr. Nutter with closing comments.

Thank you very much. To our shareholders we would like to close by saying that if you like fiscal '08, we think you're really going to like fiscal '09 and here's why. We're going see the traditional positive drop-through that you've come to expect from your company. We'll see revenue growth of 8% to 11% dropping through to 1% to 17% operating income growth.

EPS will grow between 10% to 14%, and we'll see improvement as gross profit and operating margin expansion will happen this year and we gave you a little guidance into FY10. We will continue to see strong cash flow with the business being positioned to expand, with possible acquisitions that we could bolt on to make this the blood management company that we've so successfully we've become over the last 12 months. Two years ago we set out to transform this business and fiscal '09 is the final phase of that transformation.

With the completion of ERP and our manufacturing plant automation that we talked about on the call and the restructuring, we really believe that we're going to be able to provide significant benefits in revenue growth, margin improvement, operating income growth and EPS growth in fiscal '09 and '10 so we look forward to seeing you on May 29th at our investor day in New York. Thank you. Goodbye.